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Tug-Of-War: An Economic Face-Off Between Two World Powers

기사승인 2018.12.02  19:06:14

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- Analyzing the causes and impacts of the prolonged trade war between the United States and China

   
 
ON OPPOSITE ends of the economic tug-of-war rope, U.S. President Donald Trump and Chinese President Xi Jinping take turns pulling their side, both attempting to impose their strength and topple the other. Trump makes the first move, imposing taxes on Chinese goods; Xi retaliates with a tariff on U.S. goods. Both stand their ground. Since June 2018, the world’s two largest economies have engaged in a trade war that not only affects their respective countries but threatens massive repercussions for the onlookers as well. However, recent talks and negotiations have seemed to allay further escalation of the conflict, leaving many uncertain about the war’s future. The two nations face a critical juncture of the greatest trade war in history. To understand what happens next, we need to begin by examining the events behind it.
 
How it all began: a tit-for-tat between Trump and Xi
   A key component of Trump’s campaign rhetoric was an antagonistic view of China’s trade policies, labelling China a “currency manipulator” and pledging to “instruct the U.S. trade representative to bring trade cases against China.” True to his word, on July 6, 2018, Trump officially initiated a trade war against China when he imposed a 25% tariff on $34 billion worth of Chinese imports in the United States*. Simultaneously, Trump devised a plan for a second round of tariffs on $16 billion worth of Chinese goods that included "iron and steel products, electrical machinery and railway products,” according to China Briefing. The website further mentions that, in response, Xi decided to retaliate tit-for-tat by imposing a 25% tariff on $34 billion worth of U.S. goods imported into China, including “agricultural products, automobiles and aquatic products.” These actions marked only the beginning of the great trade war, as both nations progressively levied tariffs on each other’s goods over the course of several months. This game of tug-of-war—each action followed by a counteraction of greater intensity—went on to the extent that U.S. tariffs were imposed on over $250 billion worth of Chinese goods, while China imposed tariffs on $110 billion worth of U.S. goods**.
   Although huge rivals, the United States and China have largely thrived off a symbiotic relationship, importing and exporting a large number of goods with each other. However, China’s rapid economic growth and rise as the most powerful country in Asia posed a threat to Trump and his protectionist policies. On behalf of “America First,” Trump implemented protective trade measures by making U.S. products relatively cheaper in the market by setting a higher tariff on imported goods. Trump’s administration accused China of “years of unfair trade practices” on the official White House website. The White House claimed that China imposed much higher tariffs on U.S. goods compared to tariffs imposed by the United States on Chinese goods, and further that China manipulated its currency by raising its national exchange rate, making Chinese exports cheaper and gaining an unfair competitive edge in foreign markets. Finally, the U.S. administration accused China of stealing intellectual property on technology and innovation from U.S. companies, putting U.S. information and resources at major risk***.
   In 2015, China introduced the “Made in China 2025” project, which aims to increase domestic production of core components and materials to 40% by 2020 and 70% by 2025. According to The Washington Post, this plan is considered a “threat to Trump’s trade goals,” as it will lead to increased competition between Chinese and U.S. manufacturing. Therefore, in order to hamper China from quickly rising to a strong economic power, Trump has taken major steps by starting the “biggest trade war in economic history,” as stated by China’s Ministry of Commerce, according to The New York Times.
 
Impacts on the world economy
   Though the trade war has been exclusively fought by the United States and China, it threatens knock-on consequences for the global economy. However, in an interview with The Yonsei Annals, Professor John Delury (Associate Prof., Graduate School of International Studies) offered a different insight. “So far, the trade skirmishes, of tit-for-tat tariffs on billions of dollars’ worth of traded goods, have not made a significant impact on the global economy. So far,” he stated.
According to The Guardian, the International Monetary Fund (IMF) predicts that the global economy will grow at a relatively low rate of 3.7% for the next two years. But this number is 0.2% lower than its prediction in April, before the trade war had officially started. Also, the South China Morning Post reports that in July’s report of World Economic Outlook, the IMF predicted the trade war to cost about $430 billion, which amounts to approximately 0.5% of the world GDP. Though, as the numbers forecast, the impact may not be immediately noticeable, it appears inevitable that the world economy will start to slow down if the war continues to escalate in its scale.
   In particular, Asia will most likely be severely affected by the trade war, as a majority of the region is dependent on imports and exports with China. South Korea is no exception to this victimization, as China and the United States are its biggest export partners. According to Bloomberg Intelligence, if China’s total exports decrease by 10%, the Asian GDP growth rate will decrease by 1.1% and the South Korean GDP growth rate will slow down by 0.9%. This hampered growth would make South Korea the third most affected Asian nation. Professor Delury further elaborated on this issue—“The trade war hurts Korea’s economic bottom line, as a large proportion of Korea’s trade with China consists of products ultimately bound for the U.S. market, and is thus vulnerable to tariffs or indirect negative impact of trade warfare.” The South Korean economy is widely dependent on exports of the shipbuilding, steel, semiconductor, and electronic industries to countries like China. However, due to the trade war, Korea cannot export these goods at the original amount and price, which will further lead to negative impacts on workers, many of whom will lose their jobs or receive lower wages as a result.
   Professor Delury also notes a fascinating implication for South Korea beyond the economy. “Korea’s security calculus is also significantly complicated by the conflict between the United States and China. At a minimum, it adds a complicating variable to the efforts of making peace with North Korea, which, arguably, is the top foreign policy and national security goal of the current government.”
 
A ceasefire to the war?
   While the trade war has concerned large populations around the world, Trump and Xi recently initiated talks about putting an end to the trade war. On November 1, Trump used his favorite mode of communication—Twitter—to relay that “discussions are moving along nicely” with Xi on the trade issue. He further anticipated the November G20 Summit in Argentina to serve as a pivotal stage for further negotiations****. Within the United States, the mid-term elections saw a large shift in power with the Democrats taking the majority of the House. But Professor Delury states that he believes the elections will not affect the trade war “because there is a fairly broad and bipartisan consensus in Washington on the need for a tougher, even hardline, China policy.”
   While there have been optimistic responses to the preliminary steps of ending the trade war with recent talks and phone calls between Trump and Xi, Bloomberg reports that some people, such as White House economic advisor Larry Kudlow, do not believe that there will be a swift resolution of the issue. Even with the approaching G20 Summit and promises of better trade relations, Professor Delury states that “we are only in the early stages of a new era of ‘strategic competition.’”
 
*                 *                 *
 
   The rope between the United States and China is taut with tension and uncertainty. An on-going issue for almost half a year, the trade war threatens to escalate, leaving in the aftermath no clear winners. Are there hopes of the trade war finally coming to an end? For now, a truce may not be easily found.
 
*Time
**China Briefing
***The White House
****This article was written before the G20 Summit, which is scheduled to take place in Argentina from Nov. 30 to Dec. 1, 2018

Lee So-jung sojunglee23@yonsei.ac.kr

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