The US-China trade war: The consequences on Global Economy

A trade war is an economic retaliation that results from one country imposing trade tariffs on the products of a country. Trade wars are nothing new. They always have been of existence. But there is one that threatens to impact the world economy as it involves two economic superpowers on the planet that is the US-China trade wars.

What is the cause of the trade war?

The US-China trade war is something that originated in 2018 when the united states imposed a 25% tax on chinas commodities. Like in all the other trade wars, China had to retaliate, and thus we have the trade war that has been soaring up in the last few years. Given that the two have a significant effect on the world economy, this trade war threatens the world-economy by far. Economic experts forecast that this trade war could have far more negative implications than was initially thought of.
The US-China trade war is associated with two main factors trade conflicts and the US midterm elections. These fundamental rivalries between China and the US don't seem like they can be easily settled. The increasing strain between the US and China, which are among the world's biggest economies in recent times, has led to dollar boosting and, consequently, the treasuries in The US. This had resulted in the US 10 year yields to their lowest in two years. Chong, in his research paper, 'Understanding the China-US trade war: causes, economic impact, and the worst-case scenario' state that it will cause China to 1.1% employment reduction and a corresponding GDP loss. Though these are might look s if they are negligible, they aren't. He holds a pessimistic view and contends that these can be managed by China.

Effects of the trade war on the world economy

As a macro-economic assignment solver, I couldn't help but notice the implications that this trade war could have on the economy. In this section, we take a look at the impact of the trade war in the world. Our focus will be on the US, China, Europe, and to some countries of the world. We will also learn who will be the beneficiaries and losers of this trade war.

The effects on china

China already has domestic economic problems, and with the trade war, these are becoming worse. China's move of weakening its currency has decreased the costs of its US exports, thus making Chinese goods less expensive in the US It has been a good strategy in making the Chinese economy more competitive in the global market and thus sell more exports. The trade war is not good for many industries in the US, which rely on Chinese goods for production. Different sectors of their economies are connected in some way, and this war negatively affects their performance and reduces overall growth.

the effects on the US

The top tariff rates imposed by both countries seem to be rising to ~30 %, and such high rates were observed back in the days before the Great Depression started. If Trump doesn't plummet the circumstances, it is highly likely that The US might fall into a recession by next year due to these aggressive policies. The debt-to-GDP ratio is rising at a very high rate in China, thus increasing inflation due to the burden of economic adjustment. Analysts across the world hence fear a global recession, and with the time window for its resolution reducing, it might lead to affecting the global growth majorly. It had already led to an increased risk aversion among investors and could result in an abrupt repricing of risk assets globally. An immense material slowdown in the US economy is in hindsight if Trump doesn't agree to back off the burden on China. A de-escalation at even this late point in time would cause a spike in the stock market but unwinding the material economic damage done by the trade war will take longer.

Other parts of the world

The US-China trade war is currently in the most dangerous situation with a threat of worse situations to come till 2021, which is the predicted year for peak impact. It promises to disrupt the economy, trade flow, and supply chains beyond the two involved countries. The World Bank has estimated the world economy to expand by 2 - 2.3 %, which is almost half when compared to the growth observed before the 2008 recession. The trade war between two of the world's biggest economies tends to exacerbate the situation. Ben Holland and Cedric Sam, in an article by Bloomberg, underline that economists have predicted the global GDP to be hit by about $ 600 billion in 2021. The economy in Malaysia, South Korea, and Taiwan will be the worst hit if the export from China to the US drops whereas, Canada and Mexico would take a serious blow in case of the opposite scenario. China has a major grip over the global electronics and electrical market, which will be the most hit sector when China's export reduces compared to energy products, equipment, and machinery in case The US's export reduces. However, levying higher tariffs on Chinese imports opens up a door of significant opportunities for other emerging East Asian economies like Vietnam, Philippines, and Cambodia, which are competing for their market share. Especially sectors which are comparably shared by China and East Asian companies like furniture, seafood seem to benefit the Vietnam and Cambodia largely, which are not a part of China led supply chains.

Effects on the EU

In the article by Beth Bovino 'The US-China Trade War: The Global Economic Fallout,' the short term macro-economies in The US and China are supposed to be minimally hit, whereas the
indirect impact on European and East Asian countries will be detrimental. Europe is not immune in this situation since Europe highly trades with both the US and China. These trades in the sector of transport equipment, chemicals, and pharmaceuticals contribute to around 8 % of EU GDP. Nonetheless, the European share in the US' production if much more than that in China's production owing to the historical ties in European and American economies. So, the EU suffers a direct amplified blow in case the trade war intensifies. This might force the EU to rethink its policies in the future.

Conclusions

In conclusion, even if the trade war gives the desired effect by President Trump for a short duration, it is going to be disastrous in the long term for both countries. However, in the scenario where both the giant economies reduce imports from each other, both the countries would lose in terms of welfare due to trade distortion. Emerging economies competing for exports might see a benefit in the concerned sectors but are likely to take a hit due to overall changes in the global economic scenario.