By: Param Kapoor
It is no secret that President Donald Trump is fueling tensions by continuously raising tariff rates on items imported from America’s biggest trade partner turned adversary: China.
Last July, Trump followed through on months of threats to impose sweeping tariffs on China for its alleged “unfair trade practices”. So far, the US has already slapped tariffs on US $250 billion worth of Chinese products and has threatened tariffs on US $325 billion more.
With neither Trump nor Chinese President Xi Jinping willing to back down, US-China trade tensions could erupt into a full-blown trade war, with China’s own Ministry of Commerce warning that the dispute may even lead to “the largest [trade war] in economic history to date”.
To understand the brevity of the situation, it is important to know some key terms.
A trade war is when countries try to attack each other’s trade with taxes and quotas, by implementing or raising tariffs, causing the other to respond, in a tit-for-tat escalation, hurting other supporting nations’ economies and can lead to rising political tensions.
A tariff is a tax on a product made abroad. In theory, taxing items coming into the country means people are less likely to buy them as they become more expensive, with the intention being that citizens buy cheaper local products instead – boosting that country’s economy.
Trump has made his economic policies clear, referring to it as “Smart Trade, Not Stupid Trade”
Essentially, his policies promote mercantilism through the use of protectionism to defend U.S. industries from foreign competition. His goal is to reduce the U.S. trade deficit, with the hopes of increasing military spending. The Trump administration claims the US relies too much on other countries for its metals, and that it couldn’t make enough weapons or vehicles using its own industry if a war broke out. Yet, a global trade war could hurt consumers around the world by making it harder for all companies to operate, forcing them to push higher prices onto their customers.
Prior to his presidency, Donald Trump criticized Chinese trade practices, tweeting on September 21, 2011, “China is neither an ally or a friend — they want to beat us and own our country.”
After his inauguration, President Trump sat with President Xi Jinping to chalk out a deal, resulting in US and China agreeing to a trade deal that would give US firms greater access to China’s agriculture, energy, and financial markets, while China gains access to sell cooked poultry to the US on May 22, 2017.
However, just under a year later, on April 2, 2018, China imposed tariffs, ranging 15-25 percent on 128 products (worth US $3 billion) including fruit, wine, steel pipes, pork and recycled aluminum in retaliation to the US’ steel and aluminum tariffs, which were placed a few weeks earlier on March 23, 2018, with the US imposing a 25 percent tariff on all steel imports, except from Argentina, Australia, Brazil, and South Korea, and a 10 percent tariff on all aluminum imports, except from Argentina and Australia.
Just recently, on May 10, 2019, the US increased tariff rates from 10 percent to 25 percent on US $200 billion worth of Chinese goods from 10 percent to 25 percent, as the US and China fail to strike a deal regarding trade negotiations.
Increasing tensions have taken their toll on many domestic industries that rely on foreign manufacturing, with two of the biggest being footwear and technology, hitting brands like Nike, Adidas, Apple, and Google.
- Footwear – Trump raised tariffs from 10% to 25% on $200 billion in Chinese imports. If Trump ultimately moves forward with the hikes, which would impact footwear, both companies and consumers would be hit hard. According to the Footwear Distributors and Retailers of America (FDRA), retail price increases could be “staggering.”
- Technology – US hardware companies are deeply reliant on trans-Pacific trade, but, so far, tariffs have avoided assembled computers and smartphones, focusing instead on unbundled components likely to have less effect on consumers – until now. Now, an increase in tariffs will almost certainly result in increased prices of all forms of technology, ranging from smartphones to TVs to printers.
Perhaps one of the biggest outcomes to occur thus far was the federal mandate that effectively banned Chinese technology giant Huawei from doing business in the US on May 16, 2019, a move that comes amid growing tensions with Chinese telecommunications companies.
Lawmakers and intelligence officials have claimed the telecommunications giant could be exploited by the Chinese government for espionage, presenting a potentially grave national security risk, with concerns about Huawei having more to do with cell towers than cellphones.
Huawei is one of the main suppliers for network infrastructure, the hardware that phones connect to, alongside Ericsson and Qualcomm. As carriers raced to build out 5G networks, lawmakers rushed to keep Huawei hardware out of whatever was being built. Cell networks are a very tempting target for espionage, and China has a long history of this kind of spying.
However, this led to unforeseen consequences, as rural cell service providers across the U.S. are almost entirely dependent on Huawei for inexpensive wireless communications equipment.
The Huawei ban will force many wireless providers to turn to expensive European technology, as there are few American alternatives.
While the two main parties involved are China and the US, the escalating war has results on a global level, especially impacting the rapidly developing economy of India. Industries, chiefly technology, is being pushed into the country, with Apple and Samsung, two of the world’s biggest smartphone makers stepping up their marketing and manufacturing efforts in India.
India’s stiff 20% import duty on mobile devices makes iPhones in India among the most expensive in the world and is one reason Apple has just 1% of the market there. Local production would allow iPhones to avoid the 20% tariff, allowing the brand to increase its presence both financially and socially.
With almost no positive signs coming out of the conflict, it is time to reevaluate the values and priorities of both nations involved in order to move forward in the right manner. While a trade war may no longer be avoidable, it is imperative for the heads of both nations to keep the citizen in mind when handling the future of our world’s economy.