Ill Effects of a Sino American Trade War

President Trump has been very vocal about his disdain for the economic policies that China has implemented in the past. President Trump, like a lot of Americans, believes that the Chinese have unethically outsmarted Americans in the past. He therefore wants to take strict measures and send clear messages to China. However, the United States cannot dominate China like it can dominate other nations. The relationship between China and United States lies more on mutual interdependence. Both parties are likely to suffer severe economic setbacks if the trade arrangements between them are broken. This is why past United States presidents like Barack Obama were extremely careful while dealing with China.

President Trump, however, has the reputation of being a hard taskmaster and a rash statesman. He has recently implemented countervailing duties on Chinese aluminum foil. This is because he believes that China has been illegally subsidizing these goods in order to destroy the businesses of local American manufacturers. The Chinese have built their entire nation on exports and foreign trade. They are unlikely to take this lying down. It is likely that they too will impose heavy tariffs on many American products. The end result may be a full blown trade war between America and China. Many experts have been predicting this outcome ever since Donald Trump became President of the United States

In this article, we will have a closer look at some of the possible effects of an all-out trade war between United States and China.

  • Reduced Profitability: American companies have been using China as their manufacturing base since a very long time. Companies like Apple, Nike, and Wal-Mart etc. have become global behemoths on the back of low production costs that they incur in China. A Sino American trade war is likely to affect a lot of these companies negatively. It is likely that China will retaliate making it difficult for these companies to function locally. China is also likely to make repatriation of capital and profits extremely difficult for these companies. This will negatively affect the cash flow at their American headquarters. China has significant leverage over the United States since so many of their multinational companies are based out of China.
  • Production Costs: In the absence of Chinese manufactured goods in America, inflation might suddenly increase by leaps and bounds. Most of the goods consumed in the United States are manufactured at low prices in China. If these imports are halted, American manufacturers may be forced to relocate to other regions such as Bangladesh and Vietnam. These countries are small and cannot really supply America with all its requirements. The facilities that have already been set up in Chinese cities like Shenzhen would be wasted. Also, companies would have to build their supply chains once again. This would lead to an increase in prices which would inevitably be passed on to the American consumer.
  • Intellectual Property Rights: The Chinese government has been forcing big companies to part away with their intellectual property rights if they want to do business in China. Many multinational companies have been forced to share sensitive details such as source code with their Chinese partners. Hence, if Americans were to move out of China now, Chinese companies could replicate the same products and services rather quickly. As a result, the impact of a trade war will be felt more deeply by American companies than by their Chinese counterparts.
  • Treasury Bonds: The entire world knows that China is one of the largest buyers of American treasury debt. Hence the short term solvency of the American nation depends upon China. Also, since China already holds so many treasury bonds, if they start selling, they could start a sell off and drastically bring down the price of the United States financial bonds. Obviously China will also lose a large amount of money in the process. Neither party stands to gain by indulging in this trade war.
  • Reduced Incomes: The exporters of both nations significantly depend upon the symbiotic trade relationship to make money. Historically trade wars have been known to produce bad consequences for warring nations. The last time America indulged in a trade war, it lost more than 5% of its GDP in the process. If the same thing were to repeat today, the loss would run into trillions on the American side. Similar losses would also be faced by the Chinese. The trade war would be utterly pointless given the fact that both nations are already facing dire economic consequences.
  • Access to Chinese Markets: China has a population of 1.5 billion. It is the most populous nation in the world. It is also the second largest consumer market in the world. For many American companies, China is the number one consumer market. Several American companies adhere to the difficult legislative regimen that China has created only to be able to access this mega market. Hence, if they have to forego access to this lucrative market because of a trade war, it would really impact their profitability.

The bottom line is that China is also an economic power like America. Donald Trump cannot bully China into submission. China is fully capable of retaliating even though the retaliation may have negative economic effects for both nations involved.

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