US’s 45th president, Donald Trump, recently enacted increased tariffs on Chinese goods in a bid to reduce trade deficits as well as increase state revenue. In this particular article, we will look at the definition of a trade war, the specific details regarding the US China tariff war and the possible consequences of such a war.
A trade/tariff war occurs when a nation imposes more/higher tariffs on imports from a foreign country for said foreign country to retaliate with similar forms of taxation. A country enacts such tariffs in a bid to protect the local industry and attempt to create new jobs. This typically escalates leading to a trade war and reducing international trade. Such measures may work in the short run. Ultimately the trade war leads to the loss of jobs and a downturn in economic growth for the nations involved.
U.S v China Trade War
In January 2018 Donald Trump imposed higher tariffs and quotas on imported Chinese goods namely washing machines and solar panels. The World Trade Organization (WTO) declared that the United States had no case in levying the tariff. One should note that China is one of the world’s leaders in manufacturing of solar equipment.
On March 8th 2018, Donald Trump asked the Chinese administration to develop a plan which would see the reduction of the $375 billion US trade deficit by at least $100 billion. China was open to the idea as part of China’s economic reform plan included the reduction of exports. The Asian nation cautioned that it had little power over the matter as the trade deficit was fuelled by the high US demand for low – cost Chinese goods.
On April 3rd 2018, Trump’s administration announced tariffs of 25% on imported Chinese electronics, aerospace equipment as well as machinery worth $50 billion. However, these tariffs are yet to go into effect. This almost had an immediate effect on the economy with stocks dropping as local as well as international investors anticipating a potential trade war.
This saw China announcing a 25 – percent tariff on $50 billion worth of US exports to China. These tariffs won’t go into effect immediately as well. These levies were taxed on imports of 106 US products including aircraft, automobiles, chemicals as well as soybeans.
The Trump administration justified the increase on tariffs and levies by pointing out the fact that China charges higher tariffs on American products such as automobiles than the US charges on Chinese ones. Furthermore, the Chinese administration requires American companies to license their valuable patents to Chinese firms as one of the conditions necessary for doing business within the country. Moreover, China imposes nontariff barriers to foreign companies within the nation to serve as an edge to domestic firms especially in the finance and technology sectors.
But how would this affect the global economy?
Law of unintended consequences
As previously stated, increased tariffs temporarily favour the economy but have far – reaching consequences. These follow the economic principle of the law of unintended consequences. This term was coined by the sociologist Robert Merton in his 1936 paper: – The Unanticipated Consequences of Purposive Social Action. The paper states that the consequences “are occasioned by the interplay of forces and circumstances which are so complex and numerous that prediction of them is quite beyond our reach”
Perhaps the best example of this phenomenon as regards the current war is the effects of China’s proposed tariffs on American soybeans. One consequence may be that the Chinese may keep buying them but at a higher rate. Or, perhaps more probable, is that they may switch to importing Brazilian soybeans. However, Brazil would not be able to increase production enough to supply China. Which leads to further consequences in this complex supply chain. American farmers may switch from planting soybeans to planting other, more profitable crops. This may lead to lower prices as a result of higher supply. American farmers may also sell their soybeans to nations that used to be Brazil’s customers. This would further complicate the supply chain.
Increased tariffs may be a measure of protecting domestic economies but perhaps they may have unfavourable unpredictable consequences that outweigh the benefits of the same. It may be time for the Trump and Chinese administration to have further negotiations to find better ways of improving their economies.