US-China Trade War: How Tariffs Sparked a Global Economic Crisis

US-China Trade War: A Four-Year Escalation of Tariffs, Reciprocity, and Economic Uncertainty

The four-year term of US President Donald Trump from January 2017 through January 2021 was marked by the implementation of significant economic policies that diverged substantially from those of his predecessors. Among these policies were substantial tariffs levied on key trade partners, aimed at addressing perceived imbalances in global trade practices and fostering a more equitable trading environment.

China was a primary target of this initiative, as it had continually engaged Washington in a ‘trade war’ through successive rounds of retaliatory tariffs, generating unprecedented uncertainty in the markets. The term ‘trade war,’ within this context, refers to countries imposing tariffs or other trade barriers on each other as part of economic or political disputes.

What is a Trade War?

A trade war commences when nations impose tariffs—taxes on imported goods—or export controls and restrictions due to disagreements over global economic policies. These can include import tariffs, restrictions on exports designed to protect domestic industries from foreign competition. The imposition of such barriers disrupts supply chains, increases costs for businesses and consumers alike, slows down global economic growth, and contributes to market instability.

How Do Trade Wars Affect the Economy?

Trade wars have a profound impact on the economy in various ways:

1. Higher Costs: Tariffs increase the cost of imported goods for both consumers and businesses.
2. Disrupted Supply Chains: Companies heavily reliant on global supply chains suffer from sourcing difficulties, resulting in production delays and increased costs.
3. Reduced Trade: Countries imposing tariffs witness a decrease in imports and exports, contributing to slower economic growth.
4. Market Volatility: Trade conflicts inject uncertainty into financial markets, affecting stock prices, currencies, commodities, and contributing to market instability.
5. Economic Slowdowns: Prolonged trade wars can lead to economic slowdowns, characterized by reduced consumer spending, lower business investment, and overall economic stagnation.

The US-China Trade War: Origins and Escalation

What Triggered the US-China Trade War?

The conflict between America and China arose in 2018 when President Donald Trump imposed tariffs on Chinese imports. The Trump administration identified several issues it believed warranted addressing:

1. Unfair Trade Practices: Washington claimed that Beijing engaged in intellectual property theft, manipulated its currency for trade advantage, and provided subsidies to domestic companies.
2. Forced Technology Transfer: The US accused China of obligating American businesses to transfer valuable technology as a condition of entering the Chinese market or engaging in business transactions with domestic partners.

In response to these concerns, both nations engaged in successive rounds of tariffs on imported goods, targeting hundreds of billions of dollars’ worth of each other’s exports. Key milestones include:

1. January 2018: The US imposed tariffs on solar panels and washing machines.
2. March 2018: Additional tariffs were levied on steel and aluminum imports.
3. April 2018: China retaliated with tariffs on agricultural machinery and auto parts imported from the United States.
4. June 2018: The US imposed tariffs totaling $50 billion of Chinese exports, focusing on several key sectors including electronics and aerospace.
5. July 2018: China responded by hitting back equally with its own tariff measures, targeting a range of US goods, among them were crude oil, liquefied natural gas, along with medical equipment.

The Impact of the Trade War on the US-China Relationship

The bilateral dispute affected multiple domains:

1. US Companies Impacted: American companies heavily reliant on Chinese suppliers in technology and manufacturing sectors suffered as they struggled to meet demand due to trade disruptions.
2. Escalating Consumer Prices: The discontinuation of cheap imports from China would increase costs for US consumers, causing hardships on their household budgets.
3. China’s Economic Hesitation: America constitutes one of China’s largest export markets, so abrupt cutoffs in imports by the Trump administration weighed heavily on Beijing’s GDP (Gross Domestic Product) growth rate. Figures published by China’s National Bureau of Statistics showed that its overseas exports rose to approximately twenty percent of their 2020 GDP as these would slow Chinese economic activity further.
4. Interconnected Economies Feeling Rippled Effects: Due to a long and interdependent global supply chain, the sudden decline in US-China trade led not only the US but also nations such Canada, Mexico, and many other parts in the European Union face increased uncertainty on economic stability.

Which Markets Were Most Affected by the Trade War?

Notably affected markets included:

1. Foreign Exchange (Forex) Market: The market experienced significant fluctuations with USD/CNH (offshore Yuan) and USD/HKD (Hong Kong Dollar) trading exchange rates rising during peak trade tensions.

The ongoing US-China Trade War resulted in various sectors of the economy being targeted by retaliatory measures employed by both countries.