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IMPACT OF US-CHINA TRADE WAR

IMPACT OF US-CHINA TRADE WAR

Automotive | Jun, 2021

Exchange of capital, goods and services at an international level helps to connect several parts of the globe, further helping in establishing interdependent economic relations. However, economic imbalances can reflect inadequacy in import and export activities. An economic conflict which results from extreme protectionism between growing economies leading to imposition or increase in tariffs or any other barriers against one another in response to trade barriers can be referred as trade war.

The United States-China trade War is an ongoing war between the People's Republic of China and the United States of America characterized by increasing tariffs and other measures since 2018 in order to retaliate against each other. Global economic and technological dominance is the major cause of conflict between China and the United States.


CAUSES OF EMERGING TRADE WAR

Several disagreements preceded the trade war between the US and China. One such explanation is that the cumulative trillions of dollars Americans transfer overseas as a result of yearly deficits, are then used by those countries to buy America's assets, as opposed to investing that money in the US.

Second area of dispute is the allegations against China for stealing American intellectual property and military technology along with adopting and enforcing policies. As per the allegations, the US patent holders in Chinese markets were forced to engage in joint ventures with Chinese companies, which in turn, gives Chinese companies illicit access to their technologies.

For instance, multiple US companies were not allowed to enter some business sectors, especially automotive industry, unless a joint venture, majority-owned by a domestic partner is established. In such ventures, the domestic Chinese companies gain an access to use intellectual property from their foreign partner, so that they can produce domestic products based on it. This was believed to be a violation of WTO rules concerning fair treatment of domestic and foreign companies as the leakage of intellectual property was important to be taken care of.


THE TRADE WAR “SAGA” 


June 2016:  While campaigning for the White House at a rally in Pennsylvania Trump laid out his plans to counter unfair trade practices from China.

March 2017:  Donald Trump, the president of U.S.A. signed two executive orders: one for tighter tariff enforcement in anti-subsidy and anti-dumping trade cases and the other reviewed U.S. trade deficits and their causes.

April 2017:  Trump and Chinese President Xi Jinping agreed to a 100-day plan for trade talks at their first meeting.

July 2017:  Both the sides failed to agree on new steps to reduce the U.S. deficit with China after the 100 days of talks.

August 2017:  Trump ordered “Section 301” probe into alleged Chinese intellectual property theft, described as his first direct trade measure against Beijing. Section 301 refers to the part of a 1974 trade law that lays out how the United States should enforce its rights under trade agreements.

January 2018:  Trump, in an interview, threatened a big “fine” on China over alleged IP theft, without providing details. Trump imposed tariffs on all imported washing machines and solar panels - not just those from China.

March 2018:  Trump ordered 25% tariffs on steel imports and 10% on aluminium from all suppliers - not just China.

April 2018:  China imposed tariffs of up to 25% on 128 U.S. products. Trump unveiled his plans for 25% tariffs on about $50 billion of Chinese imports. China responded with plans for retaliatory tariffs on about $50 billion of U.S. imports.

June 2018:  The United States sets an effective date of July 6 for 25% levies on $34 billion of Chinese imports. It said 25% tariffs will also kick in on an additional $16 billion of goods after a public comment period. China responded in kind with tariffs on $34 billion of U.S. goods.

July 2018:  The United States unveiled its plans for 10% tariffs on $200 billion of Chinese imports.

August 2018:  Trump ordered USTR to increase the tariffs on $200 billion of Chinese imports to 25% from the originally proposed 10%. The United States released the list of $16 billion of Chinese goods to be subject to 25% tariffs. China retaliates with 25% duties on $16 billion of U.S. goods. Tariffs on goods appearing on the Aug. 7 lists from both the United States and China take effect.

September 2018:  Trump threatened tariffs on $267 billion more of Chinese imports. The United States implemented 10% tariffs on $200 billion of Chinese imports. The administration said the rate will increase to 25% on Jan. 1, 2019. China answers with duties of its own on $60 billion of U.S. goods.

December 2018:  The United States and China agreed on a 90-day halt to new tariffs. Trump agreed to put off the Jan. 1 scheduled increase on tariffs on $200 billion of Chinese goods until early March while talks between the two countries took place. China agreed to buy a “very substantial” amount of U.S. products.

February 2019:  Trump extended the March 1 deadline, leaving the tariffs on $200 billion of Chinese goods at 10% on an open-ended basis.

May 2019:  Trump tweeted that he intended to raise the tariffs rate on $200 billion of Chinese goods to 25% on May 10. The Trump administration gave formal notice of its intent to raise tariffs on $200 billion of Chinese imports to 25% from 10%, effective May 10.

June 2019:  Trump and Xi speak by phone, and the two sides agree to rekindle trade talks ahead of a planned meeting between the two leaders scheduled for the Group of 20 (G20) summit in Japan at the end of June. At the G20 meeting in Osaka, the United States and China formally agreed to restart trade talks after concessions from both sides. Trump agreed to no new tariffs and an easing of restrictions on Chinese telecom powerhouse Huawei Technologies Co Ltd. China agreed to unspecified new purchases of U.S. farm products.

February 2020: Additional tariffs on the USD 75 billion of American products were halved by China which included automotive, agricultural products like pork, chicken, beef and soybeans, chemicals, crude oil, whiskey, and seafood. Poultry import from US to China also started.

May 2021: Amidst all the COVID-19 impact on the global economy, the trade war between China and US takes a back seat, although newly elected US president, Joe Biden, confirmed he will not be making any ‘immediate moves’ to lift off trade war tariffs before a complete review.

 

IMPORTED AND EXPORTED PRODUCTS BETWEEN US AND CHINA


IMPACT OF TRADE WAR

Some of the industries will be affected badly if this full-blown trade war between China and the United States becomes a reality. Sectors like Automobiles, Information Technology and Agriculture are likely to be the most susceptible to the impact of trade war.


AUTOMOBILES

The United States automotive industry is one of the biggest sectors which is witnessing high loss due to trade tensions between China and the United States. In 2018, China raised the tariff on the US made automobiles, from 15% to 40%, in vengeance to the US tariffs. Usually, the Chinese consumers prefer buying automobiles that are manufactured locally, therefore, by imposing such tariff it is the US automakers, like Tesla Inc. (TSLA), would bear the burden.

According to TechSci research report, China Electric Vehicle Market By Vehicle Type (Two-Wheeler, Three-Wheeler, Passenger Car and Commercial Vehicle), By Drivetrain Technology (BEV Vs. PHEV), By Charging Infrastructure, Competition, Forecast & Opportunities, 2016 – 2026”, the China electric vehicle market registered a steep growth from USD 95.57 billion in 2019 and is projected to register a double digit CAGR of 28% in the forecast period until, 2026. Growth factors like rising pollution levels, and concerns among the population regarding those pollution levels is anticipated to drive the market growth in the next five years. Also, to overcome the pollution problems, the population is now demanding the clean fuel running automobiles and technological advancements for such automobiles that are affordable and runs on cleaner fuels. Moreover, rising investments by several key OEMs to develop premium quality and more affordable electric vehicles coupled with expanding charging infrastructure would positively influence the country’s electric vehicle market in the coming years.

 

INFORMATION TECHNOLOGY

NVIDIA Corp. (NVDA), Micron Technology (MU) and Intel Corp. (INTC) companies are the most vulnerable in this trade war as these chipmakers and electronics manufacturers rely on China for sales. 

Also, Apple Inc. (AAPL) is so vulnerable to a trade war with China owing to two primary reasons. First, the phones are getting assembled in China. The company so far has been able to deal with tariffs on its China-assembled phones but with the announcement of new round of tariffs placed on Chinese exports it is possible that some of Apple’s products could get caught in the crossfire making it volatile to price increase.

Another reason is that China accounts for 20% of Apple’s revenue generated. Apple, on contrary to the other tech companies, sells its products to Chinese consumers to make a substantial amount of money. Therefore, Apple has never been in a favor of Trump’s proposed tariffs and does not support implementing taxes on China imports.

In a recent report by TechSci Research, “United States Warehouse Robotics Market, By Type (Mobile Robots, Articulated Robots, Cylindrical Robots, Scara Robots, Parallel Robots & Cartesian Robots), By Software (Warehouse Management System, Warehouse Control System & Warehouse Execution Systems), By Payload (0.5 Kg to 10 Kg, 11 Kg to 80 Kg, 81 Kg to 180 Kg, 181 Kg to 300 Kg, 301 Kg to 900 Kg ad More than 900 Kg), By End-User (E-Commerce, Automotive, Electricals and Electronics, Chemical, Rubber & Plastics, Food and Beverages, Pharmaceutical & Others),Competition Forecast & Opportunities, 2016 – 2026”, the United States warehouse robotics market, is expected to register a steep growth with an impressive CAGR in the forecast period, 2022-2026 on the account of rising online shopping and multiple market players flooding the market in the recent years. Increasing technological advancements and growing number of distribution centers are some of the major reasons behind the esteemed growth of the US market in the upcoming five years. Moreover, increasing demand for shorter delivery times and need for fulfillment of takt time, along with growth in online retail shopping and rising number of robotics manufacturing startups are bound to boost the growth of the United States warehouse robotics market in the next five years of the forecast from 2022-2026. Also, due to the recent pandemic conditions due to widespread viral infection of COVID-19, the online retail market has observed a sudden jump in the market. Though the production and manufacturing units were shut down, the demand for the warehouse robotics equipment increased multiple folds and is expected to further strengthen the growth of the market in the upcoming five years.


AGRICULTURE

China is marked as the fourth biggest agricultural exporter for the United States with a total of USD9.3 billion export in 2018.  Furthermore, China has been the largest importer of the US soybeans. Other agricultural products such as cotton, hides & skins, coarse grains and pork & pork products are also exported to China in large amounts.

In retaliation to the US tariffs, Chinese officials imposed an added tariff on the US soybeans in 2018 due to which the American soybean farmers couldn’t sell their huge stockpiles of product and suffered a loss of million dollars in the same year. In addition, cotton is another trade-sensitive agricultural product, which countries like India and Brazil are providing to China in order to meet their needs.

The farmers and related industries will be bearing the brunt of the trade war, if China slows down or stops its purchases of agricultural products from the United States again in the future.

 

TOURISM

Chinese tourists are paramount for the US as the China remains at top in generating revenues from travel. For the US, the Chinese Tourists make up the 3rd largest travel and tourism market with an average of USD5,800 per visit which is comparatively more than any other nationality.

This trade war with China is adversely influencing the Chinese tourism in the US. As a result, the country witnessed a decline of nearly 2 million Chinese visitors owing to rising currency exchange rates and hostile trade relations between the two powerful economies. 

 

WHO IS WINNING, WHO IS LOSING?

According to the current trade scenario, the US-China trade war will leave both countries worse off in the coming years. As per the current analysis, the prices for the American consumers and producers who are importing intermediate inputs from China will be hiked owing to the United States tariffs, while the Chinese tariffs will disrupt the US exporters and producers supply chain. In the coming years, it is anticipated that the US and China will divert trade to other markets to meet their requirements, and on the other hand the other countries will divert exports to China and US markets to reap the benefit from the growing dispute. As a result of this trade war, the US agriculture and manufacturing sectors are anticipated to witness downfall, while the Chinese manufacturing sector would experience upsurge, leading growth in production and trade. Moreover, the US exporting to other economies instead of China is partially hampering the overall economy of the country. On the contrary, China is ahead at diverting exports to other countries therefore, expanding its total exports. Additionally, small improvement in Chinese GDP and a slight decline in the US GDP is analyzed based on direct and indirect effects of trade tension with a marginal decline in global trade.

The ripples of the trade war are impacting various countries in different manner, as the trade conflict continues, winners and losers are beginning to emerge and create uncertainty worldwide. The global supply chain is completely distorted as a result of the trade war. Distributors are adjusting their ways of buying and selling of goods, as a result of which, the countries like Vietnam, India, among others are benefitting. The US is importing 40 per cent more from Vietnam leading to increased investment. Despite Vietnam’s success, the European Union majorly along with other third-party economies are dealing with the impact of ongoing trade war. The European economy relies on trade for economic growth, and the recent slowdown in trade due to the US-China conflict has raised concerns about future growth. Countries like Germany, among others are getting affected to a greater extent as a result of this ongoing conflict. Despite having only one-quarter of the population size, Germany produces nearly the same value of exports as the US. Moreover, downfall in demand from the US due to trade conflicts is not good for Germany. On the other side, Germany has a long history of doing business in China, and exports to the Asian giant have increased in the last two decades. However, if China’s trade activity declines, Germany will lose a massive export market.

The global economic growth is likely to get subdued due to the ongoing US China trade war. The war poses a threat of damage to other growing economies as well. China imposed higher tariffs on the US goods worth USD60 billion in retribution against Washington’s tariff hike on Chinese goods. This trade tension could be a golden opportunity for India if it is for short duration. Otherwise, if this war persists for long there will be a downfall in the Indian economy as well. India is among few growing countries which will be benefited from this dispute of world’s two top economies. While the Chinese products are being taxed with heavy duties in the US, India exporters can explore this opportunity to fill the void.

For instance, the Chinese carpets can be replaced by Indian carpets, in the US market on account of higher tariffs along with the retaliatory tariffs for a long list of products exported from China. By replacing Chinese carpets, the Indian manufacturers can reap profits to an extent owing to high price of Chinese carpets due to this tariff war. Thus, carpet exporters are looking at more business opportunities from the ongoing US-China tariff war. Not only carpet exporters, but Indian tire manufacturers have also suddenly found their products becoming more cost-competitive than before on account of increased tariffs on Chinese radial tires by the United States, that are used in buses and trucks.

Furthermore, India's processed food exporters are trying to reach out to the US retail chains like Walmart and Costco, while Indian pharmaceutical companies, especially raw material suppliers are seeking to fill in the space. A whole range of rubber items, such as hoses, pipes, rubber mats from India are likely to become more attractive for the US importers. Additionally, other Indian industries, which include apparels and textiles, leather products, machine tools, processed foods such as jams, marmalades and jellies, are also witnessing growth as the imports of these products from China have become more expensive due to higher tariff in the US.

 

RECENT DEVELOPMENTS

In August 2019 President Trump has announced that the US will impose a 10 per cent tariff on essentially all Chinese goods which were not previously subjected to tariffs from 1st of September. These tariffs will be considered as the List 4 tariffs and will hit about USD300 billion worth of imports from China. If this tariff is implemented, then nearly all products that are imported from China will be subjected to tariffs. China for the first time has allowed the yuan to weaken to more than 7 RMB per dollar since the global financial crisis. In fact, in previous years they have burned a substantial portion of their foreign reserves to defend the currency from breaching that mark. Additionally, the Chinese government has instructed few companies to stop buying the US agricultural products. The US President Donald Trump announced an additional duty on USD550 billion of targeted Chinese goods, few hours after China unveiled retaliatory tariffs on USD75 billion worth of US goods.

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