Paper Example. Trade War Between the United States and China

The U.S. and China are the world's leading powers in the size of their economies, defense budgets, and global greenhouse gas emissions. In 2017, they were each other's largest trading partners (Liu and Wing 319). The global significance of the U.S. and Chinese economies, as estimated by their nominal gross domestic product (GDP), can be demonstrated in two ways that also highlight the challenges of the ongoing power dispute. One entails the rise of the Chinese economy relative to the U.S.'s GDP while the other involves the concomitant shifts in globalization (Liu and Wing 319). Hence, it is crucial to be clear concerning the costs and benefits of U.S. trade and investment with China to measure what might constitute a sustainable economic relationship going forward. According to Meltzer and Neena, the U.S.-China economic association delivers more benefits to the U.S. than is usually comprehended (2). For instance, the U.S. exports to China support approximately 1.8 million jobs in industries like agriculture, services, and capital goods (Meltzer and Neena 2). However, trade between the two countries has also led to job destruction in some U.S. sectors, particularly low-wage manufacturing. Therefore, the purpose of this paper is to determine if the recent trade war between the U.S. and China has either increased or decreased export or business opportunities for U.S.-based firms.

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U.S.-China Trade War

The dispute concerning trade issues between the U.S. and China dates back to a period before President Trump had possibly even perceived becoming the next president of the U.S. During Barack Obama's tenure, the U.S. challenged China 16 times, on matters concerning harmful dumping of commodities onto the U.S. market, illegal taxes on American cars and steel, export restrictions on rare earth, and overcapacities in the solar panel and steel sectors (Felbermayr and Marina 27). Today, U.S. officials assert that China is pursuing unfair trade policies, exploiting the benefits of trade liberalization and the World Trade Organization (WTO) membership (Chong and Xiaoyang 185). This is happening while keeping its domestic market protected against foreign completion by availing subsidies and promoting export through currency devaluation (Kapustina et al. 2).

However, the approach that the countries are using to solve this dispute is quite different, which has left them in a spiral of never-ending tariff threats. For example, when the first wave of America's 25% tariffs on US$34 billion worth of Chinese products took effect on 6 July 2018, China retaliated by imposing 25% tariffs on the same amount of American commodities (Lai 169). Subsequently, the U.S. imposed another 25% tariff on additional 279 Chinese goods valued at US416 billion on August 23, 2018, and China responded immediately by imposing a 25% tariff on additional 333 U.S. products valued at an equal cost (Lai 169). The third round of tariffs was imposed on September 24, 2018, when President Trump began levying 10% tariffs on another US$200 billion in Chinese products. China retaliated with rates ranging from 5% to 10% on an additional US$60 billion worth of American goods (Lai 170).

With the imposition of tariffs, President Trump hopes to minimize the large U.S. trade deficit with China and to impel China to make key adjustments to its economic policies. This includes declining existing tariffs and restricting the alleged theft of U.S. intellectual property by Chinese firms. However, Kapustina et al opine that no trade war has a winner (2). Every trade war results in three losers; both trade partners and the global decline in trade. This leads to a slowdown in global economic growth. Many articles have been published on this issue, most of which condemn both nations for damaging the global economy by hampering world trade.

The Effect of the U.S.-China Trade War on U.S.-based Firms

Any trade war affects consumers, producers, firms, governments, and investors either positively or negatively. On the negative side, such a war can lead to deadweight loss or allocative inefficiency. Evans defines deadweight loss as the loss of economic efficiency that results when equilibrium for a good or service is not attained (50). It is the loss of social surplus, welfare, or utility for consumers or producers because of tariffs, subsidies, price ceilings, taxes, monopoly pricing, and externalities (Evans 50). For tariffs, deadweight loss is the excess burden created by the loss of benefit to participants in the trade, such as consumers, firms, or the government. Thus, if a tariff is imposed on a company for each unit of the good it imports, the new equilibrium price rises. In line with the deadweight loss, tariffs and counter-tariffs have a wide effect on firms, consumers, and the global economy.

One such impact is a positive effect on some businesses. According to Shoshanna (n.d), some companies have a competitive advantage that makes them immune to the prospect of increased tariffs. Mainly, firms that avail services instead of hard goods can withstand the trade war since they are resilient. For example, Microsoft Corp. (MSFT) is one U.S.-based firm that benefits from the trade war. Its stocks have less foreign input costs, which might be subject to tariffs (Shoshanna n.d). These stocks are also less exposed to trade retaliation because they have less non-U.S. sales exposure than those from firms that sell goods. Consequently, the company is benefiting from more investments as stock investors put their money in equities that can withstand the trade war. Such investments are crucial in business growth and development.

However, the longer the trade war continues, the more companies and businesses get hurt. U.S. exports are steadily declining because of the U.S.-China trade war. From August to September 2019, exports from the U.S. reduced from $207.8 billion to $206 billion (Wharton University of Pennsylvania n.d). In particular, exports in automotive parts and vehicles decreased by approximately $1 billion. Similarly, the American agricultural sector has declined significantly since the start of the trade war, mostly because of the $10.4 billion reductions in agricultural product demand from China from 2017 to 2018 (Wharton University of Pennsylvania n.d). This decline in U.S. exports has affected many firms adversely, especially by decreasing their profits. According to a survey by BizBuySell, an online business-for-sale marketplace, Chinese tariffs have raised the cost of doing business for more than one-third of small businesses across the U.S (Wharton University of Pennsylvania n.d). In addition, U.S.-based startups expecting capital from Chinese investors are stalling because of heightened regulatory red tape (Putz et al. n.d).

For example, Brooklyn Bicycle, a handmade bicycle firm based in New York City is already struggling as the U.S.-China trade war escalates. Ryan Zagat, its owner, is opting to increase his bicycles prices by $50, which is a risky strategy in the current competitive market (Wharton University of Pennsylvania n.d). He is also thinking of absorbing the cost of the tariffs, sourcing bicycle parts from other nations, or adopting a new pricing strategy to enable the company to incrementally raise prices and absorb a smaller percentage of the fare. Nevertheless, each option will incur huge costs to the firm and its clients, which Zagata is hoping to evade. Other U.S.-based businesses have reported increased prices due to the tariffs, impelling them to make hard decisions like laying off workers or delaying expansion plans. Numerous firms have shifted production to developing countries to circumnavigate the tariffs since they do not want to absorb extra costs for exports.

Conclusion

The U.S. - China trade war has received a lot of attention, not only because of its nature but also because of the vastness of the economies involved. Certainly, the trade war will continue to have a notable influence on China, the U.S., and even the world economy. Similarly, it will continue to affect some businesses positively and others negatively. In particular, firms in the services sectors, such as technology, will continue to benefit as investors put their money in equities that can withstand the trade war. However, companies like Brooklyn Bicycle that sell goods will continue to face challenges as the trade war progresses. Moreover, the trade war has decreased U.S. exports, especially to China, which is the largest consumer of U.S. goods such as automotive and agricultural products. Certainly, any adverse effect on U.S.-based firms translates into a negative impact on the economy. Therefore, there is a need for the government to consider resolving this war to avoid further damage for many businesses, consumers, and overall American citizens.

Work Cited

Chong, Terence Tai Leung, and Xiaoyang Li. "Understanding the China-US trade war: causes, economic impact, and the worst-case scenario." Economic and Political Studies 7.2 (2019): 185-202.

Evans, Olaniyi. "The effects of US-China trade war and Trumponomics." Forum Scientiae Oeconomia. Vol. 7. No. 1. Wydawnictwo Naukowe Akademii WSB, 2019.

Felbermayr, Gabriel, and Marina Steininger. "Trump's trade attack on China who will have the last laugh?." CESifo Forum. Vol. 20. No. 1. Munchen: ifo Institut-Leibniz-Institut fur Wirtschaftsforschung an der Universitat Munchen, 2019.

Kapustina, Larisa, et al. "US-China Trade War: Causes and Outcomes." SHS Web of Conferences. Vol. 73. EDP Sciences, 2020.

Lai, Edwin L-C. "The US-China trade war, the American public opinions and its effects on China." Economic and Political Studies 7.2 (2019): 169-184.

Liu, Tao, and Wing Thye Woo. "Understanding the US-China trade war." China Economic Journal 11.3 (2018): 319-340.

Meltzer, Joshua P., and Neena Shenai. "The US-China economic relationship: A comprehensive approach." Available at SSRN 3357900 (2019).

Putz, Adam, et al. "How Trump's trade war with China will affect U.S. investment markets." Seattle Business. Available at https://www.seattlebusinessmag.com/finance/how-trumps-trade-war-china-will-affect-us-investment-markets

Shoshanna, Delventhal. "8 Stocks that can prosper amid the trade war." Investopedia (2019). Available at https://www.investopedia.com/8-stocks-that-can-prosper-amid-the-trade-war-4687182

Wharton University of Pennsylvania. "The effects of the U.S.-China trade war on U.S. exports." Public Policy Initiative (2020. Available at https://publicpolicy.wharton.upenn.edu/live/news/3218-the-effects-of-the-us-china-trade-war-on-us/for-students/blog/news