The talk around the financial markets these days is about a trade war. The talks started when Trump announced plans to impose heavy tariffs on steel and aluminum. He then moved to announce heavy tariffs on an assortment of 1,300 Chinese goods. As a response, Chinese authorities announced plans to levy heavy tariffs on 128 U.S products, which include pork, soybeans, and airplanes. Here is everything you need to know about the so-called trade war.
Why Trump Imposed Tariffs
Before he became president, Trump was a businessman running a real estate and branding company. To succeed in these businesses, he had to make deals. He was used to the zero-sum game of business deals.
As president, he continued to view the trade deals the country had made in these lens. Most importantly, he viewed the trade deficit as the most important thing in global trade.
America has a high trade deficit with China because the country manufacturers most of the things that Americans consume. They have low wages, higher skills, and less regulations which makes it easier for them to achieve this.
On the other hand, the cost of doing business in the United States is high mostly because of higher taxes, more regulations, and higher wages.
Therefore, he imposed the tariffs to help the country reduce the deficit.
The Complaints Against China
Trump has some valid arguments against China. For example, China has made it nearly impossible for American firms to do business there. Those that do are forced to partner with local firms and thus share trade secrets. Others are forced to share their intellectual transfer with Chinese companies. In addition, they are forced to store their data in China, where the Chinese authorities can access it. Then, the country has higher taxes for American goods.
Implications of the Trade War
A trade war could be disastrous for the two countries and the global economy. More importantly, it would be potentially more damaging for the United States.
First, China is a communist country with prosperity that is widespread across the country. Recently, the communist party removed the term limits for president, which makes Xi Jinping more secure.
On the other hand, United States is a democratic country with regular elections. As such, it is easier for the Chinese authorities to target the products produced in the areas where Donald Trump won. They are also able to potentially target products that are highly sensitive to the American people. For example, by imposing tariffs on soybeans, they were targeting the residents of Iowa, which tend to lean Republican.
In addition, China is the biggest exporter in the United States. As such, tariffs would largely mean higher prices for the products Americans buy.
The Options for China
China has more options than possibly the United States. First, China is the biggest buyer of United States debt. They can decide to stop the purchases and as we saw a while back, the implications would be dire. Second, China could impose higher tariffs on American products such as those mentioned yesterday. They also have more products that they can place tariffs on. Third, they can also make it difficult for American companies that operate in the country.
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