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Trade War: What Is It Good For?

May 14, 2019 by Sante Mastriana


This past Friday, President Trump announced a new round of tariffs on $200 billion dollars’ worth of goods from China, increasing the rate from 10% to 25%. On Sunday, China announced retaliatory tariffs on $60 billion dollars’ worth of US goods increasing to a rate of 20-25%.1 The so-called ‘trade war’ between the US and China has been ongoing since the summer of 2018 and there is no clear end in sight. So, what does all of this mean?

 

What is a trade war?

A trade war usually centers on two nations with a trade imbalance. A trade imbalance occurs when Nation A imports more from Nation B than Nation B imports from Nation A.  Such imbalances are normal since it’s impossible for any trade relationship to ever be 100% balanced. However, when the imbalance gets too extreme it can start having a negative effect on the economy of whichever country is importing more goods. Generally speaking it essentially means that one country is getting more benefit out of the trade relationship than the other.

One way to offset this imbalance is by imposing tariffs. Tariffs are a fee that countries can place on certain goods, typically on imports. For example, let’s say a shopper who lives in Nation A goes to the supermarket to buy apples. Apples from Nation A are $2.50/lb while apples from Nation B are $2.00/lb. Naturally, the shopper buys the cheaper apples from Nation B, as do most other shoppers. As a result, Nation B’s apple growers make money, Nation A’s apple growers do not.

To address this problem the government of Nation A might impose a 30% tariff on apples from Nation B. When that shopper goes back to the grocery store to buy apples, Nation A’s apples are still $2.50/lb but now Nation B’s apples are $2.60/lb. That shopper now chooses to purchase Nation A’s apples, along with most other shoppers, and now Nation A’s apple growers make money while Nation B’s do not.

trade war occurs when rather than yield to the pressure of tariffs, a country imposes its own tariffs instead. In our example, after Nation A imposes the tariff on Nation B’s apples, Nation B responds by placing a similar tariff on Nation A’s oranges. Both countries try to get the other to back off from tariffs by making it too costly to continue.

 

The US-China Trade War

With the US and China now embroiled in a trade war the question becomes: ‘Why?’ The Trump Administration has argued that tariffs on Chinese goods are necessary to decrease the trade imbalance between the US and China and will have the effect of growing the US agricultural industry and creating job opportunities in the US.2

However, many experts are skeptical of this plan. The President’s own economic advisor, Larry Kudlow, has stated that while the tariffs will ultimately do more damage to China’s overall economy, the US agricultural industry has been and will continue to be directly damaged as farmers are no longer able to sell soy beans, corn, and pork to Chinese markets.3 Many economists also point to the fact that whatever the goals of a trade war, the immediate result is that prices for consumers rise in both countries, meaning for most Americans the only observable effect of the tariffs will be that their grocery bills cost more.4

The trade war has also produced a precipitous effect on the stock market which opened at a two-month low on Monday as a result of China’s retaliatory tariff announcement. However, many economists argue that these dips in the stock market are usually only short-term.5

Ultimately though, the President’s trade war may be poorly timed if the goal is to restore balance in the US-China trade relationship. While China continues to depend on foreign exports for things like steel, oil, and heavy industrial goods (airplanes, cars, etc.) the Chinese government has also been laying the groundwork for a massive shift away from an export-driven economy to a domestic-focused economy as Chinese consumers gain more wealth and ability to purchase goods.6 While the trade war may be accelerating their timeline and making the transition more risky, the decline in access to foreign goods may wind up boosting Chinese domestic industries as the Chinese government had planned.

 

Discussion Questions

  1. Do you think the government should be involved in regulating trade between countries?
  2. Under what conditions, if any, is it acceptable for the government to impose tariffs?
  3. If it means the economy of the country as-a-whole will improve is it acceptable for the administration to continue the trade war even if it has a negative effect on a specific industry/group (ex. farmers)?
  4. Should the goal of the government always be to protect domestic industries or to pursue policies which make goods cheaper and the economy more efficient?

 

Sources
Featured Image: Associated Press; Andy Wong
[1] Swanson, A., Bradsher, K., & Sullivan, E. (2019, May 13). China Retaliates With Higher Tariffs as Trump Defends U.S. Approach. Retrieved from https://www.nytimes.com/2019/05/13/us/politics/us-china-trade-tariffs.html
[2] Trade wars, Trump tariffs and protectionism explained. (2019, May 10). Retrieved from https://www.bbc.com/news/world-43512098
[3] Newburger, Emma. (2019, May 12). Kudlow acknowledges US will pay for China tariffs, contradicting Trump. Retrieved from https://www.cnbc.com/2019/05/12/kudlow-says-us-will-pay-for-china-tariffs-contradicting-trump.html
[4] Trade wars, Trump tariffs and protectionism explained. (2019, May 10). Retrieved from https://www.bbc.com/news/world-43512098
[5] Wearden, G. (2019, May 13). Trade war: China hits back with new tariffs on US goods – business live. Retrieved from https://www.theguardian.com/business/live/2019/may/13/trade-war-investors-china-retaliation-us-tariffs-growth-stock-markets-business-live
[6] China showing some steel as industry avoids effects of trade war tariffs. (2019, February 14). Retrieved from https://www.scmp.com/economy/china-economy/article/2186142/us-china-trade-war-having-no-effect-china-steel-amid-surging

 

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