The spinning wheel of US-China trade war

Logyn Sherif
8 Min Read

The US government announced last Thursday that it will pay American farmers affected by the trade war with China between $15 and $150 per acre in an aid package totaling $16bn promised earlier by US President Donald Trump.

“Farmers are starting to do great again, after 15 years of a downward spiral. The 16 Billion Dollar China “replacement” money didn’t exactly hurt!” Trump tweeted on 23 July.

As US and Chinese negotiators prepare to meet face-to-face for the first time since talks on the dispute collapsed in May, the agriculture secretary, Sonny Perdue, said the package showed that Trump knew farmers were “fighting the fight”.

The assistance, starting in mid-to-late August, follows the president’s $12bn package last year that was aimed at making up for lower farm good prices and lost sales.

Now and in the 12 months through June, import prices of the United States fell 2.0% after declining 1.1% in May. It dropped 0.9% last month, the biggest decrease since December, the US Department of Labor said.

This comes as the latest episode of the trade dispute which dates back to 2018, when President Trump took decisions targeting the enormous trade deficit between his country and China. He has imposed a series of tariffs as part of his “American First” economic policy.

The United States decided first to raise tariffs on imports of solar panels. Then for other products like steel 25% and aluminum 10%. At the end of 2018, almost half of the products that the US imports from China has been hit with higher tariffs.

In response, the Chinese State Council imposed 25% tariff on agricultural products, automobiles, and “aquatic products.”

Then the tension between the two countries had increased. When the US took aim at the Chinese telecom Huawei, under concerns allegations of Chinese espionage and stealing American intellectual property policies accusations. So, the US effectively blacklisted it from doing business with the US companies which had cost Huawei tremendous damages.

This act was seen by economists as a severe threat to global economy than trade war tariffs.

Trade war taking toll on business

The prices fell mainly due to declines in the costs of petroleum and other goods.

Import prices exclude tariffs. In June, prices for imported fuels and lubricants fell 6.5% after rising 2.3% in the prior month. Also imported food prices trembled 1.5%, the second straight monthly drop.

Chairperson of Federal Reserve System (Fed), Jerome Powell, last week told lawmakers the central bank would “act as appropriate” to protect the economy against risks stoked by the trade war between the United States and China, as well as slowing global growth.

On Friday, Trump tweeted, “Apple will not be given Tariff waiver, or relief, for Mac Pro parts that are made in China. Make them in the USA, no Tariffs!”

Effect on pricing in the US?

Although, since S&P 500 companies began reporting second quarter earnings, more than a third of them have cited tariffs or the US-China trade war as a headwind to profits. Knowing that GDP grew by 2.1% in the second quarter despite the war. Certainly, some industries were hit harder than others. Industries like the IS automotive industry, tech, and agriculture are affected the most by this trade war.

Secretary of Agriculture Sonny Perdue announced package of the $16bn aimed at supporting American farmers hurt by the Trade war while the Administration continues to work on free, fair, and reciprocal trade deals.

On the opposite side, Chinese’s investment in the US has plummeted by nearly 90% since President Trump took office, according to the New York Times.

Chinese economy starts to feel the pain

China’s economic growth is sputtering. A 6.2% growth actually reported in the second quarter, it might seem impressive, but in fact it had slowed about 0.4%, compared to last year and is the weakest since the government began releasing quarterly data in 1992.

Trump has quick to advantage saying that the imposition of new US tariffs is having its effect on the Chinese economy. In response, the Chinese authorities asserted that this is not a ‘bad performance’ considering slower global economic growth and it is within the annual target range of 6-6.5%.

The trade war is hurting exports, as US tariffs bite and is causing imports from the US, Japan, and South Korea to plunge, illustrating how the battle is reshaping global commerce.

Earlier this year, Beijing has stepped up fiscal stimulus plan, including about 2tn yuan ($291bn) of tax cuts. To prevent a sharper slowdown in the world’s second-largest economy, which is being squeezed by weaker domestic demand and a trade war with the United States

The People’s Bank of China has also requested banks to not lower mortgage rates further, despite easier monetary conditions. It’s also boosted credit support for small firms, increased liquidity for smaller banks and asked big lenders to sustain funding to avert a squeeze. In June, the top economic planner unveiled a stimulus plan to help spur demand for automobiles and electronics.

Also, in the next decade, Goldman Sachs estimates $1tn will enter China’s bond market from abroad. Putting it among the world’s top investment destinations.

It is not just about economic war; it is a rivalry that could possibly take à military dimension. On 9 June, China denounced a possible US weapon sale to Taiwan as a violation of international law, after the State Department approved a weapon package, including tanks, missiles, and other armaments for the island.

The US has been always supporting Taiwan’s independence from the Chinese governance, for which China is ready to use force to take over, said the Defense Ministry spokesperson Wu Qian.

This trade war between the world’s two largest economies, may have global economic impacts.

Malaysia, appears to be the trade war’s first victim and the rest of the world to come.

In June, the Congressional Research Service has indicated that the trade conflict between the US and China has the potential to affect Malaysia’s trade with both countries. As both are important trading partners. The imposition of safeguard tariffs by the US will affect Malaysia’s solar exports to the US though its exact impact is unclear due to the complicated implementation of this tariff. The tariffs imposed on China raises the possibility of trade and investment diversion to Malaysia.

Till now, we don’t know when this year-long trade war may end, but Trump has warned that China may not strike the agreement until the US elections in 2020.

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