China-U.S Trade Effect on Globalisation, World Trade Volume, Sustainable Business and Inequality

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Introduction

Since the 1980s, Trump has consistently argued that the U.S should increase tariffs in order to reduce its trade deficit and create jobs through promotion of domestic manufacturing sector (Steinbock, 2018). In 2018, as the leader of the world’s largest economy, president Trump initiated a trade war with China by imposing tariffs on Chinese goods despite tariffs being opposed by many economists and international financial institutions who maintain that tariffs are not the solution to reduce the trade deficit. However, Trump has argued that the imposed tariffs would make China stop its unfair trade practices, and forced transfer of U.S technology. As a result, China retaliated accusing the U.S of starting a trade war and has similarly imposed tariffs on U.S goods which has resulted to a trade war whose effects are being felt around the globe. Against this backdrop, this essay seek to establish how the trade war has limited globalisation thus affecting the volume of world trade, damaged sustainable business and contributed to inequality.

How China-U.S trade war has limited globalisation

Steinbock (2018) contends that anti-globalisation sentiments in developed countries have increased tremendously and played a vital part in the last U.S presidential elections and Brexit referendum. These sentiments have caused trade wars between major trading partners and most notably between China and the U.S. Additionally, Romei (2019) postulates that despite the U.S having benefited from globalisation which it has actively championed since the end of Second World War, the main losers of globalisation have been its unskilled workers, which on the contrary has created hundreds of millions of jobs for Asian workers and especially in China. While development of technology has played part in job loses, politicians have noted that blaming other countries for the loses has sounded sweet in the ears of voters, and as such, president Trump in order to ‘Make America Great Again’ initiated trade war with China limiting globalisation which in turn has reduced the volume of world trade.

According to OECD (2019) one of the main ways the trade war has limited globalisation is through the ‘supply chain effect’ as protectionist measures by the two countries immediately had an effect on exports of countries integrated in the two countries supply chains. This view is echoed by Roysadi and Widodo (2018) who assert that the trade war has led to uncertainty for companies especially those with global manufacturing networks. This is because most goods targeted have been manufacturing goods such as auto parts, electronic parts and machinery which have high linkages to several nations, as productions of these goods for exports demand intermediate goods and capital goods import from other nations. As a consequence, Asian countries with high China linkages such as Malaysia, Taiwan and Thailand have been the most affected. A case in point, supply chain effect led to 0.1% reduction in Thai exports in first quarter of 2019 with electronics being the most affected goods (Ji et al., 2019).

These findings are in consonance with ILO (2019) submission that by the end of 2018, the trade war had already started affecting global value chains (GVCs) since more than 17% of Chinese exports are assembled with oversees components, and U.S accounts for more than 11 % of the components which include software and financial services. As a solution to this limitation on globalisation, some multinational companies have started redistributing supply chains in order to minimise effects of tariffs. However, doing so would take years but still would be a loss of capital spent on establishing presence in China. Moreover, relocating to other countries would be the second best option since companies moved to China since that was the best destination for them in the first place (Antoine and Laborde, 2018). In sum, the trade war has as such limited globalisation which has resulted to reduction in trade volume as discussed below.   

Reduction of the volume of world trade due to China-U.S trade war

Chuangwei et al. (2018) concede that due to the sheer size of Chinese and U.S economies, the effects of their trade war had been expected to be felt by all major economies in the world. This has turn out to be the case since the world trade volume has contracted since the trade war began. To start with, World Bank (2019) explain that after tariffs increase between the two countries, a negative effect on international trade was already felt on the first year with China export to U.S, Japan and South Korea declining by 27%, 16% and 18% respectively. As a consequence, due to the huge amount of trade volumes concerned the volume of global trade declined by 4.1% in 2018. This partly reflected the supply chain effect from tariffs against China by the U.S (see figure 1 for summary).   

Figure 1: China’s Export Year on Year, %

Source: World Bank, 2019

Furthermore, Romei (2019) puts forth that global trade contracted during the first 7 months of 2019 as the trade war intensified which led to global decline of growth. As such, the value of world trade volume declined by 0.4% in July in comparison with the same month in 2018. This was however smaller than 1.7% reduction in June, but was the sixth reduction in eight consecutive months. According UNCTDA (2019) these reductions in trade volume reflects the negative effect of the trade war which has made U.S average tariffs on exports from China to jump from 3.1% before trade war to more than 23%. Consequently, the tariffs have led to double-digit reduction of exports between the two nations.

In addition, Orlova et al. (2019) elucidate that after a high Thailand export growth of about 12.5% in the first six months of 2018, the value of exports in first quarter of 2019 declined by 4% marking the first decline in 11 quarters. This was heavily blamed on the trade war which although the U.S did not raise tariffs on Thailand’s imports; its exports were affected due to supply chain effects of its manufacturing goods.

How the trade war has damaged sustainable business

Bekkers and Romagosa (2018) confirm that the contraction in U.S exports since the trade war began has affected American businesses negatively as increase in Chinese tariffs has increased the cost of doing business for more than a third of small scale enterprises. The tariffs have resulted to some businesses seeing their tariffs double while other businesses have increased the prices of their products by more than 10%. Moreover, the trade war has decreased profits for businesses in several industries across the country as some businesses have absorbed smaller percentage of the cost while others have started adopting strategies to source components away from China, but available sources so far have incurred significant costs to businesses and consumers. Consequently, businesses with China based supply chains which in the beginning were unwilling to abandon profitable Chinese supplier relationships are now forced to look for other options albeit less profitable. These drastic changes have most effect on small businesses due to their fragility and most researchers estimate that if the trade war continues, most will run out of business and thus more jobs will be lost that the trade war was initially initiated to save (Amiti et al., 2018).

Similarly in Asia, economists are worried that the trade war will affect traders in smaller economies such as Thailand, Malaysia and Singapore as products not exported to the U.S by China may end up being dumped in the neighbouring markets (Roysadi and Widodo, 2018). In Thailand, for example, an assessment of imports from Chinese Market showed some signs of dumping with a growth of imports of goods targeted by U.S tariffs such as aluminium structures and vehicle parts which accounted for less than 1% of imports. However, if more tariffs are imposed on Chinese goods analysts expect more dumping of the products in Thailand and neighbouring economies which will have a negative impact on local businesses as a result of lack of price competitiveness in dumped products (Ji et al., 2019).

Furthermore, in the long run the trade war will result to innovation decline by local businesses which will in turn hamper growth. This claim is shared by Orlova et al. (2019) who note that when a country increases tariffs on imports like the U.S is doing, it reduces its local businesses competitive pressure which makes the businesses complacent and don’t find any need for investing in R&D. This as a result leads to less innovation and as such the businesses are not sustainable in the global economy as the governments spend money trying to support businesses with no comparative advantage. For example, Gullen (2019) alerts that in 1980s U.S waged a trade war on Japan as its companies challenged U.S dominance in industries such as motor vehicle manufacturing and electronics. As a result of protectionist measures, American firms invested less on innovation and U.S patents ratio declined while those of Japan increased between 1975 and 1985. As a result, most analysts believe the effects of those protectionist policies are experienced by the U.S to this day.   

How China-U.S trade war has caused inequality

Amiti et al. (2018) posit that free trade between China and the U.S improves living standards of both countries citizens by the sheer fact that it lowers costs of both goods and services. As such, trade war between these two partners will result to increased prices which in turn lead to increased wealth inequalities since consumers earning less will have less purchasing power and fewer saving. Relatedly, Amiti et al. (2018) recognise that the vital channel of the trade war would run through price effects, which would have a detrimental effect on workers through real wage channel. Further on, the scholars found out that 2018 tariffs effects were felt most on consumers and caused a decrease of real income amounting to $ 1.4 billion and $ 3 billion efficiency loss and added tax loss respectively per month. More so, the trade war cost the average U.S household around $ 419 annually there by affecting living standards and contributing to inequalities.

Furthermore, according to OECD (2019) the Federal Reserve lowered its benchmark interest rate in 2019 as it aimed to lessen the damage caused by the trade war. Despite the fact that lower interest rates have some benefits such as making mortgages affordable, Americans would earn less interest on savings. More so, markets turmoil since the beginning of the trade war has resulted to loses which has had a negative effect on households (Romei, 2019).     

Moreover, Wei (2019) explicates that in China the trade war has led to multinational firms redistributing their supply chains to other countries in order to avoid the damaging effects caused by the trade war. Consequently, 2 million industrial sector jobs were lost in in China in 2018 which just like in the U.S has contributed to inequalities (ILO, 2019).

Conclusion

In closing, this essay has established that the on-going China-U.S trade war has limited globalisation mostly through the effects that tariffs have caused on supply chain. As a consequence, the tariffs have caused reduction of the volume of the world trade with exports and imports of the two countries declining since the beginning of trade escalations. Further on, the essay has found out that the trade war has damaged sustainable businesses as profits have decreased forcing the businesses to absorb some costs while passing others to consumers. Further, in Asian smaller economies such as Thailand, Malaysia and Singapore, economists are concerned about dumping of Chinese goods not exported to U.S which would negatively affect local businesses. Additionally, in the long run, protectionist policies adopted by U.S may hurt local businesses since protecting them from global competition may result to them not investing much in innovation which would make them globally unsustainable. Lastly the essay has pin pointed that the trade war has resulted to higher prices and loss of jobs which have contributed to inequalities.  

References

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