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A Trade War Looms Between China and the United States

· China,United States,Trade War,Donald Trump,Xi Jinping

Equities across the globe are flashing red, with oil and the dollar under pressure, following Beijing's rapid retaliation after the U.S. pushed ahead with $50B in tariffs. "China does not want the trade war, but facing a capricious Washington, China has no choice but to fight back vigorously in defense of its national interests, the trend of globalization and the world's multilateral trading system," according to commentary in the state media Xinhua. "When it comes to defending national interests, China means business."

The U.S.-China trade negotiations have roiled global markets this year. On and off since January, the trade war seems to be escalating in terms of intensity. Consensus is that a trade war is no good for either country. However, the Trump administration will nonetheless try its best to decrease trade deficits and address the intellectual property theft issue, whereas the Chinese government also has bottom lines to hold. China will by no means allow any possible disruptions to its 2025 industrial plans and will not let Chinese telecom company ZTE fall because of its important political as well as economic implications.

The war temporarily came to a halt on the 22nd of May after China reduced its tariffs from 25% to 15% on automobiles, agreed to buy more US energy and agricultural products, and promised to green light the NPX-Qualcomm deal. The Trump administration planned to retreat from penalties it announced against ZTE as well as spend its tariff revenues on up to $150 billion worth of Chinese imports. At that point, some trade experts believed that China had been out-negotiating the US and urged the U.S. not to settle for current results. Take China’s commitment to help reduce U.S. trade deficit by importing more energy and agricultural products as an example. Both are commodities traded on global markets, so China buying from the U.S. might just redirect some sales that will happen anyway. The trade surplus is trimmed but it would be nowhere near Trump’s goal of $200 billion, whereas China not only would not need to suffer from high tariffs imposed on $150 billion worth of goods but also would save ZTE from the brink of death.

However, later on the China hawks in Congress proposed resuming the penalties on ZTE since it violated sanctions related to Iran and North Korea. The Trump administration re-announced tariffs on $50 billion worth of Chinese imports. The trade issue got back on to the table, leaving the outlook of the trade war unclear. In addition, with the Trump administration recently slapping tariffs on its former allies, many foreign countries other than China are also ready to take retaliatory measures.

The Trump administration has been criticized for not efficiently addressing the issues of Chinese acquisition of American technology, China’s plan to subsidize growth in advanced domestic industries, and finally the limited access of U.S. companies to Chinese markets. This raises the question of whether Trump is only trying to impress his Rust Belt support base, since added together and compared with total trade figures, the tariff cost is marginal. However, doubt remains whether this strategy to keep voters for the midterm election is efficient since foreign countries are designing tariffs that specifically target the Rust Belt area.

Consensus agrees that a trade war is no good for these countries, and the back and forth talks which use legal procedures as commercial bargaining chips are disrupting the global trading system. It’s hard to predict where the trade talks are leading to, but very likely they are only high stakes negotiations and won’t go into real practice.

Written by Yuwei Fan & Edited by Alexander Fleiss

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