U.S. and China: A Complex Relationship and Trade War

Gabriela Dominguez Americas, Analysis, Asia, Conflict & Security, Economics

6 minute read

There is growing concern within the international arena of an impending global trade war. The recent tariffs imposed by the United States have triggered a domino effect of retaliation that threatens to hurt the world’s trading system. These protectionist policies are perceived to introduce negative implications for both the global economy and cross-border commerce. As a result, the G20 reaffirmed the conclusions on trade made at the Hamburg Summit and advised for further dialogue in their last communiqué.

American trade policy has shifted from a liberal approach towards a more protectionist approach under the administration of U.S. president Donald Trump. He recently imposed tariffs on steel and aluminium imports in an attempt to sanction perceived dumping practices by Chinese and European producers. The last time tariffs on steel imports were placed in the U.S. was in 2002 with the Bush administration, but these were soon overturned due to the negative effects they had on U.S. GDP and employment.

History and contemporary mechanisms of governance suggest future disappointment for the recent trade choices made under Trump’s administration. The European Union has already quickly responded to U.S. tariffs by threatening to retaliate with tariffs of their own on American exports. Canada, Mexico and Brazil have also hinted retaliation. Additionally, inter-state relationships are threatened by instability given that the justifications for U.S. tariffs are done on the grounds that the rising level of steel and aluminium imports entering their territory threatens American national security, which inherently raises fears of a global trade war overall.

The imposition of tariffs on steel imports has been done in an attempt to increase American domestic production capacity from 73% to 80%. American foreign trade policy is being conditioned by domestic politics, which has already proven to be a harmful mechanism to U.S. interests in the past. Moreover, with the recent exclusion of Canada and Mexico from the metal tariffs, actual decline in trade will only be about less than half a percent of total U.S. imports. Many have followed to argue against the tariffs by basing their arguments in the governance imbalance this policy entails. There is a risk that the costs of the policy will cancel out any potential trade benefits, which will lower American international influence and cause a shift in the world’s current balance of power.

Economists and states around the world have advised for actions to be taken solely against China, with whom the U.S. has a $500 billion-trade deficit. China has been accused of dumping practices several times before and has maintained a rocky relationship with the world, especially with the Americans. As a result of previous failed negotiations, expensive investigations, and confirmation of the alleged Chinese intellectual property theft, Washington has decided to impose extra tariffs on Chinese imports and is also considering imposing new investment restrictions. NATO, who has ruled in favor of unilateral actions in the past, has now advised the U.S. to follow the established trade mechanisms when trying to impose sanctions on foreign states, so that severe state collateral damage is avoided.

President Trump, under Section 301 of the U.S. Trade Act, has already directed the American representative to level tariffs on about $50 billion worth of Chinese imports. This section suggests raising import duties to other states in an attempt to create balance for lost concessions. However, it does not consider the measures of retaliation other states, such as China, might impose in return. Therefore, the potential start of a global trade war, starring the two largest economies in the world, is a definite cause for concern.

The number of antidumping and countervailing duty measures in effect illustrates the problem confronting the international trade market. Moreover, the U.S. emphasis on “America First” creates difficulties for global economic governance. Since 2008, G20 leaders have agreed on rolling back from protectionist policies, which means that imposing U.S. tariffs on other states is a risky strategy to apply for multiple reasons.

First, the creation of job opportunities through the imposition of steel and aluminum tariffs is being overestimated. The tariffs will create jobs almost exclusively for the steel and aluminum markets, but it is estimated to also cost 179,334 jobs through the rest of the U.S. economy. Any tariffs applied to steel—which is considered to be an intermediate product—will tend to greatly affect the rest of the world’s economy. Producers around the world will seek to reduce the high costs of production by making considerable personnel cuts.

Secondly, China has already made it clear that they are not afraid to engage in a trade war. Similar to the U.S., their economy is strong enough to take the first hit and keep retaliating until one state manages to somehow deter the other. The question that remains unanswered is the extent to which these states are willing to go to prove a point and at what cost. China has already announced they are planning to impose tariffs worth approximately $3 billion of American imports, which will continue to harm other states along the way, increasing the stakes of a potential trade war that not everyone in the international market will be able to fund.

Third, actions taken through non-transparent methods will greatly increase the risk of escalation in a trade war, which will immediately lead to an unstable trading system. As a result, strengthening the importance of the WTO within the multilateral trading system is necessary and has already been advised.

Essentially, the domestic nature of U.S. governmental decisions at the international table is cause for concern and calls for immediate action. The current trade war threat is the manifestation of a long balance of power struggle that has yet to be stabilized. Further reiteration of the Taormina Declaration will be good, especially when trying to stress the commitment to free trade that all G20 members have committed to in the past. Washington’s attempts to “strategically defend itself against China” have harmful intentions at their core, which will trigger aggressive responses by other states. At this rate, and by following the protectionist stance the U.S. and China are maintaining, it is a matter of time before a global trade war breaks out.