What is a trade war?

Trade war is a situation where countries restricts each other’s’ trade by imposing tariff or quota on imports. Retaliatory steps by partner country intensifies the trade war. As a result, international trade comes down. Main purpose of import restriction is to protect domestic industries, promotion of local production and enhancement of employment.

Donald Trump’s Trade War

The US President Donald Trump in the recent past, announced a group of protectionist measures on trade front; aiming to reduce US trade deficit with other countries and thus to protect domestic industries and employment. Most of these measures disturbs the existing trade laws and relations that were globally configured after decades of multilateral discussions and agreements. Specifically, the tariff and other steps will damage the trade agreements under WTO.

A notable element of Trump’s new protectionist step is that they are imposed on the ground of national security. Here, Trump used a 1962 Congressional power that allowed a President to limit imports that risks national security. According to the US Commerce Department, dependence on imported metals threatens the U.S. ability to make weapons. The advantage of security risk argument is that such a stand may make these measures difficult to be tackled under the present WTO framework.

Beyond tariff and goods trade, a higher-order trade war may come when the US moves to fight the alleged ‘intellectual property piracy’ by China. The US accusation is that Chinese firms imitates US technologies and China imposes forced technology transfer as a condition for US firms to work in China.

Analysts believe that though several trade war initiatives by Trump may seem against all countries, the main target is China that enjoys a mammoth $375 trade surplus with the US. In this context, any agreement with China like the one signed at the middle of May 2018 may soften trade war pressures.

Following table gives the protectionist steps announced by Trump, the sequence of events, the areas where the steps were taken, countries targeted and the corrective response measures Trump demand from the trade partners; especially from China.

Date Step Target Corrective steps demanded by Trump Follow – up action
January 22, 2018. Trump imposes tariffs and quotas on imported Chinese solar panels and washing machines. Chinese low-priced imports. Reduction of trade deficit with China. The WTO ruled that the US didn’t have a case in levying the tariff.
March 8, 2018. Imposes 25% tariff on steel imports and 10% tariff on aluminium tariff.

Objective: to protect 147000 workers in the US steel and aluminium industries.

Risk: Higher steel prices and auto prices.

Main sources of US steel imports are: Canada (1st), South Korea (3rd),

China, Russia, Japan etc.

Exempted are: NAFTA (Canada and Mexico), Argentina, Brazil, Australia. South Korea exempted as Seoul agreed to double the quota for US car imports.

Delayed tariff against Europe till June 1st, 2018.

Trump wants the U.S. ally to cut its 10 percent tariff on U.S. autos. He asked the EU to set quotas on its steel exports.

China should reduce its trade surplus with the US.

South Korea agreed to amend the 2012 bilateral trade agreement with the US.

EU is considering tariffs on $3.5 billion worth of U.S. exports. Japan says it is an ally of the US and tariff is not justified on the basis of national security.

China: US and China reached on an agreement in May 2018. China will try to reduce the trade deficit of the US to $250 bn per year (US demand $100 bn). China will import more US agricultural items and commodities.

Countries like India are trying for bilateral negotiations and consultations under the WTO.

March 22, 2018. Imposes tariff on around $60 billion worth of imports from China. The US will limit technology transfers to Chinese companies. Forced technology transfer practiced by China. Here, China wants foreign companies want to sell products in China to share their trade secrets with Chinese companies. End the Chinese practice of forced technology transfer. China retaliates: Beijing announced tariffs on $3 billion in U.S. fruit, pork, recycled aluminum, and steel pipes. Agricultural exports are politically sensitive and may put the Trump administration on the backfoot.
March 26. 2018. US initiates discussions with Beijing. Getting commitments from China. China has to reduce its tariffs on U.S. automobiles, import more U.S. semiconductors, give greater access to US financial sector companies. Negotiations going on.
April 3rd, 2018. US announces 25% tariffs on around $50 billion in Chinese imported electronics, aerospace, and machinery. The step comes with a gradual implementation procedure. Chinese manufacturing Reduction of the trade deficit. China retaliates: Beijing announced 25% tariffs on $50 billion of U.S. exports to China including sorghum and Boeing. It also cancelled soyabean import contracts. The step will take time to be implemented slowly. The tariffs strategically target 106 products. The tariff mainly falls on   industries located in pro-Trump states.
April 5, 2018. Trump warns to impose tariff on $100 billion more of Chinese imports. Reducing Chinese imports Reduction of the trade deficit. China seeks consultations with the US under the WTO’s Dispute Settlement Mechanism. Trump is a non-believer of the DSB. China also warned that it will fight US measures at any cost.
April 10, 2018. Trump demands China to reduce subsidies on high tech industries – Robotics, aerospace and software. China announces reduction of import duty on vehicles. This will have only nominal effect on trade.
May 4, 2018. US demand five steps from China:

1. End subsidies to tech companies.

2. Stop stealing U.S. intellectual property.

3. Cut tariffs on U.S. goods by 2020.

4. Open China to more U.S. investment.

5. Reduce trade deficit by $200 billion by 2020.

On May 10, China agrees to import more US goods.
May 15-20, 2018. US and China announce mutual concessions.

China to remove tariffs on U.S. pork imports and other agri. imports. US will remove tariffs on Chinese telecom firm –  ZTE. Both sympathetically considers mutual trade concerns.

Softening the trade war. US says that the agreement will reduce its trade deficit. This is the first major trade consultation that brought down the trade tension.

Removal of tariffs on ZTE is interpreted as a real gain for China.

US-China Trade: why the tension?

The US-China trade picture including the huge trade deficit for the US illustrates the cause of the trade tension between the two countries. According to the US Commerce Department Data, in 2017, the US exported $130 billion worth of commodities to China. On the other hand, U.S. imports from China were $506 billion. Here comes the huge trade deficit problem of around $ 375 billion for the US.

Main export items for the US were: aircraft ($16 billion), soybeans, ($12 billion), and automobiles ($11 billion). Imported items were mainly electronics, textiles, and machinery. A significant volume of US imports semi-finished items assembled in China and send back to the US as China has the advantage of low-cost assembling of manufactured products. This means that trade ware between the two countries will hurt the US firms significantly.

The mid-May agreement between the world’s two largest economies may extinguish the fire on the trade front to an extent. Still, when the hither order issue Intellectual Property is raised, how the two countries can solve the issue becomes decisive. So far, the tariff reduction exchanges by the two countries and the Chinese sympathetic approach to US trade deficit are workable on the goods front; but it may not be workable on the IP front.


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