Long-Term Impacts of the Chinese-American Trade War

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Long-Term Impacts of the Chinese-American Trade War

Table of Contents

Introduction
Causes and Effects of the Trade War
Trade War as an Obstacle to Global Development
Sustainable Trade Peace?
Conclusion
Works Cited

Introduction

The trade war between the United States and China is one of the main factors of instability in the global economy. It started in 2018 when the Trump administration introduced a series of punitive tariffs and other measures hindering trade with China, triggering a similar retaliation (Klein and Pettis 2). The American policy was justified by the need to pressure China into adjusting its alleged unfair trade practices, including non-tariff barriers and intellectual property theft. While subsequent negotiations yielded limited concessions from both sides, tensions remain high (Bellora and Fontagne 2). The confrontation between the worlds two largest economies has inevitably caused economic turmoil in both countries and elsewhere. The disruption of global value chains was bound to severely affect todays interconnected economies (Ernst and Haar 17). However, the ongoing conflicts influence goes beyond the economic sphere, as it also contributes to political, social, and cultural tensions. Those broader impacts and structural economic shifts may form the conflicts lasting legacy after its immediate effects subside. Thus, the resolution of the Chinese-American trade war will have a profound long-term influence on global development.

Causes and Effects of the Trade War

Although the 2018 confrontation was occasioned by the American perception of specific inequitable trading practices on Chinas part, the conflicts roots lie in more profound global tendencies. Since the end of the Second World War, the prevailing trend was that of accelerated globalization under the American aegis (Ernst and Haar 26). The United States leadership in this process, tied to the US dollars status as the international reserve asset, enhanced Americas influence (Klein and Pettis 189). This advantage came at the price of deformed growth, as US financial policies prioritized foreign investors interests over its public (Klein and Pettis 218). The resulting economic model led to persistent trade deficits, deindustrialization, and an increased vulnerability to bubbles. The meteoric rise of China in the early 21st century added the unique challenge of a dynamic state-coordinated surplus economy, which seemed to enjoy a distinct competitive advantage over America (Liu and Woo 2). In addition to undermining Americas economic power, Chinas ascendancy also had worrying geopolitical and security implications. Unable to trust Chinas political and economic model, American elites turned to the trade war to redress the power imbalance.

While much of the public discourse around the trade war focused on its immediate economic effects, its long-term impact is likely to be different. According to a Bank of Canada staff working paper, the conflict is expected to cause significant shifts in economic activity between countries and sectors (Charbonneau and Landry 26). Meanwhile, aggregate prices and output levels might be relatively unaffected in the longer run, as national economies rebalance themselves. The natural response to the trade war, practiced by both participants and other affected nations, is to seek out alternative routes and trade partners (Ernst and Haar 18). The beneficiaries include the European Union, Japan, Canada, and Mexico, while the United States and China both suffer (Bellora and Fontagne 16). On a national level, the tariffs costs for some groups may be offset by benefits to others, especially employers and workers in protected industries (Lechthaler and Mileva 26). In both cases, economic changes are likely to have political and social consequences, as the winners gain more power. At the same time, the contentious nature of this change encourages further instability and tension.

Given the limited, though impactful nature of its immediate economic effects, the trade wars long-term significance may be put into doubt. In particular, it has been argued that the current conflict is the result of Donald Trumps abnormal protectionist stance and electoral considerations (Lechthaler and Mileva 26; Yang 170). If so, it may be expected that the new policy and its effects would not outlast the Trump administration. However, the need to counter Chinas perceived unfair advantages is the subject of broad bipartisan consensus in the United States (Klein and Pettis 222). Even economists who criticize the tariffs policy recognize a dangerous trade imbalance between China and America (Klein and Pettis 2). Likewise, Chinas dubious practices, including unfair subsidies, regulations, and technology theft, are fairly well-attested, having caused earlier disputes (Crowley 89, 102). While the trade war might have been avoided, the tensions leading to it were already present. Now that it has commenced, those same tensions, exacerbated by actions and rhetoric on both sides, will make it challenging to end before it can cause lasting global change.

Trade War as an Obstacle to Global Development

If the dispute between America and China will have a long-term impact, will its effects be primarily positive or negative? Like all significant realignments, the one caused by this conflict will have winners and losers, both on the international and the national level. Both superpowers stand to lose more from this conflict than other nations, although Chinas position is currently more precarious (Li et al. 1575). However, the trade war is also likely to have far-reaching negative consequences for all nations. The American governments rejection of the WTOs dispute resolution system threatens to undermine that organization (Crowley 22). Combined with the precedent of new tariffs, this decision seems likely to result in further trade wars, destabilizing international commerce (Ernst and Haar 8). Those confrontations contribute to national animosity and negative stereotypes against enemy nations (Latif et al. 10; Yang 171). Such public attitudes would make future rapprochement more difficult, potentially creating a vicious cycle of growing hostility similar to that which preceded the First World War (Klein and Pettis 7). In the worst-case scenario, the trade war may eventually help cause an actual war.

It may be argued that the disruptive effect on international trade described above may not be entirely negative. Globalization undoubtedly created or exacerbated many problems, including rising inequality, reduced environmental and economic regulations, and crisis-prone economies (Klein and Pettis 224). Reining economic interconnectedness may prove beneficial in the longer run. However, this perspective assumes that it is possible to reverse globalization, which seems unlikely without a more significant disruption (Ernst and Haar 46). In the absence of such a shock, which would probably be socially devastating, economies will remain precariously interconnected with even less ability to control their risks. Similarly, reducing the power imbalance between nations may contribute to a more stable multipolar world order if it could be done in an orderly way. If this process occurs through haphazard confrontations and the unraveling of international mechanisms, it will cause more instability (Crowley 39; Liu and Woo 20). Increased economic and political uncertainty would hinder any efforts at sustainable development by making long-term planning difficult. Ultimately, the problems of globalization require global solutions, while the effect of trade wars is to hamper international cooperation.

Sustainable Trade Peace?

Minimizing the long-term negative impacts of the conflict requires a solution that is both prompt and sustainable. The consequences of the Chinese-American standoff will grow worse the longer it is allowed to continue. Because trade wars bring uncertainty into complex systems, their effects are increasingly unpredictable (Ernst and Haar 8; Li et al. 1569). Lingering uncertainty with regards to the conflicts resolution will cause damage by itself. At the same time, the solution needs to be mutually satisfactory. The trade imbalance between America and China needs to be addressed through both internal and bilateral changes. While the Phase One Deal halted the escalation, further action is required to reduce tariffs (Bellora and Fontagne 12). The Chinese leadership needs to act on legitimate American complaints regarding unfair practices and intellectual property protections (Liu and Woo 17). Systemic reforms in both countries aimed at reducing income inequality could help secure a more stable trade relationship (Klein and Pettis 228, 229; Liu and Woo 14). Above all, the WTO needs to be reformed to improve its ability to address such issues in the future, ensuring a lasting solution.

Achieving sustainable peace along the lines described above will involve a careful balancing act between two alternatives. On the one hand, policymakers may be tempted to seek to apply further pressure to secure a more beneficial outcome. Since the trade war causes comparatively less damage to the American economy, this strategy may be more appealing for Washington (Bellora and Fontagne 27). However, the ability of either large economy to compel the others surrender is severely limited. Despite its disadvantage, China is fully capable of absorbing the impacts of the tariffs (Li et al. 1575). Drawing out the standoff will probably provide diminishing returns in terms of leverage while increasing the adverse effects. The opposite extreme, reaching a trade peace without meaningful accommodation of legitimate American interests, will not produce a sustainable solution. The deeply-rooted nature of Chinese-American economic tensions will ensure that conflicts will recur until a solution has been found (Crowley 16). Thus, a sustainable trade peace requires both sides to cooperate in good faith to achieve their mutual interests of normalized and better-balanced trade.

Conclusion

The Chinese-American trade war that started with the Trump administrations introduction of new tariffs in 2018 arises from long-term economic tensions. The trade imbalance between the two countries has exacerbated the problems of Americas economic model. Furthermore, American policymakers have become increasingly concerned with unfair Chinese trade practices that contribute to the imbalance and with the increase in Chinas relative power. The present confrontation was motivated by the desire to compel China to alter its policies. In addition to short-term costs to the worlds economy caused by the disruption of global value chains, the conflict may have consequential long-term impacts. Those impacts include changes in trade flows, weakening international organizations such as the WTO, and increases in political and social tensions. The eventual outcome may seriously undermine the capacity for international cooperation, which is necessary to resolve the problems caused by globalization. A speedy and mutually satisfactory resolution to the conflict can avert this result. This solution must include bilateral tariff reductions, addressing American complaints about Chinas unfair trade practices, and adjustments to both nations economic models. Additionally, the framework for international cooperation and trade arbitrage must be reinforced.

Works Cited

Bellora, Cecilia and Lionel Fontagne. Shooting Oneself in the Foot? Trade War and Global Value Chains. SSRN, 2020, doi:10.2139/ssrn.3526944. Working paper.

Charbonneau, Karyne B., and Anthony Landry. The Trade War in Numbers. Bank of Canada, 2018. Web. Working paper.

Crowley, Meredith A., ed. Trade War: The Clash of Economic Systems Endangering Global Prosperity. CEPR Press, 2019.

Ernst, Ricardo, and Jerry Haar. Globalization, Competitiveness, and Governability: The Three Disruptive Forces of Business in the 21st Century. Springer, 2019.

Klein, Matthew C., and Michael Pettis. Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace. Yale University Press, 2020.

Latif, Kashmala, et al. Individual Cultural Values and Consumer Animosity: Chinese Consumers Attitude toward American Products. Sage Open, vol. 9, no. 3, 2019, pp. 1-14.

Lechthaler, Wolfgang, and Mariya Mileva. Who Benefits from Trade Wars? Intereconomics, vol. 53, no. 1, 2018, pp. 22-26.

Li, Chunding, et al. Economic Impacts of the Possible ChinaUS Trade War. Emerging Markets Finance & Trade, vol. 54, no. 7, 2018, pp. 1557-1577.

Liu, Tao, and Wing Thye Woo. Understanding the US-China Trade War. China Economic Journal, vol. 11, no. 3, 2018, pp. 319-340.

Yang, Chen. How Chinas Image Affects Chinese Products in a Partisan-Motivated US Market. Global Media and China, vol. 5, no. 2, 2020, pp. 169-187.

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