The tit-for-tat trade battle between the US and China has been embroiled for several fronts over the past few months. Mr. Trump has imposed taxes on imports from Canada, China, Mexico, and the EU to encourage consumers to buy products made from America. However, all these countries have retaliated. The most interesting is the conflict with China as it involves the two largest economies wrangling for global influence. As of 2019, President Trump further hiked tariffs on most imports from China as the trade war between the white house and Beijing escalated. According to Hung, the White House raised their existing duties on $250 billion products from China from 25% to 30% (Rampulla). The tariffs on an additional $300 billion in Chinese products from 10% to 15% took effect on 1st September 2019 (Rampulla). With a retaliation from China of new tariffs on $75 billion on U.S. goods, Trump further directed the U.S. companies to establish an alternative region to operating in China, although the demand appeared to carry no legislative weight.
Why President Trump is escalating tariffs on Chinese imports
There are various grounds on why Trump resolved to these directives with regards to increasing tariffs against Chinese imports. The US perceives China as an unfair trader due to its failure to comply with the principles established by the World Trade Organization (WTO), i.e., openness and playing a leading role in the market. The tariffs aim at controlling and mitigating China’s trade-disruptive economic model where:
The law is treated as an instrument of the state, where it facilitates the industrial policy goals in the government while securing discrete economic outcomes.
The Chinese government is aiming to attain dominance in the domestic market and global leadership in a myriad of advanced technologies through various industrial policies such as the “Made in China 2025” (Hung).
The industrial policies implemented by China provide massive market-altering subsidies.
China is pursuing various unreasonable practices and policies that harm the US innovation, and technology development, and intellectual property rights.
Impact of the tariffs on my farm business
As a farmer in Lowa, the more tariffs imposed by the US on products from China would have a significant impact on my farm business and the consumers. The tariffs will increase the cost of doing business by more than a third, thereby significantly decreasing the profits (Rampulla, 2020). The increase in price would result in product scarcity and a reduction in the demand for farm produce, in line with the laws of demand and supply. One option would be to incrementally increase the prices to absorb the cost of the fare while the other one would be to source resources from other nations. Each option would significantly cost the farm and the customers (Bekkers and Schroeter). A cost and benefit analysis would, however, aid in the selection of the appropriate economic action to take, i.e., one that lowers the costs of production while increasing the revenues.
The escalating tariffs on Chinese imports would also affect the various determinants of demand and supply which contribute to the performance of the farm business. They would increase the prices of both complementary and substitutes for farm products (Bekkers and Schroeter). However, the alternative local production systems will increase expectations of a future reduction in the prices of farm produce, hence a reduction in the local demand for agricultural products.
In line with the supply of my farm produce, the more tariffs will increase not only the costs of business operations but also the prices of obtaining resources. As a result, there will be a reduction in the supply of agricultural produce from my farm in Lowa. However, more restrictions on imports from China will encourage the use of technology in local production, which would consequently increase supply from my farm in Lowa. The consumers will be impacted negatively by the increase in price levels with the increased cost disproportionately harming the low-income households who live from paycheck-to-paycheck. Companies, including my farm in Lowa, will begin to pass on the losses brought by the tariffs to consumers.
Impact of the tariff on businesses and individuals in the US and China
The US-China trade war would result in various economic effects such as a sharp decline in bilateral trade between the countries, higher product prices for consumers, and the effects of trade diversions. The effects will be felt by both businesses and individuals in both economies.
The import tariffs would provide a sales tax and increase the costs for consumers. However, the weaker emerging market currencies would translate to lower costs of imports for the U.S. consumers, in the process of offsetting a part of the impacts of the tariffs. The corporate profits in both countries will also be highly affected (Lau). Some of the negative effects of the tariffs will be cushioned by Chinese enterprises. This would offset some of the tariffs by reducing the profit margins. A decline in the value of the Chinese currency due to reduced business between the two countries would drag the other currencies lower (Lau). The result is a reduction in both the US and Chinese corporate profits. The cost of the tariffs in one way or another will be borne by the US corporations, hence lowering their profit margins.
Businesses in China and the US would also record reduced revenues from the increased tariffs. The escalating tech war between the two countries contributes to the effects of tariffs with the Us taking new initiatives while China prepares for counter-attacks on various fronts. According to Hung, the US ban on Huawei would not only hurt the Huawei company but also its global supply chain, most of whom are companies in the United States. Some $11 billion out of the $70 billion that Huawei spent on component procurement in 2018 came from firms in the US, including Intel, Qualcomm, and Micron Technology (Hung).
The trade war would provide a negative sum-game that would hurt the US economy. China is the world’s second-largest economy and a center of the global supply chains. A large component of the US trade with China comprises of intermediate products such as parts and components, and final consumption goods. The additional tariffs would, therefore, tighten the restrictions of doing business between the two countries (Stephen). More companies in the US will have to move their operations to alternative countries to China at the expense of efficiency. The US will, therefore, lose its market share in China, and import from more expensive alternative sources.
For China, some multinationals will have to relocate their business operations from China to other regions in Southeast Asia to avoid the additional costs that result from the associated US tariff increments against products from China (Stephen). The restrictions may slow down the pace of productivity growth of China. The tariffs will prevent China from better utilizing the opportunity to improve its productivity and enhance its potential for economic growth. The future remains uncertain for both economies hence negotiators in the upcoming talks between China and the US should keep in mind how the policies will affect the countries, their businesses, and consumers.
Bekkers, Eddy, and Schroeter, Sofia. “An economic analysis of the US-China trade conflict.” World Trade Organization; Economic research and statistics division, 2020. www.wto.org/english/res_e/reser_e/ersd202004_e.pdf
Hung, Kwan C. “The China-US Trade War: Deep-routed causes, shifting focus and uncertain prospects.” Wiley Online Library, 2009. www.onlinelibrary.wiley.com/doi/full/10.1111/aepr.12284
Lau, Lawrence. The China-US trade war and future economic relations. The Chinese University Press, 2019. www.books.google.co.ke/books?id=pO9_DwAAQBAJ&printsec=frontcover&dq=US+tariffs+on+china&hl=en&sa=X&ved=0ahUKEwiy-f2B94bqAhWPi1wKHWFQDz8Q6AEILTAB#v=onepage&q=US%20tariffs%20on%20china&f=false
Rampulla, Ellie.“The effects of the US-China trade war on US exports.” Wharton University of Pennsylvania, 2020. www.publicpolicy.wharton.upenn.edu/live/news/3218-the-effects-of-the-us-china-trade-war-on-us
Roach, Stephen. Unbalanced: The codependency of America and China. Yale University Press, 2019. www.books.google.co.ke/books?id=bz2eAgAAQBAJ&printsec=frontcover&dq=US+tariffs+on+china+2020&hl=en&sa=X&ved=0ahUKEwi_57n8-IbqAhXWiVwKHYDtDlsQ6AEIYzAH#v=onepage&q&f=false
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