The trade war between the USA and China-who is winning?
The trade war between the USA and China-who is winning?
During presidential debates, the prime target for the future president of the USA (Trump) was China. He accused the Red dragon of almost everything-manipulating its currency; stealing American technologies; acting aggressively in the South China Sea; breaking the international law by building islands in the South China Sea and threatening Taiwan; putting trading tariffs to American companies; not opening completely their internal market for foreign companies violating the rules of World Trade Organization (WTO)… The other candidate, for Hillary Clinton (a presidential nominee from the Democratic party), the primary target was Russia and “Russian involvement”, Trump chose China. Many were afraid, if Trump became a president, it will trigger a new trade war.
But why China-the real answer to this is that China becomes extremely powerful (military and especially economically), now is the second-largest country in the world by GDP with astonishing annual growth. If this continues, it is a matter of time for China to become the largest economy in the world. If we are looking at GDP per purchasing power parity (PPP), China is already the largest economy in the world.
Many Chinese companies are threatening their American competitors -Alibaba (e-commerce, retail, Internet, and technology), is one of the largest companies in e-commerce, threatening Amazon, and presently has 2/3 of the market capitalization of Amazon. Other Chinese companies -ZTE, Huawei, Xiaomi… are threatening the American ones in the South-east Asia market. Huawei is now even threatening Apple, and it is the leading company in implementing a 5G technology.
China and the USA are a classical example of Thucydides Trap (The phrase ‘Thucydides Trap’ was coined by an American political scientist and professor, Graham T. Allison, to describe the phenomena of rising power and an established dominant power almost always breaking into conflict. The dominant power can’t stand to be challenged, and the future conflict is inevitable). Fortunately, all major powers are nuclear, so military actions against each other is not an option -to win a conflict and to sacrifice millions of people… this is not a victory. Therefore, the conflict would be a trade war and sanctions.
Officially, the trade war began at the beginning of 2018 (with trade tariffs of the solar panels and washing machines from China, followed by steel and aluminum… and the list goes on and on).
Almost two years later, what has changed, and do we have winners or both countries are losing?
-Trade Statistics
Let’s see how important are these countries to each other?
Being the largest and the second-largest economy in the world, The USA and China are vital for world economy and trade, and a trade dispute between them will affect the world economy will slow the annual growth and can lead the world economy to stagnation and even recession.
-The largest trade partners of the USA
The largest trade partners of the USA are[1]:
China — $660 billion traded with a $419 billion deficit.
Canada — $617 billion traded with a $20 billion deficit.
Mexico — $611 billion traded with an $81 billion deficit.
Germany — $184 billion traded with a $68.2 billion deficit.
Japan — $218 billion traded with a $67.6 billion deficit.
If we examine the volume of trade, China is the largest trade partner of the USA with 30 %[2]. Every tariff and trade war will affect the USA, too-their import and export, the balance of trade, annual growth…
-The largest trade of the USA deficit by country
This picture tells us everything-the largest deficit comes from China (63%) and Mexico. This is the only reason why during the presidential campaign, Trump attacked them so much and insisted to negotiate better deals with them. The total deficit with China is $419 billion.
-The largest trade partners of China
The USA is the largest trade partner for China too. The total trade with the USA is 22%[3]-almost the same as the trade with the EU. Trade war and tariffs with the USA will hurt China very much.
Let’s see how is the trade balance.
-The largest trade partners of China by surplus
The largest surplus for China comes from the USA-this is the reason why they are so afraid of the trade war and all these actions are something that concerns China very much. The total trade balance of China is $419.6 Billion. If we analyze the data, we see that only with the trade with the USA, China is making 65.72% of its surplus[4].
-Trade balance of the USA
The trade war between China and the USA started at the beginning of 2018. Let’s see what are the first results for Uncle Sam- the results are dubious- in the first year of the war, the deficit increased to a new height, but for the second year (2019), we had the lowest deficit in the last two years.
Therefore, on the first look, did the trade war with China help the USA to drop its deficit? It is too early to say, is this a successful policy or not?
But this first success came almost without cost- the export of the USA is falling marginally -from $1546.473 Billion. (2017) to $1665.992 Billion(2018) and $1513.982 Billion(2019)[5]. The total decrease in the export of Uncle Sam is only less than 33 Billion USD….surprising results for many observers who expect different results.
The import is falling likewise (good news for Trump)-from 2339.884 Billion USD. (2017) to 2293.233 (2019) …but the fall is marginal.
We are extremely intrigued to see how is the trade balance with China?
-Trade balance of the USA with China
The main idea, starting a trade war with China, is to decrease the deficit-let’s analyze the results after two years.
The deficit is decreasing to -320.823 Billion USD., the lowest one from 2014. We need to see the results from 2020 to 2021 to see is there a trend in decreasing the deficit or it was a coincidence.
-Trade balance of China
In 2015 was the peak of the surplus of China ($593.9 Billion.[7]), from there, there is a decline in the surplus. We can’t say the drop in surplus in 2018 is because of the tariffs from the USA or they follow the trend.
In 2019, we had an interesting picture. The surplus increased to $467.92 Billion[8], which is the highest in the last two years and in the top three of the highest surpluses in the history of China. Despite sanctions and tariffs, China managed to stop the negative trend (2016–2018) and increased the surplus again-a remarkable achievement.
Not surprisingly, the export is booming too (you can’t have a larger surplus without increased export) reaching $ 237.65 billion[9]-the highest in the history of China- with a short decline after the tariffs, China now is back on track to reach a new height. We will be extremely curious to see how China will perform in the next two years.
-Annual growth of the USA
The annual growth is starting to shrink- in 2018 we had it increased with 2.9%, but in 2019, the economy is slowing down with 2.4% and IMF predicted that the economy will expand with 2.1 % in 2020, 1.7% in 2021 and 1.6% in 2022.
Trade war with China can be one of the reasons for the slower growth because, after 2016, we have two years of continuous annual growth until we reached 2019, and this was the first decline.[10]
Stopping a trade war with China can accelerate economic growth- now, there are negotiations between China and the USA to make a better deal and to stop a trade war between them. We hope for the sake of the world economic growth to make some agreement. Historically, free trade shows us the benefits — enrichment and cooperation to all involvements.
-Annual growth of China
The economy of China is slowing down too. After a slight increase in 2017, the trade war with the USA decreased the annual growth, and we expected worse results. The expectations of the IMP are below 6 % in 2020-something not typical for the Red Dragon[11].
Hence, if we make a little summary after seeing the results of the USA and China, both countries are suffering slower annual growth. There is a phrase that there are no real winners in a trade war- the results above prove this once again.
-The unemployment rate of the USA
Despite the trade war, unemployment is dropping constantly-from nearly 10% in 2010, in December 2019 we had 3.5%- one of the lowest unemployment rates in the history of the USA. Technically speaking, the lowest one was in May 1953 with 2.5% and we are close to achieving this level.
This is very good news for Trump because he will not receive a massive criticism of his decision to start a trade dispute with China. Until there is a drastic change in the picture, we can’t expect something to change in the policy of Trump.
-The unemployment rate of China
At the beginning of 2020, the unemployment rate in China is only 3.6%. The disputing countries are very close to their levels of unemployment -3.5% vs 3.6%. The trade war doesn’t affect unemployment, reaching historically new levels for China. This is remarkably good news, and we can estimate what will happen if both countries reach some agreement…is it possible, the unemployment rate to drop below 3%. If we see the trends, it is quite possible.
Conclusion
After two years of the trade war, what can we say? Two years is not enough to see the full picture and the trends, so this summary is based only on short-trends. First, we are very pleasantly surprised because we expected both countries to suffer bigger hits. For now, both countries are performing surprisingly well despite the typical effect of the trade war- the exports of the USA were dropping with an only narrow margin (from $1546.473 billion in 2017 to $1513.982 billion in 2019), but the trade deficit had a significant impact from -419.527 to -$320.823 billion.
China is taking the trade war well also, the surplus is increased to $467.92 Billion, which is the highest in the last two years and in the top 3 of the highest surpluses in the history of China. Despite sanctions and tariffs, China managed to stop the negative trend (2016–2018) and to increase the surplus again.
The unemployment rate is decreasing too, reaching historically low rates for the two countries -3.5% vs 3.6%.
The only substantial harm is the slowdown of both economics- we can’t say confidently that this is the main reason, but realistically, it shows the negative impact and slows down the belligerent economics.
The USA and China look like a married couple, which understands that they can’t live together anymore, and they need to separate. Despite the little hassle at the beginning, both countries realized that they would be better if they continue with their lives alone.
As might be expected, in real life, this is not possible, because they realized that they are too important (the largest and the second-largest country in the world by GDP), but they want to reduce the dependence of each other and to trade with other countries more often.
Source:
[1]Source:U.S. Census Bureau available 01/2020
[2]https://www.thebalance.com/trade-deficit-by-county-3306264 available 01/2020
[3]http://www.stats.gov.cn/tjsj/ndsj/2016/indexeh.htm available 01/2020
[4]Ibid, available 01/2020
[5]https://www.census.gov/foreign-trade/balance/c0004.html available 01/2020
[6]Ibid, available 01/2020
[7]https://www.statista.com/statistics/263632/trade-balance-of-china/ available 01/2020
[8]https://tradingeconomics.com/china/balance-of-trade?ie=utf8?tag=hardwaresoftw-20&linkcode=asn&creativeasin= available 01/2020
[9]https://tradingeconomics.com/china/exports available 01/2020
[10]https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/USA available 01/2020
[11]https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/USA/CHN available 01/2020
