Future Trade War Underway Between US & China
As we all know, the relationship between China and the United States has been rough for the past few years, and the relationship does not seem to be improving any time soon. Since the presidential election, Trump has vowed to declare China as a currency manipulator, believing China was the main source for America’s economic failures. However, this is no longer true.
Although the country was known as the “champion currency manipulator” from 2003 to 2014, China has had large outflows of private capital within the last two years, which has driven its exchange rate down and initiated fears of currency devaluation. Furthermore, they have ceased buying dollars as a way to keep their currency value low. Instead, they sold large amounts of dollars to prevent their currency from devaluation. As a matter of fact, their recent intervention promoted US competitiveness. Thus, Trump labelling China as a currency manipulator would not be accurate anymore. Additionally, naming a country a currency manipulator has no significant, immediate effect, making Trump’s claim even more ineffective.
Regardless of China no longer manipulating currency, its trade relationship with the US has not improved. Because China has sold more goods to the US than it has bought from the country, the resulting trade deficit accumulated to hundreds of billions of dollars by 2016. Additionally, the effects of China’s past currency manipulation has remained a problem for the US because Chinese products became cheaper in the US due to currency devaluation while American products became more expensive in China. The trade relationship became overwhelmingly biased towards the Chinese. Thus, Trump has threatened to place a 45% tariff on Chinese imported products as punishment for their unfair practices. With this threat in place, China would most likely address this case to the World Trade Organization (WTO) as a protectionist measure in violation of US commitment to the WTO, which oversees rules of global commerce and rules on trade disputes.
Many wondered what the purpose of Trump’s tariff threat. Perhaps, it served to persuade China to change their ways. However, the threat could be ineffective since China has consistently retaliated against trade sanctions. For instance, when Obama placed a tariff on Chinese tire imports, China retaliated by placing a tax on US chicken parts. It is fair to assume that whatever the US imposes as a threat, China is likely to reciprocate. The Chinese are predictable and reliable. When they get punched, they punch back. This metaphor represents China well in their actions against the US. Thus, Trump’s administration should look for alternative ways to repair the China-US trade relation.
Sources:
https://piie.com/blogs/trade-investment-policy-watch/china-no-longer-manipulating-its-currency https://www.cbsnews.com/news/trump-vs-china-on-currency-what-its-all-about
