Understanding US-China Trade War

For most of human history, there was one superpower in the world, and it wasn’t the US, it was China. Now, the Chinese are vying for global domination once again and it’s increasingly starting to look like they’ll actually succeed in overtaking the US economy. Say what you will about President Trump, it’s undeniable that he’s trying to push back against this, and yet his trade war is having disastrous effects on many industries across the world, especially back home in the US.

Who is Really Winning the Trade War?

Let’s get into how the trade war started and who’s really winning it and back to where it all started. 18 years ago, the World Trade Organization allowed China to become a member, after tons of negotiations and some important changes to the Chinese economy. Ironically, it was the US who advocated for China to enter the market. The Chinese economy was one of the fastest growing ones on Earth and the US wanted a piece of the pie.

The US invested billions into the blossoming Chinese economy, doubling their dollars invested in just 5 years. By gaining access to international capital and the global market, China flourished. Factories sprung up that rapidly produced goods destined for export across the world, including the US.

Some Americans, however, were getting worried. You see, while Chinese companies had the benefit of cheap labor and materials, their biggest advantage was China’s loose enforcement of intellectual property rights. The situation became almost comical: one inventor launched a smartphone case with a built-in selfie stick on Kickstarter, fully patented and trademarked, but just 7 days later he found it being sold at a fraction of the price on Chinese markets before his own campaign had even been funded. In total, counterfeit Chinese goods were costing the American economy $600 billion every year and 87% of all the fakes were coming from China.

In comes Donald Trump, who campaigned on the promise of taking a hard stance on China. In 2017, he launched a formal investigation into China’s policies, which of course sparked anger and outrage in China. Xi Jinping threatened sanctions against the US, which in hindsight was probably not the smartest way one could respond to a president like Trump. One of Trump’s first actions was to pull the US out of the Trans-Pacific Partnership, the comprehensive trade agreement with Asian nations that was supposed to reduce tariffs and help free trade.

With that aspect of President Obama’s legacy out of the way, Trump began making increasingly more hostile steps. First came a US-imposed tariff in March 2018 on $3 billion worth of Chinese goods like electronic components, clothing, and scientific equipment. China retaliated very quickly with its own new tariffs on American goods like soybeans, gold, and cotton. This is where the trade war kicked off and ever since, President Trump and President Xi have each been threatening and then introducing new tariffs every few months.

Sometimes it seems as if the two sides might come to an agreement, with both sides supposedly having very productive talks, but so far it’s been all for nothing. It looks like the trade war is here to stay, so who’s winning it?

The only number that President Trump cares about is the trade deficit, how much more the US is importing from China than it is exporting to it. Unfortunately, the deficit isn’t really getting smaller; it’s no longer growing with the same pace it used to, but that’s hardly a major victory. And yet, the cost of sustaining the trade war is already being felt in the US.

The thing about tariffs is that at the end of the day, it’s the consumers who usually end up paying for them due to the associated increases in price. And that’s exactly what’s happening: when you look at the inflation in non-tariffed goods versus the inflation in the products that are getting hit by tariffs, you’ll see a pretty stark divergence.

Another big source of damage was falling direct investment: in comparison to Americans, who are still pouring as much money into China as always, the Chinese money tap has been thoroughly closed, with most of that money instead flowing to Europe and the rest of Asia.

So we definitely can’t say that American consumers are winning, at least not on the short term. There is however, a somewhat surprising winner in all of this, and it is Vietnam. Ever since the first wave of tariffs was announced, the Vietnamese trade deficit with America has been growing faster and faster. It seems that a lot of Chinese businesses are realizing that they can just outsource production to Vietnam and call it business as usual.

Vietnam is benefiting so much, that Trump is already considering putting tariffs on them as well. In the end, it seems as if no one is safe from the watchful eyes of tariff man.

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