Withdrawal and World Trade: An Analysis of the US-China Trade War

Donald Trump has always been a wild card. His presidential campaign brought to the spotlight his candid nature, strong views and unconventional ways of presenting both. Needless to say, now, as the POTUS, his almost impulsive and seemingly irrational decisions have massive repercussions on not only the United States but the entire world. In this article, I will be focusing on two strands of this decision making in context of recent economic and social policy undertaken by the Trump administration. The first strand deals with what Richard Hass, President of Council of Foreign Relations, has termed as the “withdrawal doctrine.” The second strand concerns itself with the ongoing US-China trade war and its possible repercussions.

Since the very beginning of his tenure as the President, Trump has been dismantling and renegotiating well-established deals and relationships with multiple nations.  This is the “withdrawal doctrine”. In October 2017, US announced that that it will be pulling out of the United Nations Educational, Scientific and Cultural Organization (UNESCO) terming it as “anti-Israel”. Following this, Trump went on to end the United States’ participation in the Trans-Pacific Partnership, the trade pact negotiated with 11 other nations, as well as the Paris agreement. These sporadic decisions make it clear that the United State’s foreign policy is neither principle-driven nor ideology-driven.

I will be focussing in particular one of these recent decisions namely the US-China trade war. Using the World Trade Organisation (WTO) and intellectual property rights law, Trump started the trade war by imposing punitive tariffs on China in an attempt to protect the intellectual property of American businesses. Washington and Beijing have already imposed punitive tariffs on $34 billion of imports from each other. For China, this amount is equivalent to 7% of its exports to the US and the USA did set additional tariffs of $16 billion to which China filed a complaint to the World Trade Organisation. Trump has also threatened to add an additional 200 billion to these barrage of tariffs.

With both nations not attempting to make amends or further any negotiations, this trade war is bound to worsen. With Trump justifying his decision using the laws set down by the WTO, questions of the legitimacy and efficacy of the WTO itself have been coming to forefront. and nations are trying to save themselves from the chaos that is about to ensue.

A more concerning matter is the trickling effect that this trade war will have on other countries who also have tariffs imposed on them and those that will be directly affected by the economic downfall of both the United States and China. After all, as Alice Fulwood, a South East Asian economist put it,”If you think about how globally integrated economies work, it is good for you if your neighbours are doing well.” Thus, we can conclude that this prolonged trade war will have a drastic impact on the neighbouring countries of the region as well and once that happens, it’ll have consequences as comparable to the 2008 global economic crisis.

The J.P. Morgan’s recent analysis of this trade war, taking into account all the affected nations, is comprised of three models. In the first model, the U.S. is assumed to raise tariffs on all imports by 10 percentage points, with no retaliation. In the second, the U.S. action is met in equal fashion, with other countries that are the targets of U.S. tariffs imposing a 10-percentage-point increase in tariffs on imports from the U.S. In the third scenario, the entire world raises tariffs by 10 percentage points, a phenomenon J.P. Morgan calls a ‘trade war’.

Further, the World Bank also found that if all countries raised tariffs to the maximum level allowed under the current trade law, global trade flows could fall by 9 percent (which is equal to the drop that took place during the financial crisis of 2008-2009). In addition, countries and industries would have to contend with non-tariff costs that could include logistical, legal and regulatory complications.

In my opinion, this trade war will have a major impact on the Indian economy. Considering India and China form a major part of the South Asian economies, a major trade war will erode positive sentiments in the Asian economies and will adversely affect the Indian stock market as well. If this trade war takes a turn for the worse, the United States of America will look for another big market as an alternative to the market they had with China. This may seem to be a happy consequence for us. But, the price of the rupee plays a major role in the concept of demand and supply and if the rupee is not of a suitable price this situation might just be another blow our economy has to endure. Taking into consideration the fact that our country is also struggling with bad loans and we have our own set of domestic problems especially with the banking sector. The trade war will give our economy another problem to struggle with.

To conclude, it is fair for me to say that this trade war will do no good to anyone and has already shown how it can retard economic growth (Both US and China have already shown a decrease by 0.2% in their estimated annual growth). If the two parties on whom most countries depend on for the wellbeing of their economy can reach an amicable solution without letting the situation intensify further, we can dodge an unnecessary blow to our economies.

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Vivaan is a first year undergraduate, majoring in Economics and Finance. He is interested in financial technology and investment analysis, and hopes to combine different aspects of liberal arts with business to innovate and come up with new ideas.

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