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Why Is There Trade War between the USA and China?

Trade War – The last decade (2010-20) has been dominated by the trade war between the US and China. There have been so many panel discussions on the issue that it has ceased to matter. So many editorials have been written on the subject yet nobody seems any smarter.

There is no denying the fact that the US and China are the two largest economies in the world. There was exponential increase in the Sino foreign trade after the dragon was admitted into the World trade Organization (WTO) in 2001. In 2019, the bilateral trade between the two stood at USD 559 billion.

However, the trade figure was loaded most in favor of the Beijing. The US was running a huge trade deficit with China. This snowballed into a major political issue in the 2016 US presidential election campaign. The US trade deficit was USD 375.6 billion in 2017 and reached USD 378 billion in 2018. Then it dwindled a bit in 2019 to 345.6 billion. Formally the trade war started after 2016 after it became too lop-sided in Chinese favor.

What is the trade war about?

In order to offset the burgeoning deficit, the US initiated a series of tariffs on goods imported from China. Practically it meant paying higher taxes to bring the Chinese into the US market. In return the Chinese side also issued their own list of tariffs on the import of the US good and services. In fact, the entire 2016 US presidential election was fought on the issue.

The war reached its peak in 2019 when the Washington imposed tariffs worth over USD 360 of Chinese goods. It was a steep low point in the Sino-US relationship with Chinese retaliating with own tariffs on the US goods. Ups and downs of their relationship are indicative of struggles between an established power and the challenger.

How the trade war started?

As a result of rising trade deficit with China, there was lot of concern in the US. There was anger also as Americans feared the dragon might displace them as the leading economic and military super power.  The sentiment was fully exploited in the 2016 presidential election campaign by Donald Trump.

Trump fought and won the election on the issue of trade deficit. During the election campaign he promised he would take strict measures to reduce the galloping trade deficit with China.  The president believed that the deficit was due to the unfair Chinese trade practices.

Trump accused the Chinese of intellectual property theft, forced technology transfer and not allowing market access to the US companies in China. He alleged that Beijing subsidizes favored Chinese companies thus creating an uneven playing field. And, China accused the US of snowballing rise of China as an economic power.

When did the US-China trade war start?

The US-China business trade war began on 6 July 2018 when the US slapped a tariff of 25% on the import of Chinese goods worth USD 34 billion. It was the 1st installment in a series of tariffs the US slapped in the period between 2018 and 2019.

The trade war simmered as both countries continued imposing tariffs on the import of each other’s goods. It did not stop until both sides reached an agreement in principle on a phase one trade deal in the middle of December 2019.

However, the representatives of the US and China signed the deal on 15 January 2020. Various provisions of the deal came into effect on 15 February 2020.

What is the phase one trade deal?

At the White House on 15 January 2020 the US President Trump and Chinese chief negotiator, Vice-Premier Liu He, signed the trade deal. Provisions of the deal included China agreeing to purchase additional USD 200 billion worth of the US goods and services in next two years.

Break-up of additional buying included USD 77 billion of manufacturing goods, USD 52 billion, 52 billion in energy and USD 32 billion worth of agricultural goods. It also included purchase of USD 38 billion of services such as tourism, financial and cloud services.

Chinese government also promised to lift tariffs imposed on various items US exports like seafood, dairy, pork, beef, etc.  As part of the deal, the US also agreed to scrap proposed new 15% per cent tariff for December on Chinese goods worth around USD 162 billion. And, the existing 15 per cent duty on Chinese goods worth USD 110 billion would be halved to 7.5 per cent.

How is implementation of the phase one trade deal going?

Outbreak of coronavirus in January 2020 cast a shadow on the willingness of China to comply with the terms and conditions of trade deal.  Notwithstanding the global pandemic, experts and former Chinese officials reiterated that China would honor its commitment to purchase US agricultural products as part of the deal.

However, the experts feared that the global pandemic might make China invoke a force majeure clause, referring to an unexpected act of God, for other purchases under the trade deal.  However, the Trade Representative Robert Lighthizer and US Agriculture Secretary Sonny Perdue confirmed at the end of February that China was taking action to fulfill its agricultural commitments.

Beijing also lifted sanctions on pet foods, poultry, beef and chipping potatoes. The country also introduced various tariff relief measures. It introduced a process that allowed importers for applying for waiver of duty. Chinese again began purchasing US pork, soybeans, and sorghum.

There was an increase in the purchase of US good in 2020 by the Chinese side. The dragon did not want to get things worse. Already there were lot of tensions on numerous issues including Hong Kong and technology. As a result, the US trade deficit decreased to USD 26.96 billion in May 2020. It was comparatively less than USD 33.71 billion in June 2018, a month before the trade war broke out.

At the time of signing of the phase one of trade deal, the US President Trump wanted to start the negotiation on a phase two trade deal. The purpose of negotiating a phase two deal was to resolve the issue of Chinese government subsidies.

However, making quick progress in the negotiation of phase two trade deal was remote. And the coronavirus outbreak put paid to the negotiations.

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