In his “America First” ideology, the Trump administration took many unpopular decisions. But the most significant, which affect the world economy was to initiate a trade war against China in 2018.
Before the war started, China was the largest trading partner for many years. In 2017, its share in total U imports was 21.9 percent, and the exports to China from the U.S. stood at 8.4 percent.
In 2018, after the U.S. administration decided to increase tariffs against Chinese products accusing the country of intellectual property theft and unfair trading practices, export to China slightly decline to 7.2 percent. The imports, however, remained at 21 percent.
China in response also increased tariffs against U.S. products and the two countries continued to impose restrictions on each other during 2019. This clash resulted in a decrease in bilateral trade with the import share from China falling to 18.40 percent and the export share to China decreasing to 6.48 percent.
Despite the US administration’s decision to increase tariffs up to 25 percent on $200 billion worth of Chinese goods by 2019, China maintained its position as the U.S.’s top importing partner. It is noteworthy that in 2020, although the trend of declining imports from China continued, it was slightly better than in 2019. The percentage of imports from China stood at 19.01 percent, while exports to China were recorded 8.72 percent.
While the short-term effects of the trade war may not be visible in the direct fall in trading volumes, it was seen elsewhere. The high tariffs on products from both countries created uncertainty in the markets, negatively impacting the world economy.
In 2018, Hong Kong’s Hang Seng index fell more than 13%, and the Shanghai Composite slumped by nearly 25%. However, both indices recovered some ground the next year and were up 12% and 16%, respectively. By comparison, the Dow Jones Industrial Average fell nearly 6% in 2018 and is already up some 11% in 2019.
The yuan fell over 5% against the US dollar last year before broadly stabilizing in 2019, according to Reuters.
In 2019, the markets and currencies began to stabilize and adapt to the short-term impact of the trade war. Nonetheless, the long-term repercussions are more severe and protracted. Small and medium-sized enterprises, particularly those relying on Chinese raw materials to produce their goods in the U.S. market, have been adversely affected by the tariffs. The increased cost of Chinese imports ultimately gets passed on to U.S. consumers, potentially impacting business demand if they opt for more affordable substitutes.
“As a small business, my finances were already a little tight. I had to figure out how I was going to get the money to operate the business. We’re all paying for this, not [only] China,” said Ms. Mosee, founder of handbag and backpack maker MinkeeBlue.
Many companies shifted their industries to less expensive options, such as Southeast Asian countries, as China has become an expensive raw material provider for various industries. Chief executive Magi Raible, for example, quickly shifted some production out of China to Cambodia when tariffs on some goods were hiked by 10%, and later those tariffs were increased by another 15%.
The trade war also comes as an opportunity in disguise for some other countries, as two large trading partners started to diversify and look for other countries to fulfill their requirements. As per the research conducted by Columbia Business School, the U.S.-China trade war has led to an increase in global trade, a diversified supply chain for the products targeted by the tariffs, and significant implications for the future of globalization.
To determine the countries with whom the two major trading partners engaged during the peak of the trade war in 2018 and 2019, I analyzed the trade data of both nations and made the following observations:
- The highest importing partner of the U.S. was China till 2017. From 2018 onwards, the largest contribution still comes from China but the share started to decrease.
- The largest importer for the U.S., other than China, in terms of percentage contribution remains Mexico, Canada, Japan, and Germany.
- However, other countries especially Vietnam and Switzerland contributed significantly, in the absence of China, and their imports contribution increased toward U.S. total imports (See figure).
- The export data of China also shows a similar trend. While the U.S. remained its highest export partner, the gap in the absence of the U.S. was filled by Japan, Korea, Germany, and other countries. China’s export to these countries significantly increased in 2019 and 2020.
The ongoing trade war between the United States and China has transformed into a cold war, with no end in sight. Despite this, both nations are unable to significantly reduce their reliance on each other in the foreseeable future. As a result, they have begun to seek a diversified mix of trading partners. While this shift will have negative consequences for both countries, it presents a golden opportunity for other nations to benefit from global trade reconfiguration. As one country’s loss becomes another’s gain, it will be interesting to see which nations will emerge as new trading powers in the years to come.