Eagle versus Dragon: The Trade Conflict between the United States and China Further Escalates

Yokohama, China © Pixabay/megurawa

Yokohama, China © Pixabay/megurawa

In mid-May 2019, the trade conflict between the United States and China escalated further as U.S. President Donald Trump raised tariffs on U.S. imports of Chinese goods worth 200 billion U.S. dollars from 10 to 25 percent. Although the United States and China have been negotiating a trade agreement since December 2018, an end to the conflict is not yet in sight.

The United States has had a large deficit in merchandise trade with China for many years. Amounting to around 419 billion U.S. dollars in 2018, it is higher than that with any other country. Due to the positive balance regarding trade in services, the overall trade deficit is somewhat lower but remains substantial at 379 billion U.S. dollars.

China has become a heavyweight in the world economy but has yet to assume the concurrent responsibility in the world economic order. European companies also suffer as a result of these unfair trade practices. Therefore, the European Union filed a complaint against China with the World Trade Organization (WTO) in June 2018 with a focus on China’s inadequate protection of intellectual property rights. U.S. President Donald Trump has also sharply criticized Beijing’s trade practices. In late November 2018, the WTO agreed to establish a dispute settlement panel upon request of the United States concerning China’s measures pertaining to the protection of intellectual property rights.

Tit-for-Tat Escalation

Trump wants a better “deal” for the United States, in part to decrease the high U.S. trade deficit. Thus, he implemented high punitive tariffs – 25 percent on Chinese imports worth 34 billion U.S. dollars – on the basis of Section 301 of the Trade Act of 1974 in order to address inadequate protection of intellectual property rights in China. Following an investigation and political consultations, Section 301 allows for economic sanctions against countries which infringe trade agreements or disadvantage the U.S. economy through other unfair trade practices.

The duties relate primarily to high-technology product groups such as aircraft parts, batteries, flat-screen televisions, and specialist medical equipment – products which China has identified as being particularly important in the current five-year plan as part of the Made in China 2025 strategy. The Chinese government criticized the U.S. action sharply and took retaliatory action, covering a trade volume of around 34 billion U.S. dollars. However, Trump further turned up the heat. Duties were extended to imports worth 16 billion U.S. dollars in late August 2018, meaning that a total of imports worth 50 billion U.S. dollars were hit by duties. For the Trump administration, this amount reflects the damage suffered annually by the United States through violations of intellectual property rights and enforced technology transfer by China. Again, China implemented retaliatory tariffs, also covering a trade volume of around 16 billion U.S. dollars that came into force the same day. 

At the end of September 2018, Trump ordered additional tariffs of 10 percent on a trade volume of 200 billion U.S. dollars comprising 6,000 product categories from China. China promptly responded with retaliatory tariffs of 60 billion U.S. dollars. On the sidelines of the G20 summit in Argentina in late 2018, the United States and China agreed to de-escalate the conflict and negotiate a bilateral trade agreement. The two parties hoped to arrive to an agreement by March 2019 on market access, structural reforms in China and on an enforcement mechanism. Trump first extended the March deadline citing a good negotiation process. However, sentiment reversed again at the end of April, when Trump criticized Beijing for withdrawing previously made concessions. In early May 2019, he then raised the 10 percent tariffs to 25 percent on a trade volume of 200 billion U.S. dollars. In addition, he threatened to impose further additional tariffs of 25 percent on the remaining U.S. imports of Chinese goods worth 325 billion U.S. dollars.

China has so far responded with tariffs totaling 110 billion U.S. dollars. As of June 2019, imports from the United States amounting to 60 billion U.S. dollars are charged an additional amount between 5 and 25 percent. This affects nearly all of China's imports from the United States. In addition, China threatened to restrict the export of rare earths, which are essential in the production of many high-tech products.

Threat to the Global Economy

The conflict between the United States and China is not just about competition for economic preeminence, but also about who will shape the world order in the future – it is about a battle between the systems. The old U.S. hegemonic power is being challenged massively by the rise of China; this in turn fuels fear in the United States.

The United States rightly blames China for taking advantage of the international trading system, considering that it does not honor, in many cases, its promises of accession to the WTO. President Trump also justly criticizes the lack of intellectual property protection, government subsidies, and forced technology transfer to joint ventures in China. However, the U.S. president relies on unilateral trading instruments and laws to persuade Beijing to relent. In its national security strategy of December 2018, the Trump administration disparaged the decades-long policy of turning China into a trusted partner through its involvement in international organizations and world trade, saying that this did not result in anything of value.

Tariffs and unilateral measures are, however, not successful. The tariff spiral is a major threat to the U.S. and world economies. According to a study by Deutsche Bank Research, U.S. imports from China of product groups, on which additional tariffs were imposed, fell between 25.9 and 37.9 percent year-on-year (February 2019 compared to February 2018). The International Monetary Fund (April 2019) estimated a negative impact on annual GDP growth of 0.3 to 0.6 percentage points for the United States and around 0.5 to 1.5 percentage points for China, should all U.S. and Chinese goods be subject to an additional duty of 25 percent.   

The United States should rather engage constructively in the reform process of the WTO and help to adapt modern trade rules. Only through multilateral cooperation can the United States remain a formative power in world trade. And only this way can the conflict with China be sustainably resolved.