The Potential Dangers of a U.S/China Trade War
As a consumer, I find myself constantly looking now more than ever for the “Made in China” label and it appears to be ubiquitous. Without naming any of the stores where I shop or the specific items that I purchase, I can say with some confidence that many of my friends, colleagues, and associates as well as Mr. and Mrs. Joe Normal in the good ole U.S. of A, are beginning to do the same given the recent news. A potential trade war with China, depending on the scope of exports affected by tariffs, could mean at least two things: higher prices and in some cases increased scarcity of certain manufactured goods from China. China has stated, in no uncertain terms, that they will retaliate against U.S. tariffs with “equal scale and equal strength”.
The Wall Street Journal** recently reported that the conflict between the U.S and China is taking place in the midst of growing conflicts between the U.S., Canada, and the European Union (EU) with Canada set to impose retaliatory taxes of up to 25% on U.S. items including ketchup, and yogurt primarily manufactured in Wisconsin. The punitive measures would total about $12.6 billion. This action on the part of Canada, mirrors what Mexico did on its imported whiskey coming from Kentucky. Interestingly enough, Mexico and Canada have strategically targeted Wisconsin and Kentucky, two states where key Republican congressional leaders reside, Paul Ryan and Mitch McConnell. However, these significant responses to a shift in U.S. economic policy, pale in comparison to what could happen if a trade war between the U.S and China begins.
For the everyday shopper, the rise in the cost of goods from China could increase sales of items produced locally or from other countries which is perhaps beneficial in the short run for consumers and retailers. The decision to opt out of buying imported items that are too expensive could increase demand in favor of American manufacturers who could increase production and see a bump up in sales. In the long run, the prospects could be worse, as China is one of America’s biggest trade partners, with exports to the U.S. valued at about $505 billion and imports from the U.S. valued at about $130 billion, according to the Wall Street Journal**. A trade war with the U.S. would therefore, not benefit China in the long run while boosting a currently robust, American economy briefly. The report goes on to identify three options that China could implement to counterattack the protectionist efforts by the U.S.
Option 1 – Devalue its currency (Yuan) – This would lead to cheaper currency, thus allowing production of cheaper goods for export to other countries to counter U.S. tariffs. This could also weaken China’s economy as well as too much currency could leave the country creating a windfall.
Option 2 – China could “flex its regulatory muscle” – that would add more red tape affecting U.S. companies doing business in China by blocking mergers, delaying licenses, and increasing inspections on U.S. imports and products. In addition, China could also give preferential treatment to non-U.S. companies.
Option 3 – Wage media campaigns – China has a huge market and when it speaks, the world listens. Negative press could hurt U.S. exports. China could turn up the rhetoric on its trade partners pressuring them to abandon their imports of U.S. items which worked with Japan and some of its Toyota vehicles recently.
Clearly, there is work to be done to bring balance to this economic conflict and any efforts to address and/or fix any wrongs from the past must be honest, diplomatic, and rational. Negotiations must take into account cultural realities/differences, historical events, and mutual benefits as well as shortcomings resulting from active trade agreements over a specific period of time. NAFTA should be revisited, as political and economic realities have changed in the Western Hemisphere since its passage into law in December 1993.
In addition, The Trans-Pacific Partnership (TPP), which would have expanded markets and trade opportunities for smaller countries in Asia, increasing competition, creating jobs, and placing regulations and multilateral restrictions and oversight on China, should also be revisited. Multilateral negotiations toward mutually beneficial, trade agreements can and should be a first step toward effective, economic conflict resolution. As economic powerhouses in the world, both China and the United States should lead by example, and work together to negotiate and resolve this matter, in earnest.
**Watch July 6, 2018 video clip, entitled “Here’s How China Can Escalate a Trade Dispute With the U.S” by Shelby Holliday WSJ Senior Video Journalist.
Gregory Williams is an educator, political scientist, and the owner of Trans-Continental Import-Export Services and Consulting, LLC, an export management company located in Baltimore, Maryland. He holds Bachelor of Arts degrees in French and Political Science from the University of Maryland Baltimore County (UMBC), and a Master of Business Administration from Strayer University.