US and Europe

Is a trade war coming between the US and China?

Friday February 23, 2018 Hugh Dixon

In January 2018 the US imposed a 30 percent tariff on imports of solar panels. Also, measures to restrict the import of steel and aluminium is being considered by the White House on the basis that the imports are a threat to US national security.  These measures are aimed at China which is the largest exporter of steel, aluminium and solar panels to the US. 

 

So while some opening shots may have been fired, a full scale trade war might not be imminent as both the US and China have far too much to lose, not only in economic terms, but in terms of their international reputation.  Of course there are other factors at play here, outside of the economic damage that a trade war would cause, that may tip the balance, and cause a trade war to erupt. 

 

This, of course, does not mean that we will not see small scale trade conflicts between the US and China, with China hinting that they may response in kind to the US, and impose tariffs or restrictions on US soybeans of which US$15 billion is exported from the US to China, as a means to dissuade the US from imposing further tariffs or restrictions on imports. 

 

So, if a trade war broke out, what will be at stake?

  • China holds US$1.18 trillion in US Government Debt, and is therefore the US Government’s largest creditor.
  • US exported US$169.8 billion to China in 2016, this is the 3rd largest export market for the US.  Main export goods are soybeans (US$15 billion), aircraft (US$15 billion), electrical machinery (US$12 billion), machinery (US$11 billion), and vehicles (US$11 billion)
  • China exported US$478.8 billion to the US in 2016, the largest impact market into the US.  Main imports are electrical machinery (US$129 billion), machinery (US$97 billion), furniture and bedding (US$29 billion), toy and sports equipment (US$24 billion), and footwear (US$15 billion)

Also, the current US$309 billion trade deficit that the US Government administration wants to remove using measures such as the tariff on solar panels, is being used by China to purchase US Treasury Bonds, enabling the US Government to continue running its budget deficits.   

 

So what would be the results of a trade war between China and the US?

  • Higher consumers prices, as imports would cost significantly more
  • Jobs would move off-shore to countries with lower costs
  • US manufactures operating in China would need to relocate
  • Lower economic growth
  • Higher unemployment
  • Lower wage growth
  • The US Government would face higher borrowing costs.