US-China Trade War

US-China Trade War: The much-hyped saga between the two super-powers! Is it a political drama to show who’s superior? Or is there real economics behind it?

Let’s do a quick fact chat before we draw any conclusions = blaming Trump 😊 which has become quite the fashion nowadays.

Trump triumphed and sent a shock wave to the entire nation and to the world!

“Making America Great” was a masterstroke by Trump – putting America’s interest first before any other country (prime directive of any leader in the world) gave him the edge. During the election campaign, Trump said “We can’t continue to allow China to rape our country and that’s what they’re doing. It’s the greatest theft in the history of the world.”

What transpired after that has certainly gone in the history books – “Trump Won” and the battle started on many fronts – Trade War not only with China, NAFTA, Immigration..the list goes on.

US-China Trade War – a cold war which has lasted more than 150 days!

It all began on April 2017, when the two sides decided to sought trade differences in the historical summit between Chinese President Xi Jinping and US President Donald Trump at the Mar-a-Lago estate in Florida. What started as a promising discussion turned ugly and a fight to show supremacy began!

The back n forth has been going for more than 150 days with multiple rounds of tariffs by both sides. The good news is that both sides announced a truce of 90 days. But we wonder how long it’s going to last after the arrest of CFO of Huawei in December.

The chart below shows how it transpired since it all began in April 2017.


 

So far, the US has the upper hand with tariffs imposed on $250b worth of goods!

As you can see from the chart above, Trump administration has released a list of proposed tariffs on $250bn worth of goods – effecting many industries from auto parts to food ingredients to construction materials, to solar energy cells and panels.

The tariffs carry an initial rate of 10 percent and can be increased to 25 percent by March 1, 2019 (the end date of truce agreement)

China responded by issuing its own list and imposing tariffs on $110bn worth of US goods so far – major impact is on soybean farmers and auto-sector.

The 90 days truce has come as a major relief barring a small set-back – the arrest of Huawei CFO. According to the agreement:

  • Both countries will refrain from increasing tariffs or imposing new tariffs
  • The US will not increase tariff rate from 10% to 25% on January 2019 and will not impose tariffs on an additional $267b worth of goods
  • China will purchase more US products especially agricultural and energy products and will crack down on the production and distribution of Fentanyl, a synthetic opioid produced primarily in China.

The biggest losers in the short run – Famers, Consumers and Small Businesses!

The consumers –

“There’s no way around it: Tariffs are taxes on American consumers.”

-David French, senior vice president for government relations at the National Retail Federation

  • According to an analysis of government data by Kirill Borusyak, a postdoctoral associate at Princeton University, and Xavier Jaravel, an economics professor at the London School of Economics – the tariffs would cost average American family $127 per year.
  • These are rough estimates, as it depends on consumer purchases or the way companies decides to deal with the tariffs. For example, they may very well decide to pass on the entire cost of tariffs on to consumers rather than taking a hit to profit margin.

The Farmers –

  • Agriculture market has seen rapid drops in the corn, sorghum and soybean prices – Soybean prices in the U.S. fell to the lowest point in almost a decade, lowest since March 2009. The knock-on effect from weaker soybean prices also impacts other grain products.
  • To contain the situation, Trump administration announced a $4.7 bailout package to producers of Soybean, corn and other farm products. The bulk of it will go to Soybean producers worst affected by the Trade War!

Small Businesses–

  • Although the direct impact to small businesses is negligible now but cannot be taken lightly. In the U.S., small businesses make up  7 percent of employer companies and 48 percent of the private workforce.
  • For a small business cash flow is like oxygen. Anything impacting the cash flow – new tariffs, taxes – GST😉 adds cost to the business and will slow the business!

Trump might be right and may very well win the battle after all!

The trade deficit between the two countries was huge – the US imported $522.9 billion in goods from China and exported $187.5 billion in 2017. The Chinese can’t go head to head with the US on this – their imports are far less. More importantly, Trump is dealing with the Chinese the way they are used to – some old-fashioned bargaining 😊

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About Author
Rahul Pahuja

Rahul Pahuja

Rahul Pahuja is the Founder and CEO of TradeGyani - India’s first social network for stock market that enables retail investors to learn from other passionate investors, traders & celebrity advisors to make informed investment decisions. Before starting TradeGyani, Rahul served as a senior vice president at Moody’s Analytics, and played a major role in building the captive unit in Gurugram and Bangalore. Passionate about cricket, volleyball and basketball, Rahul brings a sportsman’s energy and perseverance to everything he does. Rahul holds MBA from Purdue University, PG Diploma in International Business from Amity University & bachelor’s in computers from B.U.

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