Trade wars – the new Normal? Is there a way to avoid a trade war?

A trade war is an economic conflict between two or more countries with the goal to capture foreign markets. A trade war begins when countries put tariffs on each other’s goods. They do it primarily to make the market more reach and attractive. But let’s have a brief look in the history to know how this whole began.

Steps back to the industrial period

Many years ago the world disorder was a natural fact for the majority of countries. There were about a dozen significant powers that would able to catch big territories and use their resources to trade, to get food, to have a better market. All this had led to numerous wars during the industrial period. For example, two Opium wars occurred between the British Empire and China in the mid-1800s. The British Empire wanted to get access to trade with China, while China was isolated from the rest of the world and had its developed economic system inside the country. Or, the first Anglo-Dutch War that happened due to the growing military-naval and trade rivalry of the two nations. Dutch merchants traded almost all of the Europe that prevented the trade of other lands. As well, a good example is the Second World War. Only the United States could survive the War almost without losses. All of these trade-initiated wars required some general concept. Thus, Americans introduced the idea of a trade. Since that War, the USA had remained the only economic leader for a continued period.

Three landmark developments had occurred only at the beginning of the 2000s:

  • the Euro introduction. It was an excellent political goal. The world’s purpose was to unite the European Union. But the Europeans had set another aim. They wanted to replace US dollar and make Euro the only world currency;
  • the EP3. The US plane crashed with a spy in international waters near the coast of China. A Chinese pilot collided with it and broke. The Chinese got the plane for a couple of months. Since then, relations between the USA and China declined remarkably;
  • the 9/11. A lot of countries that were collaborating with the USA decided to exclude themselves from those horrible events. They didn’t help the USA to cope with losses.

So, the deal violated. These horrible situations put a path to an end of the dominance of an American system. And it also served as the beginning of the future global trade war.

The US-China trade war: tariffs and timeline

The US-China trade war started because two countries have been disputing tariffs on goods, trade between them, for an extended period. The trade war between the US and China had begun in January when the US announced a 30{3fbfd6f1e6b19884051837dbbbebf333964dd5fac151615ffbd47b80e5ecc87a} tariff on imported solar panels and a 20{3fbfd6f1e6b19884051837dbbbebf333964dd5fac151615ffbd47b80e5ecc87a} tariff on washing machines. US President Donald Trump also had promised to fix China’s situation with an international abusing system and unfair practice because previous US Presidents couldn’t solve the country’s problems. Economic disputes had appeared before China entered the World Trade Organization. The US President filed for WTO consultation so that China violated the rights of their intellectual property.

China–United States trade war

Trump partially agrees with the 1974 Trade Act. But this agreement gives him a right to impose penalties on a trading partner on a unilateral basis. In August 2017, the US had opened an official inquiry into attacks on the intellectual property. The USA believes that Chinese laws disturb intellectual property rights compelling foreigners to create joint corporations. That gives China access to copy, improvement and even theft of foreign imported technologies. Donald Trump also declares that China discriminates the rights of foreign imported property, and fixes nontariff goods inside the country. The US has suspicions of China that the authorities are delegating their companies to invest in American business to obtain strategic technologies. Besides, China is conducting cyber-attacks on the US companies to obtain secret commercial information.

The US-China Trade War

The arguments between the two giants are still ongoing, affecting the entire world’s economy.

Who will suffer from the US-China trade war?

Europe has been one of the main victims in this trade war. The European economy highly depends on international trade. Although first, it seemed that US policy aims against China, then it led to a confrontation with Europe. The US President imposed tariffs on the import of aluminum and steel. Europe responded with tariffs imposition on American goods, including bourbon and motorcycles. The European profits decline one of the most dangerous risks of its economy. Trump has also informed people about possible automobile tariffs. It will radically make worse the European profit. Take Germany for example. Germany is one of the failures in the current trade war. Even though their economy is one step away from destruction, the country will be able to rebuild it in a short period. Germany is free and democratic. Germany right now imports 85 {3fbfd6f1e6b19884051837dbbbebf333964dd5fac151615ffbd47b80e5ecc87a} of its energy. The country is almost entirely dependent upon exports. So, if tariffs disturb energy exports, initially Germany won’t know what to do.

The US-China Economic Relationship

As we can see above, not only European countries can suffer from a trade war between the USA and China. Economies, such as South Korea, Japan, and Taiwan which are heavily dependent on the markets of China or the United States, will experience negative consequences.

Countries, which almost managed to avoid a trade war:

As we know, there are no specific winners in the USA-China trade war. But several countries suffered less during the current trade war.

  • Japan. Japan is a country with an outdating economic system. The country figured out to have a modern economy without a workforce. It’s all based on automation. Japan also has the world’s second most forceful regional navy.
  • Argentina. Argentina has interconnected waterways to serve as a natural transport. The country has similar to the US topography. Argentina is a country with a pleasant climate, wine, and natural recourses. So, they export oil, gas, iron, pork, wheat, and beef.
  • France. The French crated EU for political reasons. That’s why they never integrated into the EU as much as other influential countries. They have Europe’s second most powerful military and navy. They’re an exporter of food. So, the French have everything at the start of the era.
  • Turkey. Turkey has everything that it needs nearby. It can get food from Bulgaria or Romania. The country can get energy from Iraqi, Kurdistan or Azerbaijan. It’s got NATO’s second powerful army. Turkey has got young demography. All of these advantages will last for decades.

The results of a trade war

During the last negotiations, the United States and China have suspended a trade war. The parties have made significant progress. China has accepted to lessen a trade gap by increasing the purchase of US goods. China wants to solve the country’s problems on the market by fair means. The US President Donald Trump has temporarily refused of tariffs on Chinese goods, but will be ready to introduce them again in the case if China “fails to fulfill its obligations.” According to the latest news the United States and China have agreed to increase mutual import duties for 90 days. It is not a world agreement, but it gives the economy to take a short break.

U.S.-China Economic Relations

The deal comes into effect on January 1, 2019, and will last until the beginning of April. This time should be used to form and put in place a trade agreement between two countries. In the words of economists, there are two variants of further events development. The first is to lead rapid and dynamic negotiation process and to reach all the agreements. In this scenario, the United States will put pressure on China to achieve the best conditions for the nation. The alternative is a possible lack of contact points. The result can be that countries won’t reach an agreement by April. It means that within three months, China will actively stimulate its economy and domestic demand, stand for exporters and banks, and by the middle of spring the world will see just another wave of trade aggression from the US.

Trade wars – the new Normal? Answering this question, let’s take as an example the long-running trade war between the United States and China. For almost a year, two countries can’t come to a reconciliation that will satisfy their interests. Despite the short peace agreement, the US and China continue to argue and prove their rights. It seems that quite the whole world has become accustomed to the endless confrontations of the two giants. And if the world wants to avoid direct participation in the trade war, it must remain passive in the US-China further disputes. The globe should have a strong internal economy that will be able to confront external circumstances.

Author: Alexej Pikovsky

Passionate about investing in private and public companies and a successful track record across different industries and geographies. German Academic Foundation Scholar and Research Affiliate at the Centre for Global Finance and Technology at Imperial College London. Addicted to reading and sharing industry deep dives. Enjoy!