China vs. US Trade Wars and How They Affect the Financial Market and Global Trade

trumpUnited States president Donald Trump had declared to fix China’s “extended abuse of the broken international system and unfair practices” in his campaign. The economic strife happened before China became part of the World Trade Organization (WTO), but Trump’s predecessors Barack Obama, George W. Bush, Bill Clinton, and George H. W. Bush did not succeed at solving the dispute.

To make good on his promise, president Trump imposed quotas and tariffs on imported Chinese washing machines and solar panels on January 22, 2018. China is the number one solar equipment manufacturer in the globe and it lodged a formal protest against the president’s decree with the World Trade Organization in August 2018.

In addition, US president, on March 8, 2018, said he was ready to increase tariffs on all US imports from China to reduce the US trade deficit that totaled $375.6 billion, which China was open to. This sparked fears of a fully blown trade war, with the potential for a conflict as big as any outlined in this timeline of the last 100 years from DailyFX.

However, China cautioned that the trade deficit was out of their hands since the shortfall is facilitated by high US demand for cheap Chinese products.
The Trump administration raised the bar on March 22, 2018, when it declared that it would impose tariffs on $60 billion of imports from China. It also stated that it would restrict its technology transfers to Chinese companies. China needs all foreign companies that want to sell their goods to them to disclose their secrets with Chinese companies, which a US trade representative terms as unfair. According to a report on The WSJ, China continues to use espionage, cyber theft, and government pressure to obtain US technology illegally.

But, four days later, the Trump administration started to negotiate quietly with Chinese trade officials, fronting three requests: that China lowers its tariff on US automobiles, that China imports more US semiconductors and that US companies get more access to Chinese financial sector.

But when the Trump administration hinted that it might levy tariffs on $50 billion in Chinese imported machinery, aerospace and electronics, China retaliated fast. It declared a 25% tariff on $50 billion of US exports to their country – strategically targeting 106 products, including Boeing airplanes and sorghum. The focus was mainly on US-based industries that supported Trump’s election. Additionally, China canceled all US soybean import deals, which is a big blow considering US farmers sell half of their products to China.

Later in July 2018, Trump accused China of ‘manipulating their interest rates and currencies lower’ with the aim of getting a competitive edge over the US. Adding that they should be allowed to recover what was lost as a result of the ‘bad trade deals and illegal currency manipulation’.

According to the latest reports, high-level trade talks between the US and China have stalled. The Rhodium Group says that the trade war between the two countries is already having an impact on investment activity. In the first half of 2018, China’s foreign direct investment into the US totaled only $1.8 billion, which is 90% lower than the same period in 2017. Money is also being withdrawn quickly, with almost $10 billion in US asset court order by Chinese investors in the first 5 months of 2018.

With this war, US-based startups that are hoping to get funding from Chinese investors are going to get the biggest blow because of the enhanced regulatory red tape. Chinese investors too, will not have the same access to deals following the new limitations on contracts with US firms involving cutting-edge technology.

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