The harmful effect of the US-China trade war on US businesses

The harmful effect of the US-China trade war on US businesses

During his presidential campaign, Donald Trump denounced unfair Chinese trade practices regarding the transfer of technology and intellectual property rights. He promised to wage war against China to protect American businesses and jobs, if he was elected. Since he is at the head of the US government, Trump has consequently declared a trade war on China. It manifests itself mainly through the rise in tariffs on imported goods in order to undermine unfair foreign competition and to promote the national economy. Trump is willing to boost the US economy by making Chinese imported products more expensive than national ones. Consequently, people will rationally buy more American goods and thus sustain national companies. So far, Trump has raised tariffs on $250 billion worth of Chinese goods. Currently, he is threatening to expand these trade barriers to no less than a supplementary $260 billion. The Chinese government has answered with similar measures on $110 billion worth of US products.

An escalation war is taking place as the two biggest economies in the world are having difficulties in finding a compromise. By launching one of the biggest trade war in history, Trump also triggered a new set of difficulties for US businesses.

The automotive industry is one of the main casualties in this trade war. In fact, one of Trump’s key measures is to raise tariffs on imported Chinese aluminium by 10% and steel by 25%. Since these materials are massively used in automobile manufacturing, US carmakers are raising their voices against the substantial rise in their production costs. Ford and General Motors - two giants in the US car industry - are expecting a decline in performance and therefore in profit in 2018 due to these policies imposed by the government.

The increasing difficulties for US companies also come from the backlash of China. In fact, China judged these imposed tariffs and further threats as unfair trade war measures and decided to reciprocate by setting up similar monetary tariffs on US imports. A company like Apple can face indirect supplementary costs with the Chinese backlash. Indeed, Apple produces electronic components in the US but then exports them to China to be assembled. If China raises tariffs on  products that enter the country for assembly purposes, the US company will see its costs go up. The products will consequently be sold at a higher price. This situation will not be triggered by Trump’s direct tariffs on Chinese products but by China’s reaction to these aggressive trade measures.

Legitimately, China responded to these tariffs barriers with a similar rise in monetary barriers concerning US products. In the automotive industry, these retalioatory barriers were applied exclusively to US companies - the import tariffs on US automobiles were increased to 40%. Ultimately, these companies find themselves at a disadvantage compared with other foreign businesses. Simultaneously, the government lowered the import tariffs applied to cars from the rest of the world. On July 1st 2018, these tariffs were reduced from 25% to 15%. Higher tariffs for imported US products therefore mean a reduced competitive advantage compared with other foreign goods. These measures also translate a long-term shift in China - from the increased automobile consumption of US cars to promoting imports of other foreign vehicles.

However, China does not have the economic strength to reproduce and put in place the same tariffs as the US. China does not import as many US goods as the US import Chinese products and therefore, it can’t replicate identical measures. The Chinese Ministry of Commerce suggested instead non-tariff barriers against the US. China could create a hostile environment to US companies in China. Making life more difficult for these companies could be another option of expressing resentment against Trump’s policies. For example, China could intensify US companies' checks on health, tax and safety grounds. The government could also decide to delay and boycott US imported products. These non-monetary measures would profoundly hurt the US business in China.

The impact of the US-China trade war on US businesses is expanding as a result of dangerously escalating monetary and non-monetary barriers between both countries. The indirect effects of introducing these policies have to be taken into account as they may overcome the initial national benefit from trade barriers. US companies are hurt not only as a consequence of Trump’s policies but also through China’s reaction measures. This escalation mechanism is openly set up to undermine each country's economy. This trade war underlines the current economic context where countries are fighting for global influence and power.

Fiona Piot.