US-China Trade War: Disrupting Billions

In January 2018, President Trump and his administration fulfilled one of his primary campaign promises to begin overhauling unfair trade deals by imposing tariffs on imported goods from China, with the intention of addressing the massive trade imbalance, a deficit averaging around $375 billion per year.

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On January 22nd, the first wave of tariffs targeted solar panels at 30% and washing appliances at 20% (for the first 1.2 million units, 50% on any units exceeding that amount). Prior to the implementation of the tariffs, the major US stock market indexes NASDAQ, Dow Jones and the S&P 500 were at their highest levels in history, peaking earlier in the month. During the period of January 22nd - February 9th, the stock prices of NASDAQ, Dow Jones and the S&P 500 decreased by $533, $2023, and $213, respectively. The largest stock market index in China, the Shanghai Composite (SSE Composite used the Chinese Yuan which was converted into $US), saw its stock price fall by $54 during that same period.


Since two of the primary exports of China are solar panels and washing appliances, the impact of the US tariffs on those industries significantly shocked the Chinese market. SunPower, the leading US producer of solar panels, emerges as one of the primary benefactors of the tariffs. In 2018, solar panel installations worth $1.5 billion were postponed or cancelled by US companies, while the average domestic price of washing machines and dryers went up by $86 and $92, respectively. Although the local production in these industries was suppressed and reduced in volume, five different states saw job growth in the solar panel industry rise by over 20%, with Florida and Illinois adding an additional 3000 jobs.


On March 1st, the US imposed tariffs of 25% on steel and 10% on aluminum, causing China to retaliate with tariffs on $3 billion worth of US goods (128 products) on April 2nd. Towards the end of March, the Trump administration announced that it would implement tariffs of 25% on $50 billion worth of Chinese goods, mainly electronics, in the future. China promised retaliation of the exact same amounts, primarily targeting American soybeans and automobiles. From March 1st - April 6th, the stock prices of NASDAQ, Dow Jones, and the S&P 500 fell by $265, $676, and $73. Meanwhile, the SSE Composite stock price was reduced by $20.


These tariffs had a positive impact on the US steel and aluminum sector. In 2018, shipments of US steel increased by 5%, selling 4.6% more tons of steel than in the previous year. US steel giants Nucor Corp. and US Steel Corp. greatly benefitted from these tariffs and played a role in raising domestic steel prices by 9%, which led to the largest US exporter of steel, Caterpillar Inc., being negatively impacted. Since the steel industry is turning to automation and machinery instead of manual labor, job growth in this industry only rose by 1%.


The aluminum sector saw production rise by nearly 67% over the course of 2017 and 2018, with shipments increasing by 6.3%. Additionally, $3.3 billion was invested in 22 different aluminum projects. The tariffs had a significant impact on major US automobile companies. General Motors decided to relocate to the Mid-West to avoid the high tariffs on steel and aluminum. Similarly, Harley-Davidson and Ford have reluctantly announced plans to gradually move production back to the US and started purchasing locally produced steel and aluminum. In total, the US solar panel, steel and aluminum industries have contributed to the addition of over half a million new manufacturing jobs in the US labor market.


On July 6th, tariffs of 25% on $34 billion worth of goods went into effect for the US and China, with tariffs on the remaining $16 billion taking effect on August 23rd. During the period of July 3rd - August 30th, NASDAQ reached a new record high, after its stock price rose by $585. Similarly, the stock prices of Dow Jones and S&P 500 grew by $1812 and $187, respectively. However, in China, the tariffs took their toll on the economy, with the SSE Composite stock price lowering by $7 to its lowest price in over two years.


On September 24th, the US imposed another round of tariffs of 10% on $200 billion of Chinese exports. The Chinese countered with tariffs of 10% on $60 billion of US goods. From September 24th - October 3rd, the stock prices of NASDAQ, Dow Jones, and the S&P 500 increased once again, by $31, $1266, and $6, allowing Dow Jones and the S&P 500 to reach their new highest record. The stock price of the SSE Composite dropped another $9. The SSE Composite plummeted to its lowest level in over 3 years later that October. The Trump administration promised to raise the tariff rate from 10% to 25%, but on December 1st, the US and China reached an agreement through successful negotiations, effectively halting any further tariffs between the two countries.


Although the Trump administration tariffs on China have arguably contributed to the recent economic achievements, such as record-low unemployment, the highest wage growth in a decade, and the GDP growth rate rising from 1.5% in 2016 to 3.1% in 2018, farmers in the agriculture sector have suffered major setbacks. The Chinese retaliatory tariffs targeting US farmers, especially the producers of soybeans, have been effective. US soybeans have been stockpiling due to the lack of demand from China, which is the primary purchaser of US soybeans. Soybean exports to China dropped nearly 98% in 2018. Meanwhile, production of soybeans grew by 7%, raising the number of bushels remaining to be sold to 955 million. Furthermore, the domestic price of soybeans increased by 10%. To temporarily alleviate the financial burden incurred by the farmers, President Trump signed a $12 billion deal to compensate for the losses caused by the retaliatory tariffs by allocating a small portion of the profits generated through the tariffs.

In May 2019, the Trump administration announced it would go ahead with increasing the tariff rate of 10% to 25% on the September 24th tariffs. With the new tariff rate taking effect on May 10, the stock prices of NASDAQ and the S&P 500 decreased by $247 and $64, after reaching a new record high at the end of April. Similarly, the Dow Jones, which remained steady near its highest level, fell by $562. The SSE Composite, which had been rising since the agreement in December, saw its stock price decrease by $11. The Trump administration accused the Chinese government of negotiating in bad faith by trying to delay the process until the US elections of 2020, with the hopes of being able to continue benefitting from the existing trade imbalance. During 2017 and 2018, the value of the SSE Composite reduced by $66, whereas the value of NASDAQ, Dow Jones and the S&P 500 grew $780, $646, and $138, respectively.

The Chinese have grown their economy by making it unfavorable for US companies to trade in China through various legal barriers. The Chinese government limits the amount of US items that can be imported, while restricting the amount of companies that can trade in China. As far as previous policy was concerned, the US has been the largest importer of Chinese goods, making the US the largest trading partner of the Chinese. Hence, the tariffs have an enormously adverse effect on the Chinese economy compared to the effects on the US economy. From a national perspective, it is essential for the US to counter the inequitable trade practices of China to attempt to balance out the massive trade deficit. By comparing recent GDP growth rates (as shown below), the tariffs have considerably slowed the Chinese economic growth, while the US economy is experiencing record growth for the first time since the recession of 2008. Nonetheless, the ultimate effect of tariffs on the US economy in a prolonged trade war with China will require a lengthy timeframe to properly determine the lasting consequences.

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Editing by Tom Handels