Pros and Cons of USA-China Trade War and Protectionist Policy

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Executive Summary.................................................................................................................1
Introduction...............................................................................................................................2
Protectionism............................................................................................................................2
USA- China: Trade Deficit and Trade War...............................................................................2
In support of Protectionist Policy.........................................................................................3
The Flip Side of a Protectionist Policy.................................................................................3
Theory of Comparative Advantage...........................................................................................5
Knowledge Economy versus Manufacturing Economy.......................................................6
USA- China Trade War: The Impact on the rest of the World..................................................7
US China Trade War : the Impact on Domestic Consumers and Firms...................................7
Impact of US Firms..............................................................................................................8
Disturbance of Complex Supply Chains .............................................................................8
Uncertainty in Business.......................................................................................................8
Conclusion................................................................................................................................9
Executive Summary
USA administration has been introducing trade barriers in the form of tariffs against Chinese
imports, in order to make it possible to reduce the wide trade deficit against China. This has
led to a series economic actions which are now being described as a “Trade War”. The
implications of this trade was shall be seen all over the world. This report investigates the
pros and cons of such a policy in the context of a globalized world as well as the
comparative advantages that both the countries have currently. It also assess the impact on
businesses in USA and China.

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Introduction
US President Donald Trump won the national election, largely based on the promise to
improve the US economy by reducing Free Trade, in general. Over the past year, USA has
been imposing higher trade barriers in the form of tariffs on several Chinese imports. In
retaliation, to the US policy against Chinese goods, China has introduced retaliatory tariffs,
resulting in a series of actions which are now being categorised as a trade war. (Tan, 2018)
Protectionism
The Trump administration has not only been arguing against more trade barriers against
China but has also, initiated actions against Free Trade Agreements, in general. The USA, in
2017, abstained from participating in the Trans Pacific Partnership, a Free trade Agreement
between over 11 countries ( Sherwood & Iturrieta, 2018). The overall policy of the Trump
administration also includes introducing more regulations to discourage the flow of skilled
and unskilled migrant workers, especially from countries like India and Mexico. This policy
of introducing higher trade barriers and barriers to labour inflow, in order to protect domestic
industry and labour is known as “protectionism” and is contrarian to US trade policy in the
The protectionist policy of USA does not operate in a vacuum. International Trade, in modern
times, has become complex intertwined structure or more “globalized” and the ripple effects
of the US policies will be seen all over the world.
USA- China: Trade Deficit and Trade War
Chinese exports to the USA tend to be lower on account of cheap labour available in China.
Import demand from USA has, in part, led to a phenomenal economic growth in China,
especially, in the past few decades.(Moes, 2018). On the flip side, the United States of
America has had trade deficits against China, every year in the last decade, with the
exception of the period during the Global Financial Crisis during the year 2008-09.(Federal
Reserve Bank of St. Louis, 2017) Since early 2018, the USA has been in the process of

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imposition of tariffs on a comprehensive list of items imported from China. (Federal Reserve
Bank of St. Louis, 2017).Among these items, metals and metal ores are the primary items of
concern along with meat items such as bovine meat. (Department of Foreign Affairs and
Trade, 2018). Trade barriers would be expected to lead to Chinese imports becoming more
expensive to consumers in the USA. this would ideally reduce the quantity of import in USA,
which may help the trade deficit become narrower than its current standing. (Mankiw 2018)
In support of Protectionist Policy
China has been able to make a trade surplus by executing currency devaluation, which helps
the Chinese imports become cheaper. This makes it very difficult for US products to compete
with the Chinese products. (Federal Reserve Bank of St. Louis, 2017)
The Chinese trade deficit reduced during the Global Financial Crisis as the Federal Reserve
Bank of USA had to manipulate interest rates to provide a boost to the US economy. A by-
product of this manipulation was a devalued US dollar which made Chinese imports
relatively more expensive. Trade deficit in USA during this time narrowed down. Hence,
there is empirical support for such a protectionist measure. ( Federal Reserve Bank of New
York, 2011)
The Flip Side of a Protectionist Policy
There can be several counter arguments against the policy. Such a protectionist policy is
against the larger goal of “globalization” and can raise other concerns. Trade is a narrow part
of international co-operation and does not exist in a vacuum, The financial markets, currency
markets, asset markets in the two country are also intertwined. There are several areas of the
US economy that benefit from a more globalized world. For example, it is easier for Chinese
investors to invest in USA due to fewer barriers in investment. As a result, Chinese investors
have been investing in assets in USA such as housing, in large numbers.(Richter, 2018)
Chinese tourists visit USA in very large number. (Sisson, 2018)
The gains from other sectors of the economy could be eroded as China may introduce barriers
to curb activities in other sectors of the economy.
There are several important consequences of globalization in consumers . In the illustration
given below, the price of iron ore based products or steel based products are given , in the