Microeconomics: A Detailed Analysis of the US and China Trade War

This essay provides a microeconomic analysis of the trade war between the United States and China, examining the economic conflict resulting from protectionist measures such as tariffs and trade barriers. It discusses the potential damage to the global economy, the economic welfare losses for both countries, and the influence of financial markets and monetary policy on the trade war's outcome. The analysis includes the impact on real exports, gross domestic product, and world trade, highlighting how protectionist environments can lead to decreased imports and inward-turning economies. The essay also explores the advantages and disadvantages of trade protectionism, such as protecting new industries versus the inefficiencies compared to comparative advantage, ultimately concluding that neither the United States nor China will truly win the trade war as both economies suffer from its escalation.

Running head: MICROECONOMICS
Microeconomics
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Trade war between China and the United States
Trade war is a kind of economic conflict which results from extreme protectionism in
which the countries usually creates tariffs or any other kind of trade barriers against each
other in response to the trade barriers imposed by the other country. The United States and
China are engaged in the trade war because each country continues to dispute tariffs paced on
the goods traded between them. The trade war which had been initiated by the United States
will be doing a lot of damage to the global economy. The country which will be imposing
tariff and the country which is subject to tariff would be experiencing losses in the economic
welfare (Robinson & Thierfelder, 2018). Those countries will also be facing any kind of
collateral damage. The losses in the economic output will become permanent since the
distorted price will prevent the globalizations. Both the financial market and the monetary
policy will be influencing the outcome of the trade war. There will be presence of no real
winners in the US initiated trade war (Liu & Woo, 2018). The countries which will be facing
the tariffs will be experiencing decline in the real exports along with the gross domestic
product. The world trade usually suffers more in case of protectionist environment as the
countries turn inward and the multinational companies will be producing to end markets so
that they can stay competitive. The United States will be experiencing the largest decline in
the imports of goods and services. The imports of U.S. will be declining to 4.5% and
similarly China will also experience a drop in real imports which will fall to 3.2% in the year
2020.
The world trade will be suffering more in case of protectionist environment as
countries will be turning inward and the multinational companies will be moving to stay
competitive in the markets. Therefore, it can be said neither the United States nor China will

Tariff + world
supply
Supply
Demand
World supply
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be winning the trade war. Both the economies will be suffering when the trade war will
escalate and spread in the other areas. The government of the United States clearly wants to
have fierce competition with China (Bichler & Nitzan, 2018). The trade war between the two
largest economies in the world took place with the most recent round of tariffs. In this case,
the United States will be imposing $200 billion worth on the Chinese goods and China will
be imposing another $60 billion on the goods of the United States. The trade war is a kind of
head to head struggle taking place between an incumbent superpower and a rising challenger.
The economic structure of China is quite disadvantageous for trading, investing and also for
operating. The trade protectionism is kind of economic practice of restricting trade between
the countries with the help of tariff or sitting quota on the imported goods (What might a
trade war between America and China look like?. 2018).
Figure 1Impact of tariff

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The United States have imposed tariffs on China and it will have both positive and
negative effects on both the countries. The consumers of the United States will be facing high
prices which also means there will be a loss of consumer’s surplus (Liu & Woo, 2018). On
the other hand the producer of the United States will be benefitting as they will be protected
from the cheap imports and will receive higher price than they would have without tariff.
Although there will be a presence of overall net welfare loss. Without trade the domestic
price and quantity will be at the equilibrium. After the imposition of tariff the world supply
curve will be shifting up and is shown by the curve of tariff and world supply. The price will
rise and then the quantity of output will also change. On case of the exporting countries, the
consumers of the product of the exporting country will be experiencing an increase in the
wellbeing because of the tariff. The decrease in the domestic price will raise the amount of
the consumer surplus of the market. The producers of the exporting country will be
experiencing a decrease in the wellbeing. In case of the exporting country the revenue will be
equal to the tariff of the importer. Therefore it can be said that the consumers of the importing
country will be suffering a reduction in wellbeing as a result of tariff.
There are presence of both advantage and disadvantage in case of trade protectionism.
One of the advantages include it will be when the particular country will be trying to grow
strong in the new industry and tariffs will be protecting it from the foreign competitors. The
tariff will therefore, give the companies time to develop the competitive advantages. The
government will try to influence trade through tariffs and quotas. The foreign tariff on the
product will have a significant impact on the sales and profits of the country. The trade
protectionism is not efficient from the economic point of view. It will be more efficient under
the concept of comparative advantage of the country to focus its production of the goods.

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Reference list
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What might a trade war between America and China look like?. (2018). Retrieved from
https://www.economist.com/the-economist-explains/2017/02/05/what-might-a-trade-
war-between-america-and-China-look-like