MBA Report: Trade War Analysis, Theories, and Industry Impact

This report provides a comprehensive analysis of the US-China trade war, examining its historical context, the economic theories of mercantilism and comparative advantage that have shaped it, and the complications that have arisen. The report delves into the impact of the trade war on the au...Read More

Running head: TRADE WAR
Trade War
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Abstract
The primary purpose of this report is to discuss about the historical context in relation to the
trade war. The report also elaborates on the political along with the economic theories that are
relevant to the trade war. The report talks about the complications that have emerged owing
to the trade war. The report also elucidates on how the automotive industry has been affected
on account of the trade war.

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Introduction
The trade war refers to the economic conflict in between two largest national
economies of the world- United States and China. The conflict was initiated by Donald
Trump who is the president of United States and it is characterized by the increase in the
tariffs along with the trade barriers that have been levied by both the countries. The primary
goal of the trade wars is to force China in making the changes to that of unfair trade policies
that have been made by China (Bbc.com., 2019). It has been found that since the year 1980,
Donald Trump has been involved in advocating the tariffs that can help in the reduction of the
trade deficit of United States. Donald Trump wants to promote the domestic manufacturing
and he has imposed the tariffs which was an important agenda of his presidential campaign.
This report discusses about the historical context in relation to the trade war of Donald
Trump. The report also elucidates on the political along with the economic theories that have
influenced the developing of the trade war. The report also elaborates on the complications
that have emerged in the present age pertaining to the trade war in between the United States
and China. The report also talks about the effect of the trade war on industry and the changes
that can be made to the business system that can help in shifting the situation to that of a
more positive outcome.
Historical context of Trade War
The Communist Party leader of China Mao Zedong was instrumental in establishing
People’s Republic of China within Beijing. It took place after the Communists had defeated
nationalist government of that of Chiang Kai-shek. Chiang along with thousands of other
troops moved to Taiwan. United States was involved in backing Nationalists against that of
the invading Japanese forces at the time of the Second World War. It supported the exiled
Republic of Chinese government within Taipei and it set the stage for the limited relationship
of US with that of mainland China. The US Secretary of State Hillary Clinton in the year
2011 outlined the fact that US was veering towards Asia (Theguardian.com., 2019). Clinton
made the call for increasing the investment within Asia-Pacific region that can help in
countering the growing influence of China. The US president Barrack Obama made the
declaration that United States along with eight other nations have reached agreement on that
of Trans-Pacific Partnership (see Appendix A). Barrack Obama announced the plans of
deploying 2500 marines within Australia that prompted the criticism from that of Beijing.

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The trade deficit of US with that of China rose from $ 273.1 billion in the year 2010 to that of
$ 295.5 billion in the year 2011 (Nytimes.com., 2019).
US, EU along with Japan has filed a “request for consultation” with that of China in
World Trade Organization over the restrictions in relation to the exporting of the rare earth
metals. United States along with the allies have contended that the violation of the
international trade norms would force the multinational firms that makes use of the metals for
relocating to that of China. China has called the move “unfair” and it has vowed to defend the
rights in relation to the trade disputes. The US court has indicted that five of the Chinese
hackers had ties to that of People’s Liberation Army of China for the charges of stealing the
trade technology from that of US companies. Beijing suspended the co-operation in that of
US- China cybersecurity group. The US authorities got the evidence that the Chinese hackers
had been instrumental for the online breach of that of Office of Personnel Management. In
the fourteenth Shangri- La Dialogue on that of the Asian security, the Secretary of Defense of
US called on China for stopping the land reclamation efforts within South China Sea
(Edition.cnn.com., 2019). The officials of US said that the images from that of the US naval
surveillance has provided the evidence that China has been responsible for placing the
military equipment on that of the chain of the artificial islands. This strained the relationship
in between the two powers- China and the United States.
Theories behind the Trade War
There are political along with the economic theories that underlie the developing of
the Trade War. Trade War was shaped by the economic theory of that of mercantilism. It
refers to the rationalization for the policies that were implemented by the countries that
helped in driving the colonization along with the imperialism in the 17th along with the 18th
centuries. It can help in maximising value of the exports and minimize value of the imports
that can increase the wealth of a country (Magnusson, 2015). It can be achieved by
prevention of the imports of that of the finished products with the help of tariffs. Promoting
the domestic manufacturing and having strict control over that of the money supply are the
core tenets in relation to mercantilism. There is the element of the national security embedded
in the concept of mercantilism. It helps in reinforcing the idea that the motivated countries
want to maximise the wealth at expense of that of the other countries. Mercantilists wants to
make the country self-sufficient and it aims at minimising the exports (Li, He & Lin, 2018).
It runs counter to that of the modern economic theories that suggests that the countries should

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produce the goods that they can make to the best of their abilities and they should import the
goods that they cannot make with the minimal pricing. The mercantilist concerns has been
exhibited by the anti-trade policies of Donald Trump. The tariffs are against industries of that
of American allies and they are framed as the issues of the national security.
The free trade agreement is being viewed by Trump as a bad deal and the trade
surpluses can help in the economic progress of a nation. The economic theory of
Mercantilism helps in promoting the regulation of the government of the national economy
for increasing the state power at the expense of that of rival national powers. This economic
theory runs counter to the theory of the political absolutism. This system of the political
economy wanted to enrich a country by restraining the imports along with encouraging the
exports. The theory of the comparative advantage states that trade will take place in between
the nations even when a country has the absolute advantage in producing the products that
have been traded (Viner, 2016). This theory points out to the fact that a nation can produce
the goods in a cheaper way as compared to the other nations but the countries would involve
themselves in trade so that they would be able to benefit each other. The relative efficiency
can be said to be the underlying principle in relation to the theory of the comparative
advantage.
Complications due to Trade War
There are complications that would arise owing to the trade war in between the US
and China. US has a notion that that the raising of the tariffs would decrease trade imbalance
in between China and that of United States. China on the other hand has also taken recourse
to the countermeasures that can create uncertainty in the US market. The Chinese side has not
fulfilled the core commitments in relation to the trade negotiations that includes the
intellectual property protection along with the reciprocal market access (Silver, 2018).
Beijing has stated that talks have stopped due to the constant changes that are being made in
the demands of US. The trade war can create the way for armed conflict breaking out in
between the Beijing and that of Washington.
The ballistic missiles of China can cripple the military base along with the naval fleet
of the United States within the Western Pacific region (see Appendix B). China is making
technological advancement along with the sharpening of the hard power that can act as a
threat for the other countries. The ballistic missiles of China have the capability of making
the precision strikes on the targets that is far away from the mainland like Singapore (Ofek &

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Masko, 2019). It can cause harm to the logistics facility of US and it can hit hard the
American base within South Korea along with Japan.
The economy of Hong Kong has been badly affected on account of the US- China
trade war. The protests have become violent in Hong Kong that has hit the investors very
badly. United States had to face more amount of economic loss as compared to China on
account of the trade war. The American exporters lost the market share within China as a fall
out of the trade war. The economic growth of China has also slowed down to 6.2 percent in
second quarter of the year 2019 owing to the trade war (Yin & Hamilton, 2018). The tariffs
of the United States are having a great effect on the companies who wants to leave China for
that of the non-tariffed countries (Ross, 2016). There are many companies who are leaving
China and this is having a negative effect on the Chinese economy. Washington has been
instrumental in imposing the tariffs that amounts to billions of dollars so that it would cause
Beijing in changing the policies in relation to the intellectual property, market access along
with the industrial subsidies.
Effect on automotive industry due to trade war
The trade tensions taking place in between the US and China has greatly affected the
automotive industry of US. China has augmented the tariffs on that of US made automobiles
who enter the country in the range from 15 % to that of 40 % as a result of the tariffs of US
(Taheripour, Richards & Tyner, 2019). The Chinese consumers purchase the vehicles from
the local manufacturers and this has adversely affected automakers of U.S like Tesla. The
company has to bear the brunt in relation to the trade war taking place in between United
States and that of China.
The trade war has affected the automotive industry as electric automaker Tesla had to
raise price of the Model S along with the Model X by that of $ 20,000 in the month of July on
account of the trade tariffs. The company then had to reduce the price so that it can absorb
difference. The US producers have to spend a larger amount on the parts from the China as
they are taxed at that of a higher rate (Ko & Ha, 2018). The US consumers will have to face
the problem of the increase in the prices even if they buy a vehicle that is built in the US
owing to share of that of imported parts content. The US companies that have the supply
chains in China have to face the problem of the trade tensions that would affect global
market.
Conclusion

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The economic theory pertaining to mercantilism was instrumental in shaping the
Trade War. It maximises that of value of exports and minimizes value of the imports which
can help in increasing wealth of a nation. China in the event of launching ballistic missiles
can cripple naval fleet of that of United States. The technological advancements of China can
threaten the presence of the other countries. China has been involved in increasing tariffs on
the automobiles that were manufactured in the US that has greatly harm the automobile
industry of US. The Chinese people prefer buying vehicles from that of local manufacturers
that has affected in a negative manner the automakers from the US. There are certain changes
that can be made to business system that can help in shifting situation to that of more positive
outcome. It can be recommended that the prices of the various products of the business can
be increased that can help the companies in surviving the onslaught of the trade war. The
automotive companies in US can carry out the partnership with the banks along with the
financial services provider that can help in offering better ways in relation to financing of
purchase of the product.

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References
Bbc.com. (2019). US-China trade row: What has happened so far?. Retrieved 5 September
2019, from https://www.bbc.com/news/business-44529600
Edition.cnn.com. (2019). The United States and China agree to meet in Washington as trade
war rages on. Retrieved 5 September 2019, from
https://edition.cnn.com/2019/09/04/business/us-china-trade-war-talks/index.html
Ko, J. H., & Ha, J. W. (2018). A Trade War between China and the United States and Its
Likely Economic Impacts. Journal of Global and Area Studies (JGA), 2(2), 47-64.
Li, C., He, C., & Lin, C. (2018). Economic Impacts of the Possible China–US Trade
War. Emerging Markets Finance and Trade, 54(7), 1557-1577.
Magnusson, L. (2015). The political economy of mercantilism. Routledge.
Nytimes.com. (2019). Trump Says China Will Suffer as Data Shows Trade War Hurting U.S.
Retrieved 5 September 2019, from
https://www.nytimes.com/2019/09/03/us/politics/trump-china-trade-war.html
Ofek, E., & Masko, J. (2019). Huawei and the US-China Trade War.
Ross, R. J. (2016). After the Cold War: Domestic Factors and US-China Relations: Domestic
Factors and US-China Relations. Routledge.
Silver, A. (2018). US-Chinese trade war puts scientists in the cross hairs. Nature, 558(7710),
494-496.
Taheripour, F., Richards, P., & Tyner, W. E. (2019). Trade War: Global land use implications
of Chinese tariffs on US agricultural products.
Theguardian.com. (2019). German factory orders slump; US-China trade breakthough –
business live. Retrieved 5 September 2019, from
https://www.theguardian.com/business/live/2019/sep/05/stock-markets-rally-us-china-
trade-talks-uk-economy-germany-business-live
Viner, J. (2016). Studies in the theory of international trade. Routledge.
Yin, J. Z., & Hamilton, M. H. (2018). The Conundrum of US-China Trade Relations Through
Game Theory Modelling. Journal of Applied Business and Economics, 20(8).

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Appendices
Appendix A
Figure: Trans Pacific Partnership
Source: (Bbc.com., 2019)

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Appendix B
Figure: Ballistic Missiles of China
Source: (Nytimes.com., 2019).