Trade War: U.S., China, E.U., Mexico Trade Relations Analysis

This report delves into the intricacies of trade wars, particularly the ongoing conflict between the U.S. and China, with a focus on its causes and effects on the global economy. It explores the shift in China's economic strategy, the role of unfair competition, and technological advancements as key drivers of the trade war. The report analyzes the macroeconomic impacts, including declines in GDP, global trade, and investment, and the implications of tariffs. It also examines trade relations with the E.U. and Mexico, as well as the potential for escalating protectionist measures and the consequences for financial markets. The report highlights the political considerations and the potential for a full-blown trade war, emphasizing the substantial economic and financial risks involved, including impacts on global supply chains and financial markets. It concludes by highlighting the potential for a global economic crisis similar to 2008.

TRADE WAR 1
Trade War
Name
Course
Tutor
University
City/State
Date

TRADE WAR 2
Executive summary
The concept of trade war seems to have gained momentum particularly in the economic politics
involving mega economies that are growing. This is best witnessed in the ongoing trade war
between the U.S. and China. Such trade wars leave the international economy in jeopardy as the
powers struggle for attention and prestige. Such a war is not without repercussions to traders,
citizens and industries as they are caught in between and have to bear the blunt of trade war. This
report will look at trade war between the U.S., China, E.U and Mexico, its causes and, the
consequences.

TRADE WAR 3
Table of Contents
1.0 Introduction...........................................................................................................................................4
2.0 Body......................................................................................................................................................4
2.1 Causes of China-U.S. trade war........................................................................................................4
2.2 Effects of the trade war......................................................................................................................6
2.3 Macroeconomic impacts....................................................................................................................6
2.4 Trade war with the E.U...................................................................................................................10
2.5 Tariffs against Mexico.....................................................................................................................10
2.6 Impact of the trade war....................................................................................................................11
3.0 Conclusion..........................................................................................................................................12
References.................................................................................................................................................13

TRADE WAR 4
1.0 Introduction
China is changing its strategy where it is focusing a change from labor-intensive and
export-controlled economy to an economy that is consumption-driven. Such a transformation has
led to upgrading industrial environment propelled by innovation and technology. However, such
a change in the trade game may not be significantly received by counterparts such as the U.S.
particularly in the short-term (Farrer, 2019).The U.S. was compelled to change its trade policy
with China way back before imposing the trade sanctions. Specifically, the U.S. view towards
China shifted from that of cooperation as stipulated in the 2015 national strategy report to that of
must compete with all tools at disposal. It is thus anticipated that China and its counterpart may
enter into a new deal, but this will consume a lot of time and also commands efforts from both
players. In the meantime, tensions between the two nations have led to instability in the financial
markets.
2.0 Body
2.1 Causes of China-U.S. trade war
One of the factors behind that have facilitated the trade war is the strategy of unfair
competition. It has been reported that China’s corporations exploit the American markets while
China’s markets, on the contrary, remain closed to the goods and services and corporations from
America (Prazeres, 2019). Such an unfair competition translates to lower output, factories exiting
the market and job losses for American industries most impacted by the Chinese competition.
Chinese enterprises have also been associated with duplicating technology from U.S. companies
(Gurdus, 2019). To address such an issue of grave importance, the U.S. had no option but to
impose sanctions against goods and services from Chinese enterprises. That is a similar narrative
that has traces to the 1980s when Japan became the unfair trade partner. The main difference in

TRADE WAR 5
this context was that the trade friction between the U.S. and Japan failed to materialize to a full-
scale trade war.
The other reason that triggered the trade war between the two countries is unique (IHS
Markit, 2019).It stemmed from China’s technological advancements and the simultaneous need
to take stewardship in emerging digital technologies. Such a threat became a matter of great
importance for the U.S., which has become a global leader of modern technology for ages.
Recent surveys have played a crucial role in revealing China’s advancements in technology. One
of the surveys that were published by Cornell University and its affiliates, China was ranked
17th, which was not far below America, which ranked sixth. The innovation survey by
Bloomberg ranked China 19, while the U.S. got ranked eleventh.
The vison 2025 adopted by China underpins the country’s desire to take leadership of
digital technologies. Beijing is aiming to dominate the global platform in developing the 5G
networks, artificial intelligence and robotics (Yao, 2018) (Dave, 2019). The opportunities
provided by the emerging digital and Fourth Industrial Revolution technologies is heating the
race for global supremacy. The race for domination is between the U.S. and China in a market
where the U.S. has been leading technological innovation for many years. However, China is fast
bridging the gap. Beijing has demonstrated its commitments spanning from developing national
strategies to advancing AI and other vital technologies to sourcing excellent talents in technology
across the world.
2.2 Effects of the trade war
The U.S. initiated a trade war that would be cause havoc to the global economy amidst
escalations of protectionist motives. Nations responsible for tariffs imposition and those
subjected to such protectionism actions would report losses in economic welfare, while nations

TRADE WAR 6
on the edges would become victims of collateral damage. The likelihood of tariffs remaining in
check would further facilitate losses in economic production being long-term as signals of price
distortions would deter specialization that increases optimal productivity globally. Though the
likelihood of a complete trade war remains low, it is gaining momentum. However, both China
and the U.S., have the most at stake, and as such, it would be prudent to strike a deal that
manages critical issues such as accessibility to the market, patent rights and technology transfer
that is related to joint-venture.
The responses following actions by the monetary policy and financial markets will affect
the trade war outcome. The rates from the federal funds have been reported to be on the rise
compared to the baseline projection and this is because of rising local inflation. An increase in
financial pressure would negatively impact contemporary credit flows and hamper investment,
industrial output and trade. Also, world equity prices are anticipated to decline in an environment
dominated by protectionist demands.
2.3 Macroeconomic impacts
The trade war initiated by the U.S. crowns no champions. It is evident that countries are
experiencing new tariffs with the inclusion of the U.S., is reporting a drop in real exports and real
domestic product. However, other nations are impacted indirectly via feeble demand for their
merchandise, either using the supply chains or in responding to declining global economic
growth. In the context of protectionists, GDP declined by 0.1% in 2018 (IHS Markit, 2019).
However, in 2019, it is anticipated to be 0.8% and in 2020 to be 1.4%. Therefore, global
economic growth this year and 2020 is above the 2.0% threshold for a worldwide recession.
It has been reported that in a protectionist environment, global trade suffers the most as
nations turn inward and global corporations shift production to the farthest markets so as to

TRADE WAR 7
remain competitive. In this context, the global exports of both commodities and services stand at
2.4% which is below the threshold required by 2020. One of the sharpest declines in exports was
apparent in China and several nations in North America. It is not surprising that the U.S.
recorded the most significant drop in its imports. In reference to the baseline level, the U.S.
imports are anticipated to decline to 4.5% by 2020 (IHS Markit, 2019). The high import
component of China’s exports has led to a substantial drop in imports, declining to 3.2% below
the 2020 threshold.
The real investment has also been restrained by the trade war situation resulting to
exports losses, financial pressure, drop in equity prices and a decline in the level of foreign
investment in markets under the radar of U.S. import tariffs. However, the most significant losses
were reported in China as international and local investors had to adopt a prudent approach
regarding capital spree in China.
Bottom line repercussions
The beginning of trade war was never the perfect timing. It took effect at a time when the
monetary stimulus was starting to wear off, the prices of oil were skyrocketing and a rise in the
political risks. On the other hand, global growth was slowing down. President Trump’s
announcement in 2018 that the U.S. would impose additional tariffs on Chinese imports
estimated at US$200 million eliminated the possibility of hopes that trade negotiations between
the two nations’ officials would ease the mounting pressure between the global largest
economies (Yao, 2018).
The mixed signals from the U.S. fooled the market as the Treasury Department seemed
eager to sit at the table to have negotiations while the White House signaled no indicators of

TRADE WAR 8
lifting barriers on Beijing (Yao, 2018). July recorded conflicting signs that preceded the first
phase of tariffs. To hark back at the events, Steven Mnuchin led U.S. Treasury Secretary by
convening talks with Deputy-Premier Liu seemed to be heading smoothly until Trump overruled
them through firing a bullet in the trade war.
The recent response from Trump’s administration elevated trade conflict to a new phase.
The volume of goods subjected to tariffs has not only grown four times, but in the first round, the
president has issued threats of slapping the punitive taxes on China’s exports to the U.S.
following China’s retaliation. However, Trump’s threat proved ineffective. In contrast, China
announced counter-tariffs totalling to US$60 billion on goods and services from the U.S. Using
the political lens, it would be hard to view how things could unfold in the future. Following such
a tough stance before the local and global spectators, neither parties can actually surrender
without reporting a significant face loss.
However, though Trump may seem interested, it is not a must that he may wish to relent
even when he is accorded a platform to do so. It is obvious that China-bashing was instrumental
in improving Trump’s public relations, and Trump may even seek platforms to demonstrate more
brutality towards China. Contrary to what Trump is doing, President Xi Jinping is ensuring that
China defends itself against the bullying propagated by the U.S., which is critical in preserving
China’s pride. Such political considerations are crucial hurdles to striking deals in future and
might become an obstacle to end the impasse not until the elections in November. The horrible
thing is that with this game of politics, the global economy may embark on a risky path.
It is estimated the U.S. economy could end up incurring a cost of 0.5 per cent in the event
of an all-out trade war on the gross domestic product following the consideration of the effects of
domestic and global feedback (Kempe, 2019). For instance, a reckless reaction by the financial

TRADE WAR 9
market could bring more harm to the U.S. economy, increasing the cost to almost one per cent of
GDP in the next two years. China in this context will lose a lot following its large share of
exports to the U.S. Using the proposed tariffs, and it is estimated that a GDP shock of almost 1
per cent would be experienced in the next one year (Bovino, et al., 2019). Such damage will
broaden its horizon to two per cent of China’s GDP should Trump find solace in imposing higher
taxes on all Chinese exports to the U.S. Such a shock would deliver a severe blow to the level of
investor’s confidence, and this will trigger a massive correction in assets markets from Beijing.
Thus, the combined effect of both economic and financial shocks is probably to be substantially
bigger than what standard economic modelling portrays since the strategy fails to accommodate
the financial shock amicably.
It is anticipated that the trade war will have sporadic effects, webbing beyond the two
countries involved. It is crucial to note that the global supply chain and financial markets are
primary promotion channels that can spread the shock across global markets. According to a
report released in July by the International Monetary Fund, the total cost of a trade war was
estimated at US$ 430 billion, tantamount to 0.5% of global GDP (IHS Markit, 2019). This
appears conservative since the conditions have since then worsened significantly. In the worst-
case situation, a full-blown trade war involving the U.S. and China will lead to the carnage of
economic and financial nature on a scale similar to that of the 2008 global financial crisis.
2.4 Trade war with the E.U.
In 2018, the E.U. threatened the U.S. exports with a 25% tariff on products such as
cranberries, blue jeans and motorcycles from Harley Davidson. This led to President Trump
delaying the steel tariff till mid-2018 (Amadeo, 2019).As of May 2018, Trump made it clear that
he would delay the tariff on steel against the European Union till June 2018. Trump wanted allies

TRADE WAR 10
to the U.S. to cut the 10% tariff on autos from the U.S. President also went further and asked the
E.U. to peg quotas on its steel exports. However, on May 31, 2018, President Trump decided to
revoke the delay, which saw the tariff imposed on the European Union, Canada and Mexico. The
Aluminium Association in the U.S. warned that the move would facilitate disruption of supply
chains where more than 97% of aluminium industry jobs depend on (Amadeo, 2019).
On June 21, 2018, Germany proposed to eliminate the E.U. 10% tax that was imposed on
auto imports from the U.S. should president Trump to remove the 25% tax imposed on auto
imports from Europe. On June 22, 2018, E.U. retaliated with tariffs amounting to $3.2 billion on
U.S. products through tariffs being imposed on steel (Amadeo, 2019). Such tariffs targeted
imports that affect Trumps political stronghold. A good example is the taxable imports on
bourbon, orange juice, among others.
2.5 Tariffs against Mexico
In June 2019, President Trump issued an ultimatum of imposing a 5% tariff on Mexican
imports effective at the beginning of June. Trump wants the state to cut the number of asylum-
seekers presenting themselves at the border of the U.S. (Amadeo, 2019). According to Trump, a
25% tariff would compel Mexico to respond. However, the tariff would be violating NAFTA.
Trump asserted that he could override the trade agreement by announcing a national emergency.
The Republicans who have had a history of supporting Trump have threatened to stop their
unwavering support towards Trump following his recent action.
2.6 Impact of the trade war
Due to trade war, the consumers of steel and aluminium are suffering due to soaring
prices for such items (Amadeo, 2019). The suppliers of soda and beer became the first cohort to
raise the prices. The costs associated with imports from clothes hangers, materials for heavy
equipment, chipsets and tool makers seem to be skyrocketing.

TRADE WAR 11
The Association of Automobile manufactures issued warnings that the steel produced in
the U.S. would cost more following elimination of cheap foreign imports. Thus, the industry’s
global competitiveness seems to be threatened, which has a subsequent impact of raising vehicle
costs for customers.
An industry such as Maine Lobster will fall victim following Chinese retaliatory tariffs
on seafood from the U.S. Cheesemakers from California have reported that their markets in
China and Mexico are disappearing as a result of retaliatory tariffs. Other industries that are also
suffering include Wisconsin auto parts manufacturers and the bourbon industry. It also goes
without saying that tariffs have been associated with slowing the timber and grain exports from
the U.S. in accordance with the Wall Street Journal.
Foreign tariffs have been reported to make the U.S. exports more expensive. Thus, the
U.S. exporters will be compelled to cut costs and lay off employees if they are to be
competitively priced. It is also devastating to find that the twelve million U.S. employees whose
jobs depend on exports could get laid off. Laying off workers could see U.S. economic growth
slow by 0.4 per cent happening simultaneously with rising oil prices and interest rates (Amiti, et
al., 2019). Trade wars have been linked to weakening the protected local industries. However,
lack of foreign competition would translate to companies operating within the industry lacking
innovation. In the long-run, the GDP would deteriorate in quality vis a vis to international-made
products.
3.0 Conclusion
In conclusion, a trade war may be attributed to improving the trade deficit of a particular
nation in the short-run, but in the long-term would come at a cost, warring countries their
economic growth. The U.S. has an ensuing trade war with China, the E.U., Mexico and Canada.

TRADE WAR 12
Due to this, the affected nations have ended up signing new trade agreements with other nations
leaving the U.S. out of the loop. Trump’s efforts at ensuring trade protectionism have resulted in
hurting the U.S. economy. This has seen the prices of automobiles, chipsets, heavy equipment
and other products soar in recent years. Thus, companies have been compelled to cut jobs as the
cost of production with domestic material is prohibitive. Foreign markets for U.S. exporters in
agricultural commodities, cheese and auto parts are slowly disappearing following the retaliatory
tariffs. President is anticipated to resolve the trade war soon before it wreaks havoc on the U.S.
economy.

TRADE WAR 13
References
Amadeo, K., 2019. Trade Wars and their Effect on the Economy and You. [Online]
Available at: https://www.thebalance.com/trade-wars-definition-how-it-affects-you-4159973
[Accessed 22 September 2019].
Amiti, M., Redding, S. J. & Weinstein, D., 2019. The Impact of the 2018 trade war on U.S.
prices and welfare. [Online]
Available at: https://www.nber.org/papers/w25672.pdf
[Accessed 22 September 2019].
Bovino, B. A., Roache, S. & Broyer, S., 2019. The U.S. – China Trade War: The Global
Economic Fallout. [Online]
Available at: https://www.spglobal.com/en/research-insights/articles/the-u-s-china-trade-war-the-
global-economic-fallout
[Accessed 22 September 2019].
Dave, S., 2019. Economic analysis of US-China trade war. [Online]
Available at: https://publicpolicy.wharton.upenn.edu/live/news/3114-economic-analysis-of-us-
china-trade-war
[Accessed 22 September 2019].
Farrer, M., 2019. ‘Wrong place at the wrong time’: how the US-China trade war is putting the
squeeze on Australia. [Online]
Available at: https://www.theguardian.com/business/2019/sep/21/wrong-place-at-the-wrong-

TRADE WAR 14
time-how-the-us-china-trade-war-is-putting-the-squeeze-on-australia
[Accessed 22 September 2019].
Gurdus, L., 2019. Here's what one top economist sees ahead for the Fed and US-China trade.
[Online]
Available at: https://www.cnbc.com/2019/09/21/fed-and-us-china-trade-what-one-top-
economist-sees-ahead.html
[Accessed 22 September 2019].
IHS Markit, 2019. Impact of a Global Trade War on the Economy. [Online]
Available at: https://ihsmarkit.com/solutions/us-china-trade-war-impacts.html
[Accessed 21 September 2019].
Kempe, F., 2019. The US-China trade war has set in motion an unstoppable global economic
transformation. [Online]
Available at: https://www.cnbc.com/2019/09/14/us-china-trade-wars-unstoppable-global-
economic-transformation.html
[Accessed 22 September 2019].
Prazeres, T. L., 2019. Services are the hidden side of the US-China trade war. [Online]
Available at: https://www.weforum.org/agenda/2019/09/us-china-trade-war-disrupting-services/
[Accessed 22 September 2019].
Yao, A., 2018. The worsening US-China trade war might cost the world much more than
US$430 billion of lost GDP. [Online]
Available at: https://www.scmp.com/comment/insight-opinion/united-states/article/2165755/

TRADE WAR 15
worsening-us-china-trade-war-might-cost-world
[Accessed 21 September 2019].