Impact of US-China Tariff Conflict on Global Economies: A Report

This report provides a comprehensive analysis of the US-China tariff conflict, examining its origins, the protectionist policies implemented by the US, and the reasons behind targeting China. It explores the impact of the trade war on the social and macroeconomic aspects of both countries, including domestic industries, agriculture, and consumers. The report also delves into the policies adopted by both the US and Chinese governments to mitigate the negative effects of the conflict, such as the Federal Reserve's easing monetary policy and the Phase One Agreement. Furthermore, it discusses the potential future outcomes of the trade war on various economic factors and provides insights into the evolving trade dynamics between the two nations and their global implications.

Running head: BEGINNING OF THE TARIFF CONFLICT
BEGINNING OF THE TARIFF CONFLICT
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1BEGINNING OF THE TARIFF CONFLICT
Executive Summary
This report is prepared to focus on the impact of the ongoing conflict between the United
States and China regarding the imposition of tariffs. The study provides a brief about the
various reasons mentioned by the US president behind the imposition of protectionist tariff
policy. It also indicates the reason behind targeting China with tariffs. Afterward, the paper
provides an analysis of the impact of the war on the social and macroeconomic aspects of
both countries. Thereafter, it incorporates all the policies that the government of both nations
has adopted to stabilize the macroeconomic condition of their respective economies. This
paper again includes the possible outcomes that this conflict can lead to in the future.

2BEGINNING OF THE TARIFF CONFLICT
Table of Contents
Introduction................................................................................................................................3
Outlining the tariff conflict amid the United States and China..................................................3
Effect of the tariff war on the social and economic aspects of the countries.............................4
Effect on domestic industries and agriculture of both the economies...................................5
Transferring the effect on consumers.....................................................................................6
Effect on the economic variables of the economies...............................................................6
Policies undertaken by the US and the Chinese government.....................................................7
Future predictions of the trade war on the macroeconomic factors of the countries.................8
Conclusion..................................................................................................................................8
References................................................................................................................................10

3BEGINNING OF THE TARIFF CONFLICT
Introduction
Theories and evidence suggest that tariff barriers lead to trade war and cause hurdles
in the swift flow of international trade operations. This tends to create turmoil in the global
trading market. Thus, when was or conflict emerges between two large countries, it tends to
create a problem for other economies that are in close association with the two conflicting
nations. Similarly, the ongoing tariff conflict between the United States and China has raised
global issues both inside their domestic territory and in other economies of the world. This
conflict originated soon after the announcement of the protectionist trade policy of US
President Donald Trump. Several economies were targeted with the harsh tariffs of the
president. However, China was the main target of the president. As mentioned by the US
president, the tariff was set to support the declining domestic manufacturing industries and
the export sector of the United States. In addition to this, the profitability of the US farmers
was also claimed to take care of by the implementation of this tariff. The trade conflict
generated both positive effects and negative outcomes for both the economies1.
The following report is prepared to evaluate the causes and outcomes of the trade war.
It begins by presenting how the trade war originated between the two countries. Additionally,
the paper includes the impact of this conflict on both the domestic as well as global
operations. The study incorporates the insights of the administration of both the economies
against the negative impact of the conflict. The paper tries to evaluate the future aspects of
the conflict as well.
Outlining the tariff conflict amid the United States and China
The war between the two economies began soon after President Donald Trump
implemented the protectionist tariff policy. This imposition of trade barriers took place at the
end of the first quarter of 2018. The United States has been witnessing a deficit in its trade
account for decades. In 2018, this gap widened to 621 billion dollars2. As a result, the
president took the initiative to control this deficit and restricted increasing imports through
the imposition of tariffs. Initially, the president imposed tariffs on several economies that
includes Argentina, Turkey, Mexico, China and European car manufacturers. The USA
imports a huge amount of merchandise goods and raw material from these countries.
1 Irwin, Douglas A. "The false promise of protectionism: why Trump's trade policy could backfire." Foreign
Aff. 96 (2017): 45.
2 "2018 Trade Gap Is $621.0 Billion | U.S. Bureau Of Economic Analysis (BEA)". 2019. Bea.Gov. Accessed
December 18, 2019. https://www.bea.gov/news/blog/2019-03-06/2018-trade-gap-6210-billion.

4BEGINNING OF THE TARIFF CONFLICT
Therefore, to reduce the excessive demand for imported items the restrictive policy was
imposed. Australia was the only country that remained in the safe side from the beginning of
the tariff imposition. Later, all these countries were set free from the harsh tariff rates of the
United States. Turkey was bound to complain against the 50 percent tariff imposed on metal
exports to the US. As a result, WTO forced the US to eliminate such high tariff rates from the
country3. The USA remained lenient in terms of these countries and reduced tariff rates that
were initially imposed in these economies. However, China continued to remain the sole
target of the US tariff rates.
The tariff imposition took place to reduce the trade deficit, support demand and
productivity of domestic manufacturers. However, the tariff imposition in China included one
extra reason. As per the rules of the World Trade Organization (WTO), theft of patent and
illegal trading are subject to penalties. China was suspected by the US to violate these trade
rules prescribed by the WTO. Furthermore, the cheap commodities and inputs of products
imported from China were increasing trade deficit and were discouraging the domestic
productivity4. In addition to this, the farmers were affected by a fall in demand for
agricultural commodities. Therefore, the tariff was imposed to restrict the entry of Chinese
commodities in the US. This harsh tariff rates affected the export revenue of China and
harmed their economy’s wealth. Therefore, to provide a lesson China imposed tariffs on US
exports. This resulted in a huge conflict between the two nations and disrupted trade practices
between them. Since the imposition of the tariff, about 360 billion dollar worth of China's
exports on the US has been restricted by the US economy5. On the other hand, China has
successfully restricted 110 billion dollars of US products in China. This retaliation has
affected the US economy leading to wider trade deficits. Therefore, this tariff war has a
substantial impact on their domestic a well as global operations.
Effect of the tariff war on the social and economic aspects of the countries
War tends to destroy every operation and function of a country. Though the tariff was
initially adopted to protect the domestic environment, yet it transformed into a severe conflict
between two trading partners. Both the economies are dependent on each other’s exporting
3 Ciuriak, Dan. "The US-China Trade War: Technological Roots and WTO Responses." Global Solutions
Journal 4 (2019).
4 Di, Dongsheng, Gal Luft, and Dian Zhong. "Why did Trump launch a trade war? A political economy
explanation from the perspective of financial constraints." Economic and Political Studies 7, no. 2 (2019): 203-
216.
5 Branch, Foreign. 2019. "Foreign Trade - U.S. Trade With China ". Census.Gov. Accessed December 18 2019.
https://www.census.gov/foreign-trade/balance/c5700.html.

5BEGINNING OF THE TARIFF CONFLICT
sectors6. Therefore, disruption or turmoil can harm the value of their respective sector's
wealth. Thus, it can create adverse consequences in the social and economic factors of the
economy.
Effect on domestic industries and agriculture of both the economies
The policy aimed at helping and supporting the domestic industries of the United
States. Initially, the tariff raised the demand for domestic manufacturing products and raw
materials7. However, it raised the cost of production of the industries that were using cheap
materials inputs from foreign countries. This reduced the revenue and profit rates of the
business in the US. As a result, productivity in the country lowered affecting other related
macroeconomic variables. The policy generated a negative consequence for the business in
the US. Additionally, the export sector is recording a severe downfall. This is because of the
fall in demand from an emerging market, like China. This has led to a fall of a 22.4 percent
drop in demand from China. On the other hand, the agriculture sector fared well. The increase
in demand for home commodities raised the revenue of the US farmers and raised
productivity in agriculture. Therefore, tariff generated a positive spell for US farmers and
food processors.
Similarly, China is witnessing turmoil in its internal market. A fall in demand from a
huge consumer market affected the export productivity of the country. In the first half of
2019, there is a 16 percent fall in China’s manufacturing and exporting hubs8. In addition to
this, the tariffs have transformed a low-cost manufacturing region into an expensive one.
Thus, to avoid such harsh barriers American FDIs in China are planning to shift to other
countries. This includes companies such as Crocs, GoPro cameras, Yeti Beer Coolers and
Roomba9. This can affect the foreign inflows and development strategies of the country.
Moreover, the restriction on Huawei has affected the GNP of China. As a result, deepening
the crisis between the two nations. However, the agricultural system remained in the shelter
and is not affected by the conflict. Therefore, the imposition of the tariff has affected mainly
6 " Unctad.Org | Trade War Leaves Both US And China Worse Off ". 2019. Unctad.Org. Accessed December
18 2019. https://unctad.org/en/pages/newsdetails.aspx?OriginalVersionID=2226.
7 Shambaugh, David. "US-China Rivalry in Southeast Asia: Power Shift or Competitive
Coexistence?." International Security 42, no. 04 (2018): 85-127.
8 Waugh, Michael E. The Consumption Response to Trade Shocks: Evidence from the US-China Trade War. No.
w26353. National Bureau of Economic Research, 2019.
9 Tita, Austen. 2019. "Manufacturers Move Supply Chains Out Of China ". WSJ. Accessed December 18 2019.
https://www.wsj.com/articles/manufacturers-move-supply-chains-out-of-china-11563096601.

6BEGINNING OF THE TARIFF CONFLICT
the manufacturing sector of both the countries and to a certain level the agrarian system of the
US.
Transferring the effect on consumers
The United States imposed about a 25 percent tariff on imports from China. The
goods turned expensive for the US customers distorting their budget as well as demand
nature. Additionally, this raised the expenditure of the manufacturers that use inputs imported
from low-cost producers of China. This increased expenditure of the producers is passed onto
the buyers of the final goods. As a result, the welfare of the consumers is affected leading to a
reduction in demand10. In addition to creating social problems by reducing welfare, the tariff
affected the total demand of the US economy. This again can affect the productivity levels,
which in turn can affect the GDP levels of the economy. Moreover, this distortion and
turmoil are not limited to the US economy. This has affected the Chinese population as well
as the economy of the country. The tariff imposed on the commodities of the US and the shift
of FDI can affect their employment numbers11. As a result, affecting the GDP of the nation.
Effect on the economic variables of the economies
A fall in the productivity of the manufacturing sector reduced the economic operation
in both economies. In addition to this, the loss from the fall in FDI inflows affected the
business in China. The American companies that shifted their operation from the low-cost
manufacturing country have to bear high expenses for the decision. This can not only affect
employment in China but also generate an impact on the GNP of America. On the other hand,
there is a fall in demand in both economies, this can affect productivity and reduce business
activity. This negative process can lead to an economic slowdown or severe downturn in the
economy. Moreover, this turmoil is not only affecting the US and China but also international
trade flows. However, certain countries are positively affected by a reduction in trade
between these two economies and a shift of FDI inflows. This conflict in trade amid the US
and the Chinese economy has led to a crisis in the WTO (World Trade Organization).
10 Amiti, Mary, Stephen J. Redding, and David Weinstein. The impact of the 2018 trade war on US prices and
welfare. No. w25672. National Bureau of Economic Research, 2019.
11 GmbH, finanzen.net. 2019. "Crocs And GoPro Are Among Firms 'Aggressively' Fleeing China To Make
Their Products Elsewhere To Avoid Trump's Tariffs | Markets Insider". Markets.Businessinsider.Com. Accessed
December 18 2019. https://markets.businessinsider.com/news/stocks/gopro-crocs-us-manufacturers-flee-china-
as-trump-tariffs-bite-2019-7-1028351936.

7BEGINNING OF THE TARIFF CONFLICT
Furthermore, if the crisis continues with the same magnitude than it can affect the world
economies like it is currently affecting Japan and the Euro area12.
Policies undertaken by the US and the Chinese government
The trade war is a matter of concern for the administration of both economies.
Therefore, the government is making strategies to deduce the negative effect possessed by the
tariff conflict. As the war has affected the manufacturing sector of the US, the administration
of the country is implementing policies to ignite business operations and productivity.
Therefore, the Federal Reserve Bank of the United States is adopting easing monetary policy
to increase investments and attract international inflows in the country13. The lower the rate of
interest the lower is the credit cost of borrowing. This makes the business profitable for the
entrepreneurs as well as the investors. Therefore, the Fed deduced the rate to 1.75 percent by
using the easing policy14. This increase in business activity increases the demand for
employment, which increases the demand in the country. Additionally, lowering interest rates
implies an increase in the supply of money in the economy. This can boost consumption and
raises total demand in the country. In addition to the interest rate, Donald Trump is looking
forward to solving the conflict by restoring the relationship with China. Trump has
implemented an agreement, which is the Phase One Agreement of trade between the US and
China15. This agreement confers China to trade with the US under certain structural
guidelines and rules of the US government. As mentioned in the agreement, the US will
continue to levy a 25 percent tariff on 250 billion dollar imports from China16. In addition to
this, China needs to follow patent rules, maintain technological privacy and obey the
exchange rates of the country. Other than the 25 percent tariff, the US has imposed a7.05
percent tariff on 120 billion dollar imports from China.
The above-mentioned policies are adopted by the United States. Similarly, the state-
led country has implemented certain strategies to eliminate the negative consequences of the
fight with the US. The Chinese administration has increased its trade activities with other
12 Urata, Shujiro. "US–Japan Trade Frictions: The Past, the Present, and Implications for the US–China Trade
War." Asian Economic Policy Review (2019).
13 Connolly, Bernard. "The Fed and the Crisis of Capitalism." The International Economy 33, no. 2 (2019): 32-
53.
14 "Fed Cuts Interest Rates By Another Quarter Point". 2019. Nytimes.Com. Accessed December 18 2019.
https://www.nytimes.com/2019/09/18/business/economy/fed-interest-rate-cut.html.
15 "United States And China Reach Phase One Trade Agreement | United States Trade Representative".
2019. Ustr.Gov. Accessed December 18 2019. https://ustr.gov/about-us/policy-offices/press-office/press-
releases/2019/december/united-states-and-china-reach.
16 "The People's Republic Of China | United States Trade Representative". 2019. Ustr.Gov. Accessed December
18 2019. https://ustr.gov/countries-regions/china-mongolia-taiwan/peoples-republic-china.

8BEGINNING OF THE TARIFF CONFLICT
countries of the World that have eliminated the fall in revenue generated from the imports to
the US. In addition to this, China is investing and supporting the growth and expansion of the
technology sector to raise its economy’s wealth. As a result, technological industries are
performing positively in China. The continuous infrastructural development and cheap source
of labor attract FDI from other countries to China17. Thus, China is experiencing lower
shocks from the conflict and is building a strong platform for future growth.
Future predictions of the trade war on the macroeconomic factors of the countries
The first and foremost impact that can be anticipated from the war is that it can lead to
an increase in employment. This is because of the rapid fall in production and a reduction in
business activity. A fall in investment and demand is affecting the manufacturing sector,
agriculture and the entire business of the economy. This share created a substantial impact on
the stock market as well. There are continues to fall in the shared values of the listed
companies. As a result, this is rendering a negative signal to the investors. Thus, there is a
chance that these sectors can cut their employment demand and lead to unemployment in the
country. Thus, the economy can be pushed into recession. The fall in demand can reduce the
price level of the country and can result in negative inflation. Thus, deflation can also lead to
recession because there is a chance of a fall in productivity. On the other hand, China’s
unemployment and inflation can be affected by the shift of major FDIs to other countries. The
working population can be reduced and lead to an increase in unemployment. This reduction
in employment can reduce inflation18. As a result, China can face a recession from the shocks
in the macroeconomic variables of the country. Summing everything, this can be said that if
the war does not end it can lead to poverty and recession in the future19. Thus, to overcome
this future economic downturn the administration should formulate and implement organized
strategies to avoid future conflict of interests.
Conclusion
The study provides a clear picture of the current dynamics of the ongoing tariff or
trade conflict between the United States and China. As mentioned by Donald Trump the tariff
was imposed to reduce the trade deficit and support the domestic industries of the United
States. Concerning this, the president mentioned that China has been detected of disobeying
17 Arnone, Marco, and Andrea F. Presbitero. Debt relief initiatives: Policy design and outcomes. Routledge,
2016.
18 Blanchflower, David G., David NF Bell, Alberto Montagnoli, and Mirko Moro. "The happiness trade‐off
between unemployment and inflation." Journal of Money, Credit and Banking 46, no. S2 (2014): 117-141.
19 Barros, Ricardo Paes de, Carlos Corseuil, Rosane Mendonça, and Maurício Cortez Reis. "Poverty, inequality
and macroeconomic instability." (2015).

9BEGINNING OF THE TARIFF CONFLICT
patent privacy and trade rules of WTO. Therefore, the tariff was formulated to target the
imports from the Chinese economy. In spite of the positive implications, the tariff generated a
high magnitude of shocks for the US economy. This induced China to retaliate with a
different set of tariff rates. As a result, the manufacturing sector and the entire business got
affected in both economies. The buyers, as well as the farmers, were witnessing shocks from
the increasing prices leading to a reducing in social welfare. Apart from this, it can reduce
employment leading to poverty in the future. Therefore, the turmoil can lead to a future crisis
in WTO as well as in both the economies. As a result, the government is planning proper
strategies to combat the consequences of the conflict. Moreover, to tackle the international
trade issues the government should plan about restoring the relationship between the two
countries and come down to an agreement that specifies the same.

10BEGINNING OF THE TARIFF CONFLICT
References
"2018 Trade Gap Is $621.0 Billion | U.S. Bureau Of Economic Analysis (BEA)".
2019. Bea.Gov. Accessed December 18 2019. https://www.bea.gov/news/blog/2019-03-
06/2018-trade-gap-6210-billion.
"Fed Cuts Interest Rates By Another Quarter Point". 2019. Nytimes.Com. Accessed
December 18 2019. https://www.nytimes.com/2019/09/18/business/economy/fed-interest-
rate-cut.html.
"The People's Republic Of China | United States Trade Representative". 2019. Ustr.Gov.
Accessed December 18 2019.
https://ustr.gov/countries-regions/china-mongolia-taiwan/peoples-republic-china.
"The United States And China Reach Phase One Trade Agreement | United States Trade
Representative". 2019. Ustr.Gov. Accessed December 18 2019.
https://ustr.gov/about-us/policy-offices/press-office/press-releases/2019/december/united-
states-and-china-reach.
“Unctad.Org | Trade War Leaves Both US And China Worse Off ". 2019. Unctad.Org.
Accessed December 18 2019. https://unctad.org/en/pages/newsdetails.aspx?
OriginalVersionID=2226.
Amiti, Mary, Stephen J. Redding, and David Weinstein. The impact of the 2018 trade war on
US prices and welfare. No. w25672. National Bureau of Economic Research, 2019.
Arnone, Marco, and Andrea F. Presbitero. Debt relief initiatives: Policy design and
outcomes. Routledge, 2016.
Barros, Ricardo Paes de, Carlos Corseuil, Rosane Mendonça, and Maurício Cortez Reis.
"Poverty, inequality and macroeconomic instability." (2015).
Blanchflower, David G., David NF Bell, Alberto Montagnoli, and Mirko Moro. "The
happiness trade‐off between unemployment and inflation." Journal of Money, Credit and
Banking 46, no. S2 (2014): 117-141.
Branch, Foreign. 2019. "Foreign Trade - U.S. Trade With China ". Census.Gov. Accessed
December 18 2019. https://www.census.gov/foreign-trade/balance/c5700.html.

11BEGINNING OF THE TARIFF CONFLICT
Ciuriak, Dan. "The US-China Trade War: Technological Roots and WTO
Responses." Global Solutions Journal 4 (2019).
Connolly, Bernard. "The Fed and the Crisis of Capitalism." The International Economy 33,
no. 2 (2019): 32-53.
Di, Dongsheng, Gal Luft, and Dian Zhong. "Why did Trump launch a trade war? A political
economy explanation from the perspective of financial constraints." Economic and Political
Studies 7, no. 2 (2019): 203-216.
GmbH, finanzen.net. 2019. "Crocs And GoPro Are Among Firms 'Aggressively' Fleeing
China To Make Their Products Elsewhere To Avoid Trump's Tariffs | Markets
Insider". Markets.Businessinsider.Com. Accessed December 18 2019.
https://markets.businessinsider.com/news/stocks/gopro-crocs-us-manufacturers-flee-china-as-
trump-tariffs-bite-2019-7-1028351936.
Irwin, Douglas A. "The false promise of protectionism: why Trump's trade policy could
backfire." Foreign Aff. 96 (2017): 45.
Shambaugh, David. "US-China Rivalry in Southeast Asia: Power Shift or Competitive
Coexistence?." International Security 42, no. 04 (2018): 85-127.
Tita, Austen. 2019. "Manufacturers Move Supply Chains Out Of China ". WSJ. Accessed
December 18 2019. https://www.wsj.com/articles/manufacturers-move-supply-chains-out-of-
china-11563096601.
Urata, Shujiro. "US–Japan Trade Frictions: The Past, the Present, and Implications for the
US–China Trade War." Asian Economic Policy Review (2019).
Waugh, Michael E. The Consumption Response to Trade Shocks: Evidence from the US-
China Trade War. No. w26353. National Bureau of Economic Research, 2019.