Analysis of the US-China Trade War's Economic and Social Effects

This report provides a comprehensive analysis of the US-China trade war, examining its origins, the imposition of tariffs, and the resulting economic and social consequences. It explores the impact on producers, businesses, consumers, and farmers in both the US and China, as well as the effects on international trade and government policies. The report details the adverse effects of the trade war on both economies, including reduced productivity, increased costs, and disruptions to global trade. It assesses the impact on various sectors, such as manufacturing, agriculture, and consumer markets. Additionally, the report investigates the policies adopted by both governments to mitigate the crisis and considers the potential long-term effects of the trade war on the health of both economies. The analysis covers the trade deficit, the use of tariffs, and the impact on foreign direct investment, concluding with a discussion of the overall effects on macroeconomic variables and the future implications of the trade conflict.

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1TARIFF IMPOSITION LEADING TO TRADE WAR
Executive Summary
This paper aims to evaluate the influence of the trade war between the US and China on the
economic and social aspects of both economies. The paper begins by presenting an overview
of the trade war. It provides the reason behind the implementation of tariff policy by the US
president in 2018. Furthermore, the analysis includes the impact of this war on the
production, business and consumers of both the economies. It also portrays the effect on the
international market. Additionally, the paper informs about the policy under consideration to
deduce the impact of the war. The author’s determination of future effects of the wars is also
mentioned in the analysis. Therefore, the paper solely aims at providing the present and
future consequences of the US-China tariff war.

2TARIFF IMPOSITION LEADING TO TRADE WAR
Table of Contents
Introduction................................................................................................................................3
Overview of the US-China trade war.........................................................................................3
Impact of the war on the society and economy of the US and China........................................4
Impact of war on the producers and domestic business.........................................................4
Impact on buyers budget and farmers income.......................................................................6
Impact on the domestic economy and international trade......................................................7
Policies of the government of the US and China to negate the crisis........................................8
The possible impact of the trade war on the health of the US and China..................................9
Conclusion................................................................................................................................10
References................................................................................................................................11

3TARIFF IMPOSITION LEADING TO TRADE WAR
Introduction
Experiences from the past suggest that trade war tends to create severe turmoil in the
market, whether it is a domestic operation or global movements. There are both advocates
and criticizers of the effect of the tariff war. They tend to present contrasting views regarding
the effect of the trade war. Similarly, the trade war between the United States and China has
already created several problems in both the domestic and global economic functions. The
trade war was inaugurated in the year 2018, when President Donald Trump announced the
imposition of tariff on the imports from China. However, China is not the only country that is
targeted with the harsh tariffs; several other countries were targeted by the harsh tariff
structure of the country. This protectionist trade policy is designed to support and elevate the
productivity of the domestic manufacturing and agricultural sector of the United States (Di
Luft and Zhong 2019). As a result, the trade war began and affected the operation of both
economies. Advocates claim that the war provided several benefits to the agrarian sector and
certain domestic producers of the US economy. However, there are adverse effects of the
conflict that has affected the business operation and wealth account of the country
(Unctad.org 2019).
This study is designed to present an overview of the continuing trade war between the
United States and China. Relating to the trade war, the paper includes the possible impact of
the war on the economic operation and the society of both economies. Additionally, the paper
includes the social and economic policies adopted by the government of both countries to
overcome the effect of the crisis possessed by the war. Lastly, it tries to incorporate the
possible outcomes of the war on all the macroeconomic variables at both the domestic and
international levels.
Overview of the US-China trade war
The trade war originally began in March 2018 when President Donald Trump decided
to adopt a protectionist trade policy to support the deteriorating business structure of the US
economy. The tariff is imposed on several economies of the world such as Argentina, Turkey,
Mexico, and China (Irwin 2017). Except for China, all the other economies of the world were
later exempted from the harsh tariff barriers of Trump. Turkey and China continued to stay
under the tariff imposed by Trump. The tariff is designed to overcome the gap between rising
imports and falling exports of the US economy (Noland 2018). Moreover, the continuous use
of imported and relatively low-cost machinery neglected domestic production. This raised the

4TARIFF IMPOSITION LEADING TO TRADE WAR
total value of imports in the country leading to a deficit in the trading account. The US
economy was witnessing high volumes of trade deficit. Statistics suggest that about 3.121
trillion USD was imported in the year 2018 compared to the 2.5 trillion USD exports from
the US. This resulted in a trade deficit of about 621 billion USD in 2018 (Bea.gov 2019).
Moreover, the export sector of the country was severely affected by the continuous fall in the
revenue and profitability rates (Huang et al. 2018). The country imposed trade barriers on
both merchandise and agricultural products. These mainly consisted of machinery inputs and
electronic products. China was the main target of the US tariff policy and thus, the US aimed
at reducing the cheap products imported from China.
The United States blamed China of performing illicit trade practices. This includes
theft of intellectual property (IP) (Shambaugh 2018). In addition to this, the Chinese
exporters sell cheaper raw materials to the US firms that affect the productivity of the
country. The domestic producers were losing business confidence due to a rapid fall in their
profits. Additionally, there is an increase in imports of agricultural commodities that
burdened the economy with widening deficits in the trading account. This affected the
farmers of the United States and raised the price level of the country. As a result, President
Trump implemented a restrictive tariff policy on China to protect the domestic farmers as
well as the business sector of the United States (Waugh 2019). These high rates of tariffs
induced China to retaliate and impose tariffs on US exports to China. Until date, about $360
billion worth of China’s products is restricted with tariff by the US. Therefore, in retaliation,
China has imposed tariff barriers on the US goods that has a worth of about $110 billion
(Ustr.gov 2019). Consequently, the cross imposition of tariffs led to the formation of a trade
war amid the two dominant economies of the World.
Impact of the war on the society and economy of the US and China
Since the inception of the trade war between the two large economies, both economies
have witnessed random economic shocks. Both the negative and positive effects of the war
influence the business sector, residents of the nation, agrarian sector and the international
market. The first and foremost effect of this war is on the smooth functioning of the world
trade. This war created trade diversions. The effects are listed as follows.
Impact of war on the producers and domestic business

5TARIFF IMPOSITION LEADING TO TRADE WAR
Though the policy aimed at supporting the local producers of the US, yet it tends to
backfire the domestic business. The imposition of tariff made raw materials expensive. This
initially boosted the demand for local production of the raw materials. However, the domestic
producers that use the imported inputs for manufacturing final goods were directly affected.
This is because the cost of production raised and this increase in cost was reflected in the
increasing prices of products. As a result, the demand for US commodities fell. Moreover, the
fall in export demand from China harmed the exporting sector of the US. There is a reduction
in the revenue of the export producers. The United States is the most attractive consumer
market for producers. A fall in the demand for Chinese exports in the US harmed the
profitability of China. In 2019, there is about a 16 percent drop in productivity in China’s
export sector. On the other hand, the retaliatory tariffs from China reduced the demand for
the products of the US by 22.4 percent in 2019. This affected the FDI (Foreign Direct
Investment) in China. An increase in tariffs affected the American companies that were
operating in China. China is known to be an attractive country for MNCs because of its low-
cost production techniques and the availability of low wages. Companies like GoPro and
Crocs planned to shift their operating activities in the country. This harmed the business
sector of China and the GNP of the United States. In addition to this, Huawei has been
banned in the US because of the allegation of IP theft. This again harmed the business of
China. The figure below portrays the various business that has been affected by tariffs.
Figure 1: Impact of the tariff on various sectors of the US and China
(Source: Census.gov 2019)
As demonstrated in the diagram, the intermediate, capital and the consumer goods
manufacturing sector of the US were harmed (cnbc.com 2019). However, the manufacturing

6TARIFF IMPOSITION LEADING TO TRADE WAR
AS’
AD
E
Price
Level
Quantity0
P’
Q*
AS
P*
E’
Q’
sector in China fared well compared to the US. Overall, all the sectors in both economies
recorded significant turmoil from the imposition of the tariff. Because of this loss, the
economy witnessed a fall in productivity levels. This reduced the productivity and raised
price level (Rao 2016). This shifted the aggregate supply curve to AS’ and pushed the
equilibrium upwards. Consequently, it raise the price level to P’.
Figure 2: Aggregate demand and supply affected by US-China trade war
(Source: Created by Author)
Impact on buyers budget and farmers income
The imposition of a 25 percent tariff on Chinese exports raised the expenditure of the
US producers (Census.gov 2019). This increase in cost was transferred to the consumers. The
consumers were affected by the rapid increase in prices of domestic products. Additionally,
the expensive imports from China and other foreign economies affected the budget of the
residents of the US. The effect of trade diversion is added as well. There is a fall in the
imports from a relatively cheaper source and an increase in imports from expensive sources.
As a result, there is a drop in the national demand of the country, which further affected the
growth of the business sector. The increase in domestic prices and expensive imports reduced
the welfare of buyers of both countries (Mor 2018). Thus, this can be inferred that society is

7TARIFF IMPOSITION LEADING TO TRADE WAR
AS’
AD
E
Price
Level
Quantity0
P’
Q*
AS
P*
E’
Q’
AD’
being influenced by the continuous increase in prices of commodities and a fall in demand.
This is portrayed by the AD-AS curve below. The shift in both AS and AD raised the price
level upwards. However, the shift in supply exceeds demand because tariff affected producers
of both the nations.
Figure 3: Shift in national demand due to tariff
(Source: Created by Author)
The farmers cultivating in the United States were positively affected by the imposition
of tariffs. The increase in demand for domestic production of agricultural commodities
injected confidence into the farmers of the US. This raised the overall productivity of the
agrarian sector of the US. Consequently, the profitability of the farmers increased. Therefore,
the tariff war turned out to possess a positive influence over the domestic farmers and food
processing systems of the US economy. On the other hand, the agriculture sector was affected
by the imposition of barriers by China. There was a drop in demand for US agrarian
production in China. This again led to a reduction in the profit ratio of this sector.
Impact on the domestic economy and international trade
As already mentioned in the preceding sections, the trade war affected the producers’
profitability and distorted the welfare of the buyers (Amiti Redding and Weinstein 2019). A

8TARIFF IMPOSITION LEADING TO TRADE WAR
loss in productivity and a fall in consumer demand together generated a substantial impact on
the GDP growth of both economies. In addition to this, the stock market is affected by the
trade war. A fall in productivity and loss in revenue of the manufacturing and other sectors
created instability in the prices of the stock market. As a result, the wealth account of the
country got affected. Additionally, the decision of the MNCs, situated and located in China,
to move out from the Chinese economy to avoid large tariffs affected the GNP of the US and
the GDP of China. This included companies such as GoPro, Crocs and Roombas. Moreover,
restrictive tariffs created turmoil in the international market. Several countries related to the
trading activities of the US and China, such as Japan and Europe, were facing loss in
international business (Urata 2019). However, several other economies such as Australia and
Vietnam were positively affected by an increase in trade from China. Furthermore, this
widened the crisis in the smooth functioning of the World Trade Organization (WTO)
(Ciuriak 2019). This induced them to take steps against the trade distortions.
Policies of the government of the US and China to negate the crisis
The trade war generated severe effects on the economic as well as societal functioning
of both the economies. To control the present and the future effect of this trade war the
government of both the economies needs to addressee reforms in the policy. The policy was
implemented to support the domestic productivity of the United States; however, it created a
negative impact on the business. Therefore, to boost the business confidence and attract
foreign investments into the country the Federal Reserve Bank of the US reduced the interest
rates to 1.75 percent (Connolly 2019). This expansionary monetary policy is implemented to
inject money supply in the economy and increase productivity (Mankiw 2014). This is
portrayed in figure-4. A reduction in interest rate reduces the cost of credit and makes it
profitable for investors to participate in the business. Additionally, the demand of the country
can also increase due to a fall in Fed’s Funds rate (Koepke 2018). As a result, the US Central
Banked aimed at supporting the deteriorating business scenario of the country. Furthermore,
the US administration to reduce the struggle of the farmers provided subsidies to the
agricultural sector to support productivity. Apart from agriculture, manufacturing and exports
should also be given subsidies to promote productivity and growth.

9TARIFF IMPOSITION LEADING TO TRADE WAR
Figure 4: Interest rate can influence money supply
(Source: Mankiw 2014)
Moreover, the falling trade conditions have influenced the Trump government to
improve the US-China trade relationship. President Donald Trump initiated phase one
agreement of trade between the two nations (Ustr.gov 2019). This includes structural changes
in the business and trade regime of China over patent rights, agriculture and manufacturing
sector, technology transfer, financial services, exchange rates. Additionally, the trade
agreement mentions that China needs to purchase extra goods from the American market to
counterbalance the previous hazards caused by the country. However, the agreement will
maintain the 25 percent tariff of the US on the $250 billion imports of Chinese commodity
and 7.05 percent on about $120 billion imports of China. On the other hand, China has
invested in developing its technological sector, which is glaring well. Additionally, the
economy has focused on increasing trade relations with other economies to negate the effect
caused by the trade distortions with the US. This has helped the economy in balancing growth
and expansion. The government has implemented structural reforms to support the business
and exports of the country as well. As a result, the country intends to perform well in the
future.
The possible impact of the trade war on the health of the US and China
The trade war has already generated several impacts on the domestic and international
business amid the United States and China. If the war is not ending in the future, it can
develop a severe macroeconomic impact on both countries. The fall in productivity and loss
in the major economic sectors has possessed severe threats to the employment sector of the

10TARIFF IMPOSITION LEADING TO TRADE WAR
countries. Therefore, the administration needs to eliminate the problems to curtail the
unemployment issue. Additionally, the expensive imports and high prices of domestic
commodities can deepen the impact on consumers’ welfare (Handley and Limão 2017). This
can increase inflation to a greater level that can further reduce the nation's demand for goods.
Furthermore, the expatriate labor force can be affected by rising prices as well as a fall in
employment opportunities. This can increase poverty levels in both economies. In addition to
this, the excessive turmoil caused by the trade war can diverge the path of inward FDI
inflows into the economies (Li He and Lin 2018). The stock market has already witnessed
severe shocks from the US-China trade turmoil and anticipation of future war can pose a
severe effect on both the economy’s health. Therefore, the administration should address
these issues to deduce the effect on future growth.
Conclusion
The war has generated a severe impact on the health of both economies. Whether in
terms of business or the wealth of the individual people of the economy, the ongoing trade
war has created distortions in the entire market and business sector. The entire manufacturing
sector has been harmed protectionist policy of Trump and the retaliatory tariffs of China.
There is a fall in profitability and business growth. However, the tariff has created a positive
impact for the US farmers but a fall in total demand and increasing prices have widened their
struggles. The welfare of the consumers has fallen affecting the demand of the country. The
stock market is characterized by instability and threats from a fall in FDI inflows. Thus, the
fall in trade between the two large economies of the world has caused a crisis in the WTO
operations and the global market. However, the administration of both economies has
formulated steps to support the business and the welfare of the consumers. If this war does
not end, it can possess severe threats to the social and macroeconomic variable of both the
countries. Hence, to conclude this can be mentioned that the administration should adopt
strategies to curtail the effects of the trade war and balance the volatility in the economy.

11TARIFF IMPOSITION LEADING TO TRADE WAR
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