U.S.-China Trade War: Free Trade Agreements and Economic Effects

This report examines the U.S.-China trade war, focusing on the impact of free trade agreements on economies and the business environment. It analyzes key issues such as intellectual property rights, trade deficits, foreign direct investment, and tariffs on steel and aluminum. The report explores the causes of the trade war, including China's economic advantages and alleged breaches of trade agreements, and discusses the adverse effects on both nations, including job losses and market disruptions. It offers recommendations for improvement, including trade protectionism, reduced outsourcing, and seeking solutions through the WTO, along with strategies to balance interest rates and trade deficits. The report concludes by referencing several sources to support its analysis.

Organisation Name
U.S-China Trade War- The Economy Eater
Student name:

Table of Contents
Table of Contents..................................................................................................................................1
INTRODUCTION.................................................................................................................................2
Free Trade Agreement...........................................................................................................................2
Unilateral trade agreement...............................................................................................................3
Bilateral trade agreements................................................................................................................3
Multilateral trade agreements..........................................................................................................3
CASE....................................................................................................................................................4
KEY ISSUES........................................................................................................................................4
1) Intellectual Property Rights (IPR) and Cyber Theft.....................................................................4
2) Trade Deficit..............................................................................................................................4
3) Foreign Direct Investment (FDI).................................................................................................5
4) Tariffs on Steel and Aluminium..................................................................................................5
CAUSE..................................................................................................................................................6
EFFECT................................................................................................................................................6
RECOMMENDATION.........................................................................................................................7
REFRENCE..........................................................................................................................................8

INTRODUCTION
In this report we will study how free trade agreement affect the economy and business
environment, by co-relating the factors with the case “U.S-China trade war” and after the
complete study we will be recommending some ways by which this situation can be
improved
Free Trade Agreement
It is an agreement in which two or more countries enter to establish a free trade zone, through
which trading of goods and services takes place among the member nations, member nations
impose common tariff while trading with non-members countries (Thebalance, 2019).
There are three types of trade agreements:-

Unilateral trade agreement: It is a situation in which one country implies trade restriction
and no other nation retaliate. It is usually applied by the developed nations like The United
Stated (Thebalance, 2019).
Bilateral trade agreements: an agreement between two countries, in this both the nations
agrees to alleviate the trade restrictions, so that business opportunities can be expanded
between them. They work on mutual agreement which contain (negotiated tariffs & trade
conditions) (Thebalance, 2019).
Multilateral trade agreements: - An agreement among three or more countries, it is very
difficult to have a mutual concern in this agreement, as each country has its own needs and
requirement. It provides a greater competitive advantage to the member countries
(Thebalance, 2019).
Impact on economies & business environment: (Thebalance, 2019).
Pros
1) Free trade allows the nations to depreciate the cost of import and allows the consumer
to avail the benefits, which leads to the regular low of currency among the member
nations; hence there GDP grows, as one-fourth of the total global production is
exported.
2) Provide a new market to the domestic manufacturer for their tariff free products.
3) Raise the living standard of the people of the member nations
Cons

1) Domestic countries that do not produce tariff free products have to suffer; as they
cannot compete with the nations that have a lower living standard, hence the company
has to windup its operations.
2) Free trade brings a trade war between the companies and the consumers
CASE
Even though the commercial ties were flowering, the mutual relationship started becoming
convoluted in (2017), which acted as a root cause for the trade war between the two nations,
as per the perspective of the U.S, the amendments in the trade policies by China were the part
of the bilateral agreement between the two nations, China breeched the agreement by not
following the below parts of the agreement (Everycrsreport.com, 2018).
KEY ISSUES
1) Intellectual Property Rights (IPR) and Cyber Theft: The firms of U.S faced this
issue due to inadequate protection of Intellectual Property Rights, while carrying on
the business in China a study on theft of America IP stated that 80% of annual
economic losses of U.S are accounted by china, according to the report of U.S.
Customs and Border Protection, china is the major contributor in counterfeit goods
which has affected the economy of U.S adversely (Fas, 2019).
2) Trade Deficit: President Trump has highlighted the issue that there were U.S.
bilateral trade imbalances, according to the policy makers of U.S the deficit indicated
unfair trade relation, This lead to trade deficit in U.S, the U.S. merchandise trade

deficit with China in 2018 was $419billion (up from $376 billion in 2017), this
imbalance showed a negative weight on the scale of U.S because of which its
economy showed a declining graph (Fas, 2019).
3) Foreign Direct Investment (FDI): The trade officials of U.S have asked China to
liberate its trade policies, so that U.S could increase its export and business operations
in china and the agreement for bilateral trade have a balanced impact. The FDI flows
of U.S-China were comparatively small as compared to given high level of bilateral
trade, despite standards for such flows vary; this fact is as per the report of Bureau of
Economic Analysis (BEA). In (2017) the FDI of china in U.S was $40billion & the
FDI of U.S in China was $108billion, because of this imbalance the differences
between the countries started happening (Fas, 2019).
4) Tariffs on Steel and Aluminium: On March 1, 2018 it was announced by president
trump that the tariffs on import of steel would be imposed at 25% & 10% on
aluminium, which affected the china’s import by $34 billion. In response to that china
revoked the import contact with U.S and it also raised the tariffs from 15% to 25% on
various products of United Stated, this step from both the nations affected their trade
relations and also the economy, which can be seen by the fall in import-export
between the two nations (Fas, 2019).

CAUSE
A) China has the advantage over other countries of having cheap labour, because of which
they can manufacture goods effectively and efficiently
Que: How does China produces so economically?
Ans: A lot of economists stated that the low price is a result of 2 factors:
1) The standard of living in China is low, which grant the organisation to pay low wages
to the workers
2) The exchange rate is partially fixed to the dollar.
The advantage of cheap labour provided China a monopolistic power because of which the
change in policies took place and the trade war started (The Balance, 2019).
EFFECT
The incident had affected both the nations adversely in the following ways:
1. China has lost its largest export market, as U.S consumers have started consume few
Chinese products and also lost its largest FDI share holder (The Balance, 2019).
China: - fall in sale of cars by 11.7% & fall in sale of real estate by 3%. (Scmp, 2018).
2.. U.S lost its interest rate controller, China holds the title for being the largest lender to U.S
government by buying the treasury bills, which is 28% of total public debt owned by foreign
countries, this helped U.S in keeping the interest rate low (The Balance, 2019).

U.S:- leads to unemployment & shut down of many small scale industries (Scmp, 2019).
RECOMMENDATION
1. In our opinion if U.S impose trade protectionism policy, then the trade deficit can be
balanced as the consumers will pay for the “Made In America” product, even though the
price for the products would increase, but still the flow of currency will take place in the
country itself and it will also increase the job opportunities in the country and the standard of
living.
2. The companies should stop getting the work outsourced so that the dependency can be
decreased and the export can be increased, just to cut down the cost many business
organisations get their work outsourced through china and India which actually leads to the
unemployment in the nation.
3. Both the nations should have a word with each other and try to figure out an effective
solution with the help of WTO as they both are members of the same, so that they can have
mutual benefits.
4. U.S must try to neutralise the interest rate by reducing its trade deficit for which it can go
with the two options:
A. Allow the FDI to be in a proportionate manner and with low formalities along with the
subsidies from the government, so that the flow of currency increases from other countries.
B. Increase the import of the products and resources at a pocket friendly cost so that the
revenue can be generated and deficit can be balanced.

REFRENCE
Everycrsreport, (2018), China-U.S. Trade Issues. Accesses 5 April, 2019 from
Fas, (2019), congressional research paper. Access 5 April, 2019 from
The Balance, (2019), US Trade Deficit With China and Why It's So High. Accesses 5 April,
2019 from
Scmp, (2019), US-China trade war could slash almost 1 million jobs from the US economy,
new study says, Accesses 5 April, 2019 from https://www.scmp.com/economy/china-
economy/article/2185446/us-china-trade-war-slash-almost-one-million-jobs-us-
economy
Thebalance,(2019), Free Trade Agreements, Their Impact, Types, and Examples, Accesses 5
April, 2019 from https://www.thebalance.com/free-trade-agreement-types-and-
examples-3305897
Scmp, (2018), China data shows economic growth slowing as impact of trade war with US
intensifies, new study says, Accesses 5 April, 2019 from
https://www.scmp.com/economy/china-economy/article/2174541/china-data-shows-
economic-growth-slowing-impact-trade-war-us
Ourworldindata, (2018), Trade and Globalization, Accesses 5 April, 2019 from
https://ourworldindata.org/trade-and-globalization
Smallbusiness, (2018), The Effects of Free Trade, Accesses 5 April, 2019 from
https://smallbusiness.chron.com/effects-trade-3842.html