What?

Simply put, it’s US & China constantly imposing tariffs on each other’s goods.

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Why?

POWER

Purely defensive measures

• Trump claims that trillions of dollars Americans transfer overseas (as a result of yearly trade deficits), instead of being invested in the U.S.,  are used by those countries to buy America’s assets; that raises the scenario that foreigners can buy up America.
• U.S. Trade Representative Robert Lighthizer said that the value of the tariffs imposed was based on U.S. estimates of the actual economic damage caused by
  • alleged theft of intellectual property; and
  • China requiring/ pressuring foreign companies to transfer technology (as a condition for securing investment or other approvals).

China stealing American intellectual property and military technology

• China (through its intelligence services) has been accused of either:
  • stealing American intellectual property and military technology or
  • adopting and enforcing policies which put U.S. patent holders at a disadvantage in Chinese markets
    • by forcing foreign companies to engage in joint ventures with Chinese companies; Foreign companies are forced to (as “performance requirements” to receive government approval in sectors such as electric vehicles):
      • transfer IP to their Chinese partner, and
      • establish research and development in China.
    • which in turn gives Chinese companies illicit access to their technologies.
• In August 2017, U.S Trade Representative Robert Lighthizer opened a formal investigation of China in regard to alleged unfair trade practices, which are thought to cost the U.S. an estimated $225–600 billion a year.
• In response, China state media declared that
  • the government’s attitude toward the protection of intellectual property rights is clear and firm, and
  • it has continuously strengthened protection at all legislative levels and achieved remarkable results.

• The European Commission filed a complaint with the WTO over these rules,  believing that this violates WTO rules requiring fair treatment of domestic and foreign companies.
• The Chinese government has denied that such “forced” transfer of IP is a mandatory practice, and acknowledged the impact of R&D performed in China.
  • Former U.S. Treasury Secretary Larry Summers assessed that Chinese leadership in some technological fields was the result of “huge government investment in basic science” and not “theft” of U.S. properties.
  • The National People’s Congress endorsed a new foreign investment bill, to take effect in 2020, which explicitly
    • prohibits the forced transfer of IP from foreign companies, and
    • grants stronger protection to foreign intellectual property and trade secrets.

Foreign direct investment

China had also planned to lift restrictions on foreign investment in the automotive industry in 2022. A concern raised for a portion of the bill that grants China the power to retaliate against countries that impose restrictions on Chinese companies.

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How?

Goods that are prone to tariffs in this trade war are related to technology (cars, aircraft parts, batteries, flat-panel televisions, medical devices, satellites, …), natural resources (steel, aluminum, …)

Made in China 2025: 5 pillars

• Setting explicit targets: firms’ decisions are based on the plan’s priorities
• Providing direct subsidies: direct support for the 2025 industries
• Foreign Investment & Acquisitions:
  • China provides funds for foreign firms
  • Foreign firms provide technology to China
• Mobilizing state-backed companies
• Forced transfer agreements: force joint venture and technology transfers.

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Possible effects

Lower foreign-ownership limits

• In April 2018, China announced that it would eliminate laws that required global automakers and shipbuilders to work through state-owned partners, affirming a desire to (all central issues in Trump’s complaints about their trade imbalance):
  • increase imports, lower foreign-ownership limits on manufacturing, and
  • expand protection to intellectual property.
• Trump thanked Xi for his “kind words on tariffs and automobile barriers” and “his enlightenment” on intellectual property and technology transfers.

Employment status

• A number of industries showed employment growth while others were planning on layoffs.
• Regional commentators noted that consumer products were the most likely to be affected by the tariffs.
• When the tariffs went into effect, markets recovered due to positive jobs report in the U.S; Asian markets similarly recovered.
• The positive reaction to the tariffs in U.S. and Asian markets was because of an end to uncertainty and markets had largely priced in the impact.

Market index

• On August 4, 2018, China fell from second to third largest market capitalization.
• On December 4, 2018, the Dow Jones Industrial Average logged its worst day in nearly a month as it declined nearly 600 points.

Trade with other countries

• China was forced to import soybeans from Brazil and other producers instead of from the U.S.
• President Trump responded that he would spend the tens of billions of dollars in tariffs from China to:
  • buy products from “Great Patriot Farmers”, and
  • distribute the food to starving people in nations around the world.
• Supply chain gradually shifts to South East Asia

Trade balance

• Despite US-imposed tariffs, China’s annual trade surplus in 2018 was $323.32 billion, a record high.
• In both 2017 and 2018,  the US trade deficit reached a record high. On 23 May 2019, President Trump announced a $16 billion aid to U.S. farmers hurt by the trade war with China

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Further questions?

1. Why are consumer products were the most likely to be affected by the tariffs?
2. Why did China lower the FDI restrictions through IP policies but later propose to lift restrictions on foreign investment in the automotive industry?
3. In economics theories, trade is the key to prosperity, why do the 2 countries think that tariffs would bring benefits to them?
4. Who actually bears the burden and who is more advantageous? Reference 1, Reference 2