Trade conflict between the United States and China and its impact on the global economy

Abstract

The United States and China relations have evolved from tense standoffs to a complex mix of intensifying diplomacy, growing international rivalry, and increasingly intertwined economies. In 1979, the United States and China re-established diplomatic relations and signed a bilateral trade agreement, providing mutual mostfavored-nation treatment, which allowed to substantially expand their economic relationship since then. Between 1980 and 2018, the United States and China trade rose from US$ 4.9 billion to US$ 738.6 billion, making them each others largest trading partners on a country basis. Between 1990 and 2018, the United States merchandise trade deficit with China rose from US$ 10.4 billion to US$ 419.3 billion. Chinas large merchandise trade surpluses and some trading practices with the United States have strained both countries relations. In 2018, China was the largest foreign holder of the United States government debt at US$ 1.113 trillion. The rising Chinas economy set off alarm bells amongst advanced economies, particularly the Unites States. Thus, their bilateral trade balances have come under scrutiny. Recently, trade tariffs, as an instrument of trade and foreign policy, have returned to mainstream politics in the United States, raising fears of resurgence of protectionism. The United States imposed tariff hikes on US$ 250 billion worth of Chinese products, while China retaliated with tariff hikes on US$ 110 billion worth of the United States products. Their rivalry began playing out in the crucial technology sector. The ongoing trade conflict between the worlds two largest economies, which account to 40% of global GDP, had increased fears that further escalation would harm the global economy. In 2019, the International Monetary Fund reported that the United States and China tensions have negatively affected consumers and producers in both countries. Although the imposed tariffs have reduced trade between them, their bilateral trade deficit remained broadly unchanged, while the impact on global growth was relatively modest. However, disruption risks remained for the global supply chains. It is argued that trade wars are not easy to win, even for large economies such as the United States. China has the tools to manage the economic blow. Thus, the United States and China will eventually reach a deal to lift some of their reciproc l tariffs, but their economic competition will persist as the United States strategy evolves beyond tariffs to counter Chinas emergence as an economic, military, and political peer. It is argued that both countries might be falling in a “Thucydides trap” when a major rising power challenges a major ruling power.