An Introspect in The US-China Trade Deal


All you hear about the year-long US-China trade war is that it is bad for manufacturers and farmers. But farmers and small-time manufacturers are just collateral damage in this war between the two biggest economies of the world.

 For years, the United States and China, the two biggest economies of the world have been stuck in the Thucydides trap. Thucydides, a Greek philosopher, explained that when one ‘state’ rises in power, it is bound to displace or challenge the ruling state’s authority which inevitably ends up as a war. The US saw a title challenge from USSR after WWII and is now experiencing a threat to its polarity from China.

 In 2019, when almost everyone country has nuclear weaponry, a war between the states might mean total annihilation of the earth. So, states have shifted to a different strategy of fighting, a fight for money.

 Toward the end of the Cold war, China made some reforms in its domestic market and opened its boundaries for foreign direct investment. China had closed its borders for foreign direct investment to save domestic producers from foreign competition. This gave the government sole access to what goods and services will flow through the economy.

 In 1978, China experienced an alarming rate of poverty of 97 percent in rural areas along with rising population growth. The Chinese government saw no other alternative but to allow FDI and gave ownership to farmers of their product. This policy drastically shaped to what China is today- the biggest manufacturer in the world. In just 40 years, the poverty rate has fallen to a mere 3.1 percent in 2017.

 With FDI and availability of cheap labor, China could employ almost all its citizens in the farming and manufacturing industry. Having the largest population of 1.38 billion people and a mere gross domestic product per capita of $16,600 person (as compared to $59,000 in the US), the low standards of living allows companies to produce goods at a mass scale with cheap labor. 

 Today, China is the biggest exporter of goods and services in the entire world, exporting $2,263,370,504,301 in 2017 alone. The United States imported $430,328,146,524 worth of goods and services from China the same year and was the biggest importer of Chinese products.

 President Trump raised concerns over the trade deficit of the U.S. with China. According to the United States Census Bureau, U.S. exported $111,158.4 million in 2018 to China while importing goods worth of $493,489.9 million, creating a trade deficit of $382,331.5 million.

 Trade deficit with China affects the U.S. economy more than people might think.

 A rising trade deficit means fewer goods are produced domestically and the country relies more on imports, leading to loss of jobs to foreign nations. Imports also drive currency out in the international market, increasing its supply which in turn might reduce its own price.

The US hasn’t seen a trade deficit with China since 1985. The U.S. has always imported more from China than exporting goods to it.

After the 2008 economic depression, China picked up the pace and filled the international monetary void of dollars with its exported goods. While the dollar fell, China enjoyed an economic boom due to rising exports. A stronger dollar will raise the international market making goods and currencies attached to it expensive too.

Since commencing office, President Trump has criticized China’s trade practices. Unhappy with the trade deficit, President Trump imposed restriction on the flow of goods between the two countries.

Trump imposed a 25 percent import tariff on 818 Chinese goods, valued at $34 billion on June 6, 2018. This came in response to China dismissing President Trump’s demand to allow more access to U.S. companies in China and reduce the trade deficit between the two countries. US also threatened China that it would impose tariff on all Chinese imported goods.

The U.S. saw a gradual decline in its unemployment rate after tariffs were imposed on China stooping down to a historic low of 3.7 percent. But despite increased tariffs, US imports from China didn’t decline, but rather grew. Tariffs would have generated a lot of cash, but the impeding problem went unaddressed. The country still suffered a trade deficit after a yearlong expensive tariff on imported goods.

China retaliated with imposing tariffs on 5,207 American products valued at $60 billion. This escalated the U.S. to impose even higher tariffs which China following the suite. Both countries imposed tariffs on goods valued at $200 billion each, sending the globe in an economic standoff between two economic monsters.

Another effect of trade deficit is depreciating currency value. When a country sells its products abroad, it drives the demand for its currency higher. But a trade deficit will weaken the importing country’s currency. The U.S. dollar became stronger in 2018 relative to the Euro and British Pound. Although this seems like good news but is a death warrant for the country’s export.

When the dollar is strong or expensive, other countries have a more difficult time paying the country for their goods and services. This might even discourage a lot of developing nations or nations in political turmoil to import goods from the US while encouraging them to export in the US economy for better returns.

To tackle a strong dollar and reduce the trade deficit, President Trump erected the highly-criticized trade barriers. When you restrict the flow of imported goods, it forces domestic companies to produce more, hence driving the employment rate up. Consumers also tend to buy domestic products because they are cheaper compared to imported products with heavy tariffs.

Trade barriers not only push the domestic market to its optimum but also helps in regulating currencies. When you restrict the flow of dollars to the outside world, it becomes scarce and more valuable.

China’s currency, Yuan, is on a peg to the dollar. This means that yuan is valued at a fixed exchange rate to the dollar. China’s central bank pays the US fixed amount of money in exchange of dollar, irrespective of price change. China uses the peg model to keep its currency at a lower level for competitive exports.  

Due to high exports, China can accumulate a lot of money and buy when it’s weaker to support the US Treasury by driving up the demand of dollar. This leaves China with an abundance of money leaving the U.S. in a tight spot.

In Sept. 2018, US owed China approximately $1.15 trillion. The U.S. is trying to reduce this debt by making China open its borders more for trade and restricting the flow of dollar to the outside world.

A good way to reduce debt is to reduce imports while exporting more. A weaker dollar indicates to reduce imports.

If China one day decides to unload its stash of the dollar in the market, it might hurt the US currency and have its value dropped. The effects won’t be on the U.S. alone, as 66 other countries also peg their currency to the US. A weaker dollar might lead to weaker economies of these 66 countries.

According to President Trump, China undervalues its currency to attain competitive export prices in the South-Asian market. The Chinese economy saw a growth of 10 percent in its GDP every year in the past decade. A fast-rising economy is bound to experience inflation, but China saw less than 2.5 percent inflation on an average in the past five years.

In 2016, China let loose its Yuan in hope of having a bigger impact on the world economy. The People’s Bank of China tried unpegging the yuan from the dollar. If the growth rates were right, the Yuan should have climbed up on the stock market, but rather it saw a huge plummet which made it clear that China has been fabricating its economic data.

Despite all the restrictions and trade talks, the trading terms between the U.S. and China don’t seem to change a lot in the coming future. Both countries exist on a symbiotic relation. The U.S. imports cheap products from China in turn for providing mass cheap labor. The US can afford to look for another third world nation to be its manufacturing district, but very few countries can provide as much employment to the Chinese nationals as the US does. A disruption in this give and take relationship can hurt both economies pretty badly.