Source from Finance Times
The ongoing trade war between the US and China, the two largest trading countries globally, has significantly impacted the world economy. The trade war has not been limited to China and the US, as it has led to economic downturns in other regions such as the European Union. This paper explores the history of trade wars, their underlying motivations, and lessons from previous trade wars, particularly the US-Japan trade war. Furthermore, it analyzes the worst-case scenario of the trade war on China's economy and revisits the key assumptions of the model.
History of Trade Wars
Trade wars have been a recurring phenomenon throughout history. The US has engaged in several trade wars, including those with China, Japan, and the European Union. These disputes have typically been resolved through negotiation, although some have escalated into full-fledged trade wars that were eventually settled by the WTO's dispute settlement mechanism.
A recent example is the China-US trade war that began in 2018 when the US initiated a 'Section 301 investigation' into China's intellectual property practices and threatened extra tariffs on Chinese imports. In response, China imposed reciprocal tariffs on US goods, and the two countries engaged in a tit-for-tat escalation that has yet to be resolved.
Motivations for Trade Wars
To evaluate a trade war, it is essential to see through aggressive rhetoric and focus on the underlying motivations. Economic reasoning alone may not fully explain the reasons behind a trade war. In the case of the US-Japan trade war, the main reasons were trade imbalances and the overlap of industrial structures between the two countries.
Japan's rapid development of its light industry after World War II led to a surge in exports to the US, resulting in a trade deficit. Japan's upgrading of its industrial structure also allowed it to outcompete American companies in various sectors. Japan's attempt to gain an equal footing with the US triggered a full-scale counterattack from the US government, which tended to lump trade and security issues together to put pressure on Japan.
Lessons from Previous Trade Wars
Past trade wars have shown that no one emerges as a winner. For example, the US-Japan automobile trade war in the 1980s resulted in a decrease in revenue for Japanese car producers and a sharp jump in automobile prices for American consumers, leading to job losses and a decline in car sales.
Learning from past trade wars, it is crucial to understand the underlying economic motivations of the parties involved to assess the potential impact of a trade war. Although trade disputes can be resolved through negotiation, they can also escalate into full-blown trade wars that harm both parties. Long-term planning remains essential in the strategy of industrial transformation and upgrade, especially in cutting-edge industries such as high-end manufacturing, where a suitable development path must be found.
Impact of Trade War on China
The paper analyzes the worst-case scenario of the trade war on China's economy. The study estimates the impact of the trade war on the trade volume between China and the US, with a focus on the 25% increase in tariffs on imported goods, worth a total of US$150 billion. It is estimated that the maximum fall in trade volume in response to this increase is 27%.
The impact on China's output is calculated by determining trade's importance to total output. The estimated decrease in trade surplus is conjectured to reduce net exports by US$60.8 billion, which could cause GDP to go down by US$121.6 billion, representing around 1% of the total GDP. The worst-case scenario could lead to job losses of around 1.1% of total job positions in China.
The simulation shows that China will bear most of the US$101.3 billion decrease in trade surplus with the US, with US$60.8 billion.
In conclusion, the ongoing trade war between China and the US has significantly impacted the global economy, with consequences extending beyond the two countries involved. While the impact on China's economy may not be devastating, it is important to implement aggressive policies to smooth fluctuations in the short run and facilitate industrial upgrades in the long run. Furthermore, accurate estimations of the impact on other trading partners of China, such as the EU, ASEAN countries, South Korea, Japan, and Taiwan, require additional factors to be considered. Lastly, understanding the underlying motivations behind a trade war is crucial to fully assessing its potential impact.
History of Trade Wars
Trade wars have been a recurring phenomenon throughout history. The US has engaged in several trade wars, including those with China, Japan, and the European Union. These disputes have typically been resolved through negotiation, although some have escalated into full-fledged trade wars that were eventually settled by the WTO's dispute settlement mechanism.
A recent example is the China-US trade war that began in 2018 when the US initiated a 'Section 301 investigation' into China's intellectual property practices and threatened extra tariffs on Chinese imports. In response, China imposed reciprocal tariffs on US goods, and the two countries engaged in a tit-for-tat escalation that has yet to be resolved.
Motivations for Trade Wars
To evaluate a trade war, it is essential to see through aggressive rhetoric and focus on the underlying motivations. Economic reasoning alone may not fully explain the reasons behind a trade war. In the case of the US-Japan trade war, the main reasons were trade imbalances and the overlap of industrial structures between the two countries.
Japan's rapid development of its light industry after World War II led to a surge in exports to the US, resulting in a trade deficit. Japan's upgrading of its industrial structure also allowed it to outcompete American companies in various sectors. Japan's attempt to gain an equal footing with the US triggered a full-scale counterattack from the US government, which tended to lump trade and security issues together to put pressure on Japan.
Lessons from Previous Trade Wars
Past trade wars have shown that no one emerges as a winner. For example, the US-Japan automobile trade war in the 1980s resulted in a decrease in revenue for Japanese car producers and a sharp jump in automobile prices for American consumers, leading to job losses and a decline in car sales.
Learning from past trade wars, it is crucial to understand the underlying economic motivations of the parties involved to assess the potential impact of a trade war. Although trade disputes can be resolved through negotiation, they can also escalate into full-blown trade wars that harm both parties. Long-term planning remains essential in the strategy of industrial transformation and upgrade, especially in cutting-edge industries such as high-end manufacturing, where a suitable development path must be found.
Impact of Trade War on China
The paper analyzes the worst-case scenario of the trade war on China's economy. The study estimates the impact of the trade war on the trade volume between China and the US, with a focus on the 25% increase in tariffs on imported goods, worth a total of US$150 billion. It is estimated that the maximum fall in trade volume in response to this increase is 27%.
The impact on China's output is calculated by determining trade's importance to total output. The estimated decrease in trade surplus is conjectured to reduce net exports by US$60.8 billion, which could cause GDP to go down by US$121.6 billion, representing around 1% of the total GDP. The worst-case scenario could lead to job losses of around 1.1% of total job positions in China.
The simulation shows that China will bear most of the US$101.3 billion decrease in trade surplus with the US, with US$60.8 billion.
In conclusion, the ongoing trade war between China and the US has significantly impacted the global economy, with consequences extending beyond the two countries involved. While the impact on China's economy may not be devastating, it is important to implement aggressive policies to smooth fluctuations in the short run and facilitate industrial upgrades in the long run. Furthermore, accurate estimations of the impact on other trading partners of China, such as the EU, ASEAN countries, South Korea, Japan, and Taiwan, require additional factors to be considered. Lastly, understanding the underlying motivations behind a trade war is crucial to fully assessing its potential impact.