What are the effects of the trade war between the US and China?

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The trade war between the United States and China generates an impact on the entire world economy, we could handle two scenarios: a positive scenario and a negative one.

To begin, we must talk about the benefits of free trade that were generated in the last years of the 20th century and the beginning of the 21st century, which favored the growth of the international economy and the well-being of the world population in general.

As borders were opened, economic globalization reached spectacular levels. Consumers around the world managed to obtain an ever greater variety of products with the best quality characteristics and the best prices in international competition.

In the same way, companies from all countries of the world found the doors open to a world market where they could place their products in the place in the world where it would be most convenient for them.

A competitive situation was achieved not only at the country level, but also at the regional and global level. Where the market was conquered by the most efficient producers in the world, that is, those with the greatest comparative advantage.

What is happening in international trade?

It happens that after the great crisis of 2008, where the most developed countries in the world suffered the impact of low or zero growth in gross domestic product (GDP), an increase in the level of unemployment, a recessive process and negative trade balances; they began to apply monetary, fiscal and commercial policies to achieve a reactivation of their economies.

In the case of international trade, obstacles or protectionist policies began to be applied to protect their trade balances and their national producers. This situation has hardened more between 2018 and 2019 and especially among the great powers such as the United States and China.

Possible positive scenario

We could consider that the frictions between the United States and China can create some sources of opportunity such as the following:

  • European, Asian and some Latin American countries that already have a high level of industrialization could export products to the United States, because it would be more profitable to import from other countries instead of buying products from the Chinese. Of course, as long as the Trump Administration does not impose tariffs on these countries as well.
  • Countries with a low level of industrialization could export more raw materials to the Chinese market.
  • Many Chinese companies that have their investments in the United States, or US companies in China; they could move these investments to other countries that are attractive for this purpose.

Possible negative scenario

Among the negative aspects that we can mention as a result of this war, we can mention the following:

  • That there is a contraction of the economies of the United States and China, which would cause a lower purchasing power to buy in the international market.
  • Lower world trade growth, if the participation of these two powers in the world market falls, world trade would drop considerably.
  • More expensive prices in high-tech products, due to the tariff barriers that both countries would be placing at the same time; United States to Chinese products and China to American products.
  • Drop in the price of the shares of technology companies, both Chinese and US; due to the uncertainty caused in international markets, problems such as the case of Huawei.
  • The uncertainty could cause people to want to save dollars, which would cause the currencies of other countries to lose value against the dollar and also have an impact on interest rates, which would rise.
  • The competitiveness of countries would be reduced and prices would rise to consumers in different countries of the world, affecting the global production chain and we all lose the benefits of free trade.

What does the World Trade Organization (WTO) say?

The WTO (World Trade Organization) has projected that the growth of international trade will be 2.6% in 2019, this was announced in a press release made by the director of the WTO Roberto Acevedo and where concern was expressed of the problems generated between the United States and China.

In the following graph taken from the source: WTO and UNCTAD for trade; We can see that there is already a low growth effect on world trade and as a consequence on world real GDP.

Let's take the example that a North American citizen who buys a cell phone in the free market at $ 800, if the government puts a 25% tariff on it, we would have $ 800 × 0.25 = $ 200, this would make the final price for the same product be $ 1000.

Conclusion on the trade war

We can affirm that tariffs are taxes that increase the price of products and that excess price is always paid by the consumer at the cost of the inefficiency and protection that the government provides to national producers.

The positive scenario would only be achieved in the short term, but in the long term it is most likely that we will experience the negative scenario. Protections of any kind to the trade balance or as in the case of Trump's veto for Huawei only make companies less competitive and reduce global trade and GDP growth.

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