The US and China Trade War Hurts the World Economy and Now, There is a pall


How the US-China Standoff Hurts the World Economy





A continued trade war between the US and China will have no clear winners and will leave the entire world in a far worse situation in the coming year.

This is an observation noted by one economist, who noted that the tightening financial constraints and tariff on consumer goods coming out of the tensions between Beijing and Washington could trigger the next financial meltdown. Growth could be compromised, and may cause a permanent loss in productivity and output.

But a silver lining seems to be in the horizon, as there is an apparent positive outcome from the G20 summit meeting between US President Donald Trump and Chinese President Xi Jinping in Buenos Aires.

Both sides established a 90-day “truce” in the trade war, in which both sides will try to negotiate new policies and reforms to try to arrive at a consensus. In good faith, China has agreed to reduce the tariff it imposed on US cars entering the Chinese market, below the 40% it is currently levying.

Trump has threatened before to raise tariffs on Chinese goods worth $250 billion from 10% to 25% by 2019 if China doesn’t further open up its market to the US. The 90 day truce has seen an extension to this threat, but only if both sides cooperate.

The Dilemma

There are a number of dilemma facing the US and China that makes resolving this particularly challenging.

The US needs to have China open up its market to trade to lower its trade deficit, and it is using tariffs as a tool to do so. This tactic, however, is a double-edged sword, as it also harms the profits of American businesses by raising prices. China is essentially waiting on Trump to do so, daring him to raise tariffs up to 25%, knowing full well it would harm the US economy.

China, on the other hand, is one the losing end of the current trade war, as it is hurting its economy more than it is hurting the US. Why China is still pursuing it is because of its economic model of protecting Chinese firms from foreign, particularly US, competitors. Giving in to US demands would upend that model and force China to abandon it, which is highly unlikely.

This stalemate makes many fear that the new March 2019 deadline is simply delaying the inevitable. If no resolution is made, then economists and businesses fear that the increasing tariffs could escalate prices, reduce profits and weaken the entire economy in general. The US economy, in particular, is heading to a “self inflicted pain” situation.

Far-Reaching Effects?

Having a trade war between the two largest economies on Earth is not without global repercussions – everyone is affected by this, with global growth dropping well into 2019. The International Monetary Fund (IMF) reported that the global economy will grow by 3.7% - which is the same rate in 2017, and a full 0.2% drop from its estimates earlier this year before the US-China tension. This signals a growth slowdown in 2019.

Everything stems right now if China and the US can arrive at an agreement to end the trade war come 2019. If not, gloomier times will haunt the world’s economy come 2019.

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