The Us–China Trade War: Deal or No Deal?
31 Pages Posted: 31 Aug 2020 Last revised: 21 Oct 2021
The US–China trade war in 2019 led to major shifts in global trade and supply chains, highlighting the recent trend in deglobalization. This case discusses the patterns of international trade and capital flows across the two countries, determinants of trade imbalances, and the role of national savings, policies, institutions, and exchange rates. The material allows for an examination of several factors, including the broader context of tech competition between China and the United States. The case raises a series of questions around the uncertainty the trade war created, the impact of tariffs on both economies, and diverging views from the two sides on who is winning. The case has been successfully taught in second-year MBA classes and executive training programs on global economies and markets.
Rev. Apr. 7, 2022
The US–China Trade War: Deal or No Deal?
At its simplest, the intent of G20 summits was to encourage global economic growth through cooperation among governments, central banks, and international organizations. The seeds of the summits were planted in 1975, when heads of state from six countries, known as the G6, gathered to discuss economic issues. Nearly 45 years later, it had grown into a forum of 20 countries' leaders, and invited guests from nonmember countries and international organizations that met to exchange thoughts and expertise on topics such as economic growth and disparities, sustainable development goals, innovation, infrastructure, global health, and free trade. At the June 2019 G20 summit, two leaders—US president Donald Trump and Chinese president Xi Jinping—attracted a lot of attention because of the trade war between their countries.
A trade war was an economic conflict resulting from trade when nations used tariffs or other against each other to gain advantages in trade, business, economic, and political positions. Since 1947, tariffs between countries had been falling in line with the General Agreement on Tariffs and Trade (GATT, originally signed by 22 countries) and its 1995 successor the World Trade Organization (WTO, with 164 member countries in 2018), from a global average of 22% to less than 5%. The resulting boom in trade led to the coining of the term globalization, meaning the integration of national and local economies, along with social and cultural elements. But in the second half of the 2010s, protectionism reasserted itself in grand fashion as the United States and China—the world's two economic superpowers—initiated rounds of tariffs, counter-tariffs, and uncertainties amid negotiations on a wide range of imports, exports, and structural trade issues.
By June 2019, the United States had set a 25% tariff on $250billion of Chinese imports, and China had retaliated with 20% to 25% tariffs on more than 5,000 US products, with the promise of more to come. In early August, Trump promised another 10% tariff on an additional $300billion of Chinese imports. The meeting between Trump and Xi at the G20 summit was a pivotal point, crucial to either ending the trade war or resuming stalled negotiations between trade representatives that had been underway for two years. The trade war contributed to China's slower GDP growth in the first quarter of 2019 (see Exhibit 1).
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Keywords: macroeconomic imbalances, balance of payment, foreign reserves, tariffs, industrial policies, IP protection, consumption vs. production, trade and welfare, efficiency vs. distribution, global business strategy
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