The Effect of the U.S.-China Trade War on Global Trade

The Effect of the U.S.-China Trade War on Global Trade

Ahu Coşkun Özer (Marmara University, Turkey)
Copyright: © 2020 |Pages: 15
DOI: 10.4018/978-1-5225-9566-3.ch003

Abstract

If one country attacks another country's trade with taxes and quotas, it is defined as a trade war. It is aimed to protect the domestic market from competition. The U.S.-China trade war begun on March 1, 2018, and was centered on the customs duty of 25% for the imported steel and 10% for the imported aluminum. The protectionist measures against each other in both countries have increased day by day. However, the impact of these protectionist measures on global trade is not yet known. In this chapter, the effect of the U.S.-China trade war on global trade is analyzed. For this reason, the export data of the U.S. to China and the global export data yearly is compared. According to the results of the linear regression analysis, if the value of the goods export of the U.S. to China increase 1 unit, the value of global export of the goods increases to 58 units. While the trade wars decreased the goods export from the U.S. to China, it has decreased global goods exports too. In 2018, developments in global commodity exports and the U.S. goods exports to China were observed in the same direction.
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Background

A trade war is defined as an attack on a country trade with protectionist policies implemented with taxes and quotas. When a country raises tariffs, the other country will respond with escalation and raise its tariffs (“Trade wars, Trump tariffs and protectionism explained,” 2018). The conservationist policies of the two countries are applied mutually.

A trade war is a result of the protectionist policies, it occurs when the country raises its imports tariffs on another country’s goods and that protectionist measures are applied using by tariffs. Tariff is tax on imported goods and services. Trade wars can start if a country perceive another country’s unfair practices on trade or if domestic industries want to be protected by making expensive and less attractive imported goods. Trade war eliminates the advantages of free trade (“Trade War,” n.d.).

As a result of trade wars, the protectionist policies applied by raising tariffs lead to an increase in prices. However, it is stated that the countries implementing these policies have gained competitiveness in certain sectors. With these policies, it is aimed that domestic enterprises are protected from competition. The impact of the protectionist policies in economies is the research topics. According to some studies in the literature, increasing the tariff causes welfare loss in countries. In addition, it is stated that both countries suffered from losses in tariff increase. For instance, according to Ossa (2014), if the optimal tariffs are 62% and when this rate to be 63% of the countries losses from welfare because of the breakdown of the international trade policy and government welfare losses are average 2.9%. However, if the governments negotiate, the possibility of the country welfare gains are average 0.5%.

Yan Dong and John Whalley (2012) states that increasing the protection in the U.S. and China yield substantial gains to the U.S. but losses to China and Japan. Protectionist policies causes much more welfare losses to China rather than the U.S. According to the Dong and Whalley (2012) if the U.S. increases it tariffs on China to 25%, the U.S. has a welfare gain of 67.215 billion dollars but China has welfare loss 39.021 billion dollars, if China retaliates and increase its tariffs to 25% for the imported the U.S goods, the U.S. welfare gain falls to 59.753 billion dollars.

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