Ayesha Tahir- 18542 International Political Economy

MBA-M Trade, Production and Financial Systems

Examine the ongoing trade war between China and the US. Who benefits and who loses in
a trade war? What would be the alternatives to a trade war? Please explain your answer in
detail and apply the concepts from your readings to shape your answer.
In the book “Global political Economy_Evolution and Dynamics” [ CITATION Bri161 \l 1033 ]

explains meaning of trade as an exchange of goods and services among two or more individuals.

This mostly refers to domestic trade. International trade, on the other hand, refers to exchange of

commodities beyond national borders. Different perspectives exists that explain the how trade

works in economies. According to liberal economies, free trade is a win-win outcome for

economies because of increased efficiency and productivity. Free trade encourages on positive

sum view, which derived from a theory of comparative advantage. This theory states that

countries should specialize in those products and services that they can produce efficiently.

However, mercantilist approach believes in giving priority to domestic economy by protecting its

produced goods and services from competition from abroad. For that purpose, they tend to put

protectionist policies to augment national production and welfare. Under this perspective, nations

should have absolute advantage in trade, which is a zero-sum game. Protectionist’s policies

include tariff, import quotas, currency controls, subsidies, voluntary export restraints and

administrative regulations.

United States is a neoliberalist economy, which supports free trade, have a flexible exchange

rate, is an import-oriented nation, and has set transnational corporations around the world,

majority in developing countries to induce benefits of cheap labor and other raw materials. On

the other hand, China a mercantilist economy, which supports trade with some protectionist

policies. It does not have a flexible exchange rate; rather it has pegged its yuan to US dollar. It is

an export-oriented nation, which has developed certain export processing zones in its country,

along with export promotion incentives to produce and supply goods to different economies.
Ayesha Tahir- 18542 International Political Economy
MBA-M Trade, Production and Financial Systems

These features explain the kind of approach both these nations have adopted over the past years

and continue to follow.

Moreover, this book also discusses that after World War II, Us emerged as a hegemonic state,

which has risen the number of transnational corporations (TNCs), since 1950s. This global

production structure has integral impact on global trade, economic structures, government

policies and infrastructural and industrial developments. The emergence of global supply chain

along with TNCs have affected regional and national developments around the world. Therefore,

government policies towards foreign investment has also changed. The ultimate control of TNCs

on capital given them a great deal of strategic power and dominance over global political

economy. In addition, this has augmented their influence on international trade negotiations and

agreements that have become a hot topic of discussion among contemporary global political

economy.

In past years, United States had a fixed its currency US dollar with gold. In late 1960s the dollar

held outside US economy exceed the amount of gold. Hence, it became inevitable to follow

floating exchange rate. This happened due to rise of investments in number of US TNCs outside

US, military spending and a desire by foreigners to hold US dollar. This made situation volatile

and people started selling US dollars in the market. This speculation broke US broke with gold.

This overvalued dollar, which made its exports expensive and imports cheaper, deteriorated US

trade balance. In 1971, President Richard Nixon came up with “Nixon Shock”, in which he

changed US, monetary system by ending dollar-gold peg and simultaneously imposed 10% tax

on imports. This caused devaluation of US currency as it began to float in free market through

forces of demand and supply. The ultimate objective of it was to restore US economy’s

competitiveness.
Ayesha Tahir- 18542 International Political Economy
MBA-M Trade, Production and Financial Systems

In 2000s currency misalignment again occurred, but this time among US and China. US claimed

that China has pegged its currency by fixing it and deliberately devalued as well. That is to get

benefit of cheaper exports around world, which would increase China’s produced good demand

and imports that way becomes expensive, maintaining a trade and balance of payment surplus.

However, this devaluation has made US imports cheaper and exports expensive, reducing their

competitiveness in world along with its demand. Hence, US balance of payments have become

deficit. This argument regarding accurate currency value is complicated because the growth of

these two nations are dependent on each other that will be discussed later in this answer. Over

the years, this has increased competitiveness, volatility and complexity in relationship between

these two nations.

China has over the past years have become an integral nation in international political economy.

It has attracted large amounts of foreign direct investment from nations like US and European

Nations. Money flowed into China because of its trade surpluses. Chinese government did not

allow its currency to rise in value by taking investment (money) coming into China and sending

it to US, through buying back US government bonds. This easy money coming into US was a

positive sign for them as US can now keep their interest rates low and finance its large budget

deficits. This arrangement enabled US to wage war against Iraq and cut taxes. Similarly, low

interest rates hiked consumption and flourished housing sector. This way both the nations were

being benefitted, US from high consumption and China from large number of exports and trade

surpluses and economic development. In short, this explains that US is borrowing money to

maintain its consumption level, while on other hand China is completely dependent of exports

for its economic growth, which in years have increased employment opportunities and curbed

social unrest. This US-China financial relationship is not sustainable. We can see that in US
Ayesha Tahir- 18542 International Political Economy
MBA-M Trade, Production and Financial Systems

financial crisis of 2008. US was dependent on China to continue investing in US to finance

budget deficits in wake of financial crisis when government bailed out financial institutions to

take economy out of recession. This weakness of US is exposed to China and if China someday

decides to take out money from US, it will make US pay the real cost of budget deficit in a way

that Federal Reserve will raise the interest rates to attract investors, which will hamper US

consumption and overall economy and result fall in growth. This scenario can cause global chaos

and a turmoil in US economy. However, it will have repercussion on US economy as well

because a decrease in US consumption will hamper Chinese exports, employment levels and can

result in social unrest. To avoid repercussions, China in increasing its domestic consumption by

increasing its domestic spending through “Made in China 2025” plan. This is done through

spending on infrastructural developments and discouraging saving phenomena by providing

robust social security programs. This explanation pretty much sums up the relationship between

US and China, which can affect other global political economies.

An online article [ CITATION Jam19 \l 1033 ] on website “Investopedia” explains trade war as a side

effect of protectionism, where one nation retaliates against protectionist policies imposed by

other by raising import duties, tariffs and imposing import quotas. These are steps taken by

government to retain its nation’s competitiveness. The paper “The China-US Trade War: Deep

rooted Causes, Shifting Focus and Uncertain Prospects” [ CITATION Hun20 \l 1033 ] explained that

US has waged a trade war against China, because of the threats to itself as US hegemony. It has

been done by imposing additional tariffs on goods imported from China. Along with this US

have impeded and placed stringent restrictions on transfer of technology to China and business

activities of particular company, Huawei. This seems more of a tech war than a trade war that is

straining relationship of US and China.

Ayesha Tahir- 18542 International Political Economy
MBA-M Trade, Production and Financial Systems

This trade war between US and China escalated when sanctions were imposed on China as per

Section 301 of Trade Act in March 2018. The widened the preexisting trade dispute between two

countries. As a retaliation tariffs’ were increased, which further lead to trade war. The factors

that lead to trade war as mentioned as follows:

 US is dissatisfied from China’s unfair practice of currency control. They have devalued

their currency to make its imports cheaper in the world market. Threatening US market

exports and balance of payments.

 The political and economic views, as discussed earlier diverge from each other’s.

 US now sees China as a threat to its hegemony, which it has maintained since past many

decades, does not want to lose to an Asian power.

These factors have led to trade war from which their arrangement in past have moved from

engagement to decoupling.

To dissuade rise of China, US is making sure to put impediments in transfer of technology,

turning this trade war into more of tech war . They are making it difficult for China to import

technology, by curbing foreign direct investment. On the other hand, China is making it stringent

for US to work with its high tech companies. Huawei is a company, who is second largest

company to sell smartphones, leader in 5G facilities and world’s largest supplier of

telecommunication network. It tried to operated and sneak in US territory. However, I faced with

rigorous hurdles. US government took several steps impede form entering into US market. They

did this by banning sales of its equipment; CFO of the company was arrested on December 1 st

2018 for allegedly violating US trade sanction against Iran. On 15 th May 2019, US Commerce

Department added Huawei and other 68 companies on Entity List, which requires companies to
Ayesha Tahir- 18542 International Political Economy
MBA-M Trade, Production and Financial Systems

have a license to carry on activities in US. This ban Huawei to buy parts and components from

US without US government approval. Similarly, on same day, President Trump passed executive

order to bar US companies from using telecommunication service by countries posing risk to

national security, which led to led on doing business with Huawei. This ban would not only hurt

Huawei, but will impact business who are its suppliers, including US companies Qualcomm,

Intel and Micron Technology, who have spent $11 billion. Negative impact on profitability of

Huawei will simultaneously affect stock pricing of these companies. The ban was placed in total

of 180 days. However, after meeting President Xi in Osaka on 29 June 2019, President Trump

decided to curb some parts of ban.

As discussed earlier, that if this arrangement between US and China gets strained, both parties

will lose out and will have detrimental effects on world economy. Due to high tariffs on Chinese

exports, TNCs may relocate to other nations to avoid reduced demand for high priced products

due to tariffs. This may affect overall GDP of China’s economy as stated in “The Guardian”

online article [ CITATION Dav19 \l 1033 ] which says that China’s GDP fell from 6.3% to 6% in

three months amid US China trade war. This has been recorded as lowest in a quarter as

compared to last year’s same quarter. Besides that, China’s productivity growth might be slowed

down because US has placed hurdles for Chinese companies to acquire US high tech company

through mergers and acquisitions. Moreover, China is catching up with developed nations by

importing technologies from abroad, which has contributed in high economic growth. However,

due to trade war with US it can miss this opportunity to have high economic growth rates and

high levels of productivity. Which is already falling due to their ageing population and non-

availability of surplus labor. Hence, China will lose out eve on the Plan for 2025 “Made in

China” which could affect their vision of becoming an industrialized nation.

Ayesha Tahir- 18542 International Political Economy
MBA-M Trade, Production and Financial Systems

On the other hand, US economy will also hit by this trade war in a way that China is considered

second largest economy, with center of global supply chain, and supplying consumer goods and

components to companies based in US. This makes up large part of trade of US with China.

Hence, due to retaliation, US will face costly imports deteriorating its balance of payments and

consumption in an economy. Moreover, US based TNCs will have to relocate to different

countries and might lose their efficiency because of that, which China was able to provide it. In

addition, US have to cover up huge budget deficits that it had been incurring, if China withdraws

its money from US leaving US in trap. Hence, US will lose its market share from China and have

to switch to more expensive sources to import.

Therefore, there is no win-lose nation that would result out of this war. Besides the impact on

individual nation, the global economy also has to bear the repercussions of this trade war.

According to “The Guardian” online article [ CITATION Dav19 \l 1033 ] International Monetary

Fund (IMF) decided to cut its global economic forecasts from 3.2% to 3% in lieu of this trade

war. This shows how two strong economies can have devastating impact on world economic

growth. In result of this war, the world economies may be disintegrated in two blocs pivoting on

US and China. Supply chains have to be reshaped and have to be adapted to this new change.

TNCs can no longer operate effectively and efficiently with all these tariffs and other

protectionist policies. Overall, global trade and investments will degrade and hamper, slowing

down global economy on whole. Other than that, in present situation of global pandemic of

Coronavirus, where business and shutting down, stock markets are falling each day and

worldwide shutdowns have taken place. To continue this war, it will further pull world into

global recession. After China US have been affected most with this virus. It becomes inevitable

to end this war and not continue it.

Ayesha Tahir- 18542 International Political Economy
MBA-M Trade, Production and Financial Systems

Alternatives exists besides indulging into trade war are China. Firstly, US cannot afford to wage

a trade war with China. These are just temporary measures taken by President Donald Trump to

make his candidacy stronger for upcoming US election in 2020. This was done in act of

patriotism. Since, US have no other choice to grow with China rather than without China.

Moreover, if US turns its back at China, it will indulge in importing from rest of the world,

which would in a way again lead to trade deficit, as stated in paper “A better Alternative to Trade

War” [ CITATION Lau18 \l 1033 ] US has an investment-saving imbalance. To correct this and trade

deficit, if an autonomous increase in demand for exports happen, it will improve real GDP of

US, which would result in improved trade deficit. To make it happen US have to work on

exporting agricultural products, energy, education and tourism to China. Other than that, they

have to cut down their budget deficits, by cutting on defense budget and should redirect it to

increase exports, by providing export-processing zones. Due to Coronavirus, many people would

be unemployed, hence, they should make sure to provide employment opportunities through

these export-processing zones to augment exports and bring out nation from recession, which is

expected to occur due to coronavirus.

In sum, US and China need to stop this trade war, otherwise both nations will lose out; ultimately

have spillover effects on global economy. US should begin working on exports side to correct its

balance of payments.
Ayesha Tahir- 18542 International Political Economy
MBA-M Trade, Production and Financial Systems

References

Brien, R. O., & Williams, M. (2016). GLobal Political Economy_Evolution and Dynamics.

Palgrave Macmillan.

Chen, J. (2019, August 21). Trade War. Retrieved from Investopedia:

https://www.investopedia.com/terms/t/trade-war.asp

Davis, R. (2019, October 18). China's Quaterly economic Growth Sinks to 26-year Low Amid

US Trade War. Retrieved from The Guardian:

https://www.theguardian.com/world/2019/oct/18/chinas-quarterly-economic-growth-

sinks-to-26-year-low-amid-us-trade-war

Hung, C. (2020). The China-US Trade War: Deep rooted Causes, Shifting Focus and Uncertain

Prospects. Asian Economic Policy Review, 55-72.

Lau, L. J. (2018). A Better Alternative to Trade War. Social Science Research Network.
Ayesha Tahir- 18542 International Political Economy
MBA-M Trade, Production and Financial Systems

Critical Questions

1. With reference to repeated economic crisis, is global financial system stable?

2. In Mundell- Fleming model, why does it get hard to follow independent monetary policy, a
stable exchange rate and free capital flows?
3. What parameters justify fair trade? Isn’t this a normative concept?