NEWS
10/05/2019 8:21 PM AEST

The Trump-China Trade War Explained In A Way That Won't Make Your Brain Hurt

This stuff matters.

Beijing has vowed to retaliate after Donald Trump raised duties on 200 billion US dollars (£155 billion) of Chinese imports from 10% to 25%.

China’s Commerce Ministry said would take “necessary countermeasures” but gave no details.

The increase went ahead after US and Chinese negotiators began more talks in Washington aimed at ending a dispute that has disrupted billions of dollars in trade and shaken global financial markets.

But what does this actually mean?

China and the US are currently engaged in a battle of wills over trade between the two countries. So far its effects are mostly felt in those two countries but if things escalate it could have serious global repercussions. 

In sum, this stuff really matters.

What are tariffs?

Tariffs are used to protect a country’s own industries against competition from abroad. 

Take the UK textile industry for example – a factory in the UK making t-shirts has to pay its staff the minimum wage and adhere to relatively strict safety standards, both of which increase the cost of production.

But a factory in a country like Bangladesh for example, can pay its staff less and therefore charge less for its t-shirts.

Tariffs aim to level the playing field. 

Why is Trump so obsessed with tariffs?

It’s all about balance.

A trade deficit is the difference between the value of imports and exports between two countries.

The trade deficit between the USA and China is huge – Americans spent $323.3bn more on Chinese goods last year than the Chinese spent on American goods. 

Statista

This is essentially US dollars flowing out of the country into the pockets of foreign players. If they decided to sell these dollars all at once, it could seriously devalue the US currency.

By increasing tariffs, Trump aims to make Americans spend less on Chinese goods and more on American goods, thereby reducing the deficit.

In the latest round, Trump has targeted Chinese-made internet modems, routers and other data transmission devices.

Why is this a bad thing? 

Because China can impose tariffs on American goods as well and when a tit-for-tat escalation occurs it can become what’s known as a trade war.

Statista

Who Usually Wins A Trade War?

In short, nobody.

There hasn’t been an international trade war since the 1930s, in part because American leaders knew their history and were aware of how disastrous the last one was.

Enter Donald Trump.

Only it’s not easy in the slightest.

The internationally-respected Fraser Institute, notes of the “horror story of the United States’ anti-trade Smoot-Hawley Act of 1930” which triggered the last global trade war:

“Most economists believe the result was disastrous. World trade fell by 66% from 1929 to 1934; US exports and imports to and from Europe each also fell by about two-thirds. The causes were varied but one influential study, though it examines trade only through to 1932, estimates that the Smoot-Hawley inspired trade war caused half the decline.

“Benefits? The depression worsened for farmers and workers, the supposed beneficiaries. Smoot and Hawley were defeated in their re-election bids.

“The results would be worse now.”

Who loses?

In a worst-case scenario - everyone. But even before a global trade meltdown occurs, any American who produces goods to export to China will be hit hard.

A good example of this is beef. China imports a significant amount of American beef but the ongoing trade dispute has seen China impose higher tariffs on the meat.

This means Chinese consumers have been spending less on US beef which has had a serious effect on American farmers.

Politically, this is extremely risky for Trump – farmers form a core part of his support base and he can’t afford to lose them in the run up to the 2020 presidential election.

Statista

Could it affect the UK?

Yes, pretty disastrously if things escalated to a point outlined above by the Fraser Institute.

But even if things didn’t get that bad, we could still be hit – China isn’t the only country being hit by Trump’s tariffs and last month he announced $11bn of EU-produced goods including everything from aircraft and aircraft parts to cheese, wine and olives would be subject to tariffs.

Obviously, Britain doesn’t plan to be part of the EU for much longer but post-Brexit we will have to negotiate a trade deal with the US and tariffs will undoubtedly play a part.

Speaking about the latest round of tariffs, French Finance Minister Bruno Le Maire, said further escalation could “destroy” jobs across Europe.

He said there is “no greater threat to world growth”, adding: “It would mean that trade tariffs go up, fewer goods would circulate around the world and jobs in France and in Europe would be destroyed.”

What’s the bigger picture?

Even without the trade war, China-US relations have continued to deteriorate, with an uptick in tensions between the two countries over the South China Sea, Taiwan, human rights and China’s plan to re-create the old Silk Road, called the Belt and Road Initiative.

The two countries are also sparring over US allegations that China steals technology and pressures American companies into handing over trade secrets, part of an aggressive campaign to turn Chinese companies into world leaders in robotics, electric cars and other advanced industries.

Anything else?

As a reward for getting this far, here’s a video of all the times Trump has said “CHINA!”