A full-scale trade war between China and the United States appears imminent following President Donald Trump's recent threat to impose tariffs exceeding 100% on Chinese goods imports starting Wednesday, April 9. In response, China has vowed to fight back vigorously, asserting that it will not succumb to what it perceives as US coercion. This escalating trade conflict raises critical questions about its implications for the global economy.
In 2023, the trade in goods between these two economic giants amounted to approximately $585 billion (£429 billion). The balance of trade heavily favors China, with the US importing $440 billion worth of goods compared to just $145 billion in exports to China. This imbalance has resulted in a substantial trade deficit of $295 billion for the US, accounting for around 1% of its economy. However, this figure is notably lower than the $1 trillion deficit that Trump has claimed during recent statements.
During his first term, Trump implemented significant tariffs on Chinese imports, which have remained in place under President Joe Biden's administration. As a result, the share of goods imported from China has decreased from 21% of total US imports in 2016 to 13% in 2023. Despite this reduction, analysts highlight that some Chinese exports have been rerouted through Southeast Asian countries to evade tariffs.
China is steadfast in its refusal to back down from Trump's escalating tariff war. For instance, the Trump administration imposed a 30% tariff on imported solar panels from China in 2018. However, a 2023 report from the US Commerce Department revealed that Chinese manufacturers had relocated their assembly operations to countries like Malaysia, Thailand, Cambodia, and Vietnam, thus circumventing these tariffs. Consequently, the new reciprocal tariffs on these nations will likely lead to increased prices for a broad range of goods originating from China.
In 2024, one of the most significant categories of US exports to China will be soybeans, primarily used for feeding China's estimated 440 million pigs. Additionally, the US exports pharmaceuticals and petroleum to China. Conversely, China exports large quantities of electronics, computers, toys, and batteries—essential for electric vehicles—to the US. Notably, smartphones constitute the largest category of US imports from China, representing 9% of total imports, with many of these devices manufactured for Apple, a leading US multinational. The tariffs imposed on China have significantly impacted Apple's market value, resulting in a 20% decline in its share price over the past month.
With the existing 20% tariffs already set to increase the cost of these imports, a potential rise to 100% tariffs could lead to even more dramatic price increases. Moreover, US imports into China will also see price hikes due to retaliatory tariffs, ultimately affecting Chinese consumers as well.
Beyond tariffs, both nations have other tools at their disposal to inflict economic damage. China plays a crucial role in refining essential metals like copper, lithium, and rare earths, and could impose restrictions on the export of these materials to the US. This strategy has already been observed with germanium and gallium, two materials vital for military applications. Meanwhile, the US could tighten its technological blockade on China, initiated by Biden, making it increasingly difficult for China to import advanced microchips crucial for technologies like artificial intelligence.
Trump's trade advisor, Peter Navarro, has suggested that the US could pressure countries such as Cambodia, Mexico, and Vietnam to limit trade with China if they wish to maintain access to the US market.
The combined economic power of the US and China accounts for about 43% of the global economy, according to the International Monetary Fund. If these two nations enter into a full-blown trade war that stifles their economic growth or triggers a recession, the repercussions would likely extend beyond their borders, adversely affecting global economic growth and investment.
Additionally, China, as the world's largest manufacturing nation, is already running a goods surplus of nearly $1 trillion, exporting more than it imports. This surplus is often supported by domestic subsidies and financial assistance for favored firms, leading to products being sold below their true production costs. Should Chinese goods be unable to enter the US market, there is a risk that these products could be dumped in other markets, potentially harming local producers and threatening jobs in those countries. The lobby group UK Steel has already raised alarms about the potential influx of excess steel into the UK market, highlighting the global ramifications of a trade war.
In summary, the potential fallout from a full-scale trade war between the US and China is profound, with experts widely predicting that the negative impacts would resonate throughout the global economy.
