Are US-China Tensions the Root of All Global Trade Problems?

China’s integration into the global economy triggered a new set of political realities, which are at the root of today’s global trade tensions. Two decades on, China has grown by all economic measures, but many of the US and other advanced economies remain frustrated with the country's limited market liberalisation.

Ever since July 2018, the two countries have been involved in several negotiations and imposing tariffs, consequently leading to the start of the US-China trade tensions.

Tariff Trade War Timeline: 2018-2020

The US delivered 3 rounds of tariffs on Chinese exports to the US in 2018, the first of which came about in July 2018.

By the end of December 2019, the US imposed tariffs on more than $360 billion of Chinese goods. China retaliated with tariffs on more than $110 billion of US products.

Phase one trade deal was signed. China pledged to boost US imports by $200 billion above 2017 levels and strengthen intellectual property rules while the US agreed to halve some of the new tariffs it had imposed on China.

By mid-2020, China had only met 28% of its commitments. There are also many more substantive issues – such as state-owned enterprises – which have not been addressed yet.

Impact on Global Economy

The world's two biggest economies have become less competitive

The annual ranking by the IMD World Competitiveness Centre saw the US slip from 3rd to 4th in 2020 and China slipped 6th place to 20th place.

Corporations have become targets on both sides

The US added over 60 of Chinese firms to trade blacklist. China has taken to non-tariff measures that discriminate against foreign companies.

US-China trade war gives licence to others

The actions of the US and China in an escalating trade war have given licence to others to pursue protectionist agendas. The economic crisis caused by the COVID-19 pandemic has fuelled this further.

The Futures of Trade Geopolitics

There are three possible scenarios for the future, the most likely being that global trade tensions get worse before they get better.

1. The ‘continuity’ scenario

China reforms its domestic economic structure and undergoes significant trade liberalisation to fit more comfortably into the existing global trade order, which remains largely the same.

2. The ‘risk’ scenario

Western economies led by the US use interventionist politics to halt, or even reverse the integration of China into the global economy. The outlook for the global trade order is uncertain.

3. The ‘opportunity’ scenario

The global trade order and the Chinese economy both undergo some level of reform to reconcile major issues and take tensions out of the system, delivering public goods for all stakeholders.

Global Trade Evolution

Rethinking International Supply Chains

The shock of the COVID-19 pandemic and global trade tensions have driven a recalibration of supply chains. Many companies are choosing to simplify and diversify their global value chains. 

Shifts in the trade policy agenda starting from early 2018 have caused some firms to consider developing production bases within advanced economies. Overall a major recalibration of supply chains will take place over the next several years.

Manufacturing Leaving China

Businesses have been moving some of their production out of China to Mexico as well as other low-cost labour centres in Asia.

Global Trade Recommendations

International Business

  • Be ready to reorganise your business to enable you to operate in a climate of growing protectionism.
  • Consider how your supply chains can be recalibrated in order to balance efficiency, risk and resilience.
  • Be vocal in identifying opportunities with key trading partners for governments to act on.
  • Make the case for international – if not multilateral – agreement on key issues such as data, e-commerce, and services.
  • Make the case for a rules-based trading system and WTO reform towards government.

Government

  • Like-minded governments must come together and defend global trade. This should include finding common ground for progress on WTO reform.
  • Governments must be more innovative with their trade policy in terms of seeking out deeper regional and bilateral deals and pursuing opportunities at the international level in specific sectors.
  • Governments and other stakeholders should make the case domestically for international trade rather than allowing it to be scapegoated.
  • Building national security into trade should be done in a way that is strategic and, constructive, not as a short-term protectionist measure.

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