The Impact of US, China Trade War on Economy

All wars have collateral damage. In the case of the China trade war, the long-term supremacy of the U.S. is one of them. Regrettably, the trade war initiated by the United States will likely inflict serious damage to the global economy. Countries that impose tariffs and countries that are subject to tariffs would experience losses in economic welfare, whereas countries on the side-lines would experience collateral damage.

For China, the US-China trade war has up until now ‘only had a restricted impact on Japan’s lukewarm economic growth’, but the impact is likely to spread if Washington imposes further consents on Chinese imports. Japan is the second-biggest economy in Asia and the third-biggest in the world behind the US and China, hence the risks are high not only for Japan — but for global trade.

According to Business Radio Podcasts,

“Of the two likely outcomes of the tariff war, Berkovich identified the implications for the financing of the U.S. debt is more significant in the long run. Thus far, trade with China has helped finance U.S. debt, and a reduction in the volume of that trade means others have to pick up the tab. “When we shut down the trade channel by which dollars are sent out to broaden and come back as purchases of assets, we are actually forcing the debt in the U.S. to grow,” he said. “We’re forcing U.S. households to buy the debt, and that’s going to long term drive the economy down.” 1

What Does This Mean for Consumers?

1 .Price Rise

The 10% tariffs announced a couple of weeks ago will increase prices on just about everything American consumers buy including items like smartphones, toys, shoes, and furniture. The increase in tariffs could cost the average household an additional $650 a year, according to estimates from Kathy Bostjancic, Chief U.S. Financial Economist for Oxford Economics.

2. Stock Market Turbulence

The most recent escalation in the trade war caused panic among investors, causing all three major U.S. stock indexes to nose-dive. Investment analysts expect the instability to continue until the United States and China find common ground with their differences.

The volatility has an impact on the value of workers’ 401(k) plans and other retirement accounts, although investors are usually advised against making changes until the markets stabilize a bit.

3. Dip in Interest Rates

The Federal Reserve lowered the benchmark interest rate on July 31, due to the growing trade tensions, which was also seen as one of the main risks to the economy. Economists predict that the Fed will cut rates to limit the damage to the economy if the trade situation continues to worsen.

The low-interest rate may have a mixed effect on people. On one hand, mortgages and auto loans are inexpensive, but then again their savings would earn less interest.

[Source 2]

Increased Economic Angst

A prolonged trade war is bad news for the overall economy. Businesses tend to hold off on investing in new projects or hiring until a trade deal is in place. Such a pullback could cause a sluggish job market which, in turn, could affect consumer spending, which is the principal driver of the U.S. economy.

Resolving the trade war relatively soon will help encourage businesses to increase investments and persuade consumers that it’s safe to spend.

Is This an All-Out Trade War?

Dark times may soon be a reality for the U.S. economy as the repercussion of President Trump’s latest threat on August 1 to levy 10% tariffs on roughly $300 billion of imports from China. In response, China tolerated the Yuan to weaken against the dollar and thus mitigating the impact for Chinese exporters.

Trump has also ordered additional tariffs of 25% and 10% respectively, which are to be imposed on steel and aluminum imports into the U.S., on national security grounds. Although the tariffs do not target China particularly, China is the leading producer of both steel and aluminum and has long been accused by the U.S. and others of abandoning cheap metal in international markets.

Although Trump is openly steering towards China, it currently looks more likely that the U.S. and China will look to bring about some sort of solution that will not threaten or harm either economy. China’s leadership has long-stood on a foundation of support derived from providing continued growth and development, while Trump has often publicized the performance of the U.S. stock market during his tenure and the on-going development of the US economic picture.

As per HIS Market,

“The timing of the trade war (never good) could not be worse. It is occurring as monetary stimulus is beginning to wear off, oil prices are elevated, and political risks are on the rise. Global growth is beginning to slow—the only question is, how much?” 3

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Source Links:

Source (1): https://knowledge.wharton.upenn.edu/article/u-s-china-tariffs/

Source (2): https://www.cnbc.com/2019/05/13/china-is-raising-tariffs-on-60-billion-of-us-goods-starting-june-1.html

Source (3): https://ihsmarkit.com/solutions/us-china-trade-war-impacts.html