How a trade war can cripple world economies

Trade wars have been around for centuries, but who really wins when a trade war takes place between countries: history indicates trade wars are harmful to global economies.   I shall explore these trade wars, currency reserves, intellectual property, mobile devices, and rare earth. 

The Trade War Today

Since last year President Trump has been in trade disputes with multiple countries: 

  • Canada and Mexico
  • European Union  
  • Japan
  • China

Trade disputes usually result in a tit for tat for all tariffs, duties, or disagreements.  I am focusing on the escalating trade war with China, as neither leader seems willing to back down and it could be a long battle to see who is the victor.  

The Peoples Republic of China (PRC) is an authoritarian power and a peer competitor of the USA rather than an ally.   The two countries do approach trade, especially access to their home markets in a similar fashion.  

The USA has been in an ongoing trade deficit with China for over 25 years and has accumulated a $6 trillion dollar trade deficit.  Why has this been allowed to go on for so many years? Why is this deficit only being addressed now?  

In 2018, the US trade deficit with China was $419 billion, which has become a useful political tool for Washington that can be powerful and dangerous.   This is because it focuses on the symptoms, rather than the cause. 

Thus far, the PRC’s strategy has been to respond to U.S. measures in kind. This reciprocity is somewhat ironic, given widespread complaints about Beijing’s lack of market access reciprocity.

President Trump could “win” this trade war by getting Beijing to seriously address the structural and intellectual property concerns raised in the US Trade Representative report this past March.  The challenge is whether Xi can make the changes and continue on his China Dream.  

This week China state media published that China would “never accept” the US suppression of the Chinese development.

The growth rate of the Chinese economy is slowing. Beijing has taken the economic slowdown in a perfect stride by offering a serious stimulus package, including more fiscal spending and more monetary easing to bolster the local economy.   

Currency Reserves (Debt)

Public debt is the total amount of money owed by the government to creditors. It is usually presented as a percentage of gross domestic product (GDP).

The United States has the largest global currency reserves totaling $10.7 trillion; reserves held in US dollars are $6.6 trillion or 62% of the allocated reserves that is followed by the Euro at 20%. 

China is sitting on $3 trillion in currency reserves.  The US debt to China is $1.2 trillion. 

Based on 2017 Debt to Global percentage of debt

Growing debt is the major problem, as it finances bubbles at home and abroad.  In order to fully analyze each situation, you need to compare the debt to the GDP and determine the relevant percentage and the structure of the economies. 

As the trade war escalates a key figure to watch will be the debt to GDP ratio, as debt increases and GDP declines it can put the economy into a tailspin and depression.

The chart below compares statistics from 2017 – 2018, looking at the debt to GDP, the domestic growth and the percentage of the debt to GDP. For Debt and GDP, the letters represent T = Trillion, B = Billion.

CountryDebtGDPGDP GrowthPercent2023 Project
USA$21T$19.4T2.2%105%116%
China$5.2T$12T6%47%69%
Canada$671B$1.7T1.9%40%38%
Mexico$446B$1.2T1.8%47%49%
Europe$12.7T$18.8T0.2%86%82%
Japan$4.4T$4.9T0.8%236%227%
  • Remember these are projections

The key to government debt is that a government must be able to run a primary surplus (the excess of tax revenues over program spending) sufficient to pay back what was borrowed by a set deadline. 

Public debt also called “government debt” or “national debt” includes money owed by the government to creditors within the country (domestic or internal) as well as to international creditors (foreign or external).

Intellectual Property

United States President Donald Trump has repeatedly lashed out at China’s lax IPR protection laws, forced technology transfer, and alleged IP theft.

Foreign firms have long complained that enforcing their intellectual property rights in China is difficult due to judicial protectionism, challenges in obtaining evidence, small damage awards and perceived bias against foreign firms.

U.S. Companies facing licensing challenges in China

China will continue to improve IPR protection to bolster innovation, support industries, and serve its own interests rather than bowing to US pressure.

Last year, the US government banned sales by American companies to China’s ZTE Corp to punish the Chinese telecommunications equipment maker after it allegedly made false statements during an investigation into sales of its equipment to Iran. 

The example of the Chinese company ZTE is telling. With 74,000 workers jobs risked by its expulsion from the U.S. economy, Beijing focused the entirety of its next move on attempting to remedy this.

Impact of malicious cyber activity on companies

“As the US ignores all the progress China has made and the huge profits American companies have earned in China market, the consensus is building among Beijing officials that the US is just using IPR as an excuse to contain China,”

Mobile devices

Trump is targeting Huawei, the worlds largest maker of telecoms equipment. Trump has banned their products in America and put restrictions on US suppliers for providing products to Huawei.  Any US company wishing to conduct business with Huawei must have a license.

The US is worried about national security concerns, which Huawel has repeatedly denied. “This decision threatens to harm our customers in 170 countries, including more than 3 billion consumers”

Huawei is taking the US government to courts, Huawei’s chief legal officer, Song Liuping, said “The U.S. government has provided no evidence to show that Huawei is a security threat,” Mr. Song said. “There is no gun, no smoke. Only speculation.”

Thankfully, Xi has not retaliated by restricting American mobile phone producers (Apple) in China. They have not restricted manufacturing or blocked the selling of phones in China. The Chinese market represents 20% of Apples revenues and a majority of Apple products are assembled in China.

Apple revenues in China were $18 billion in 2017 and have declined to $13 billion in 2018. The Chinese are very loyal to China and there is a growing Apple boycott that could cost the Cupertino company as much as half of its sales in the country.

Apple manufactured the majority of its products in China for export to other countries. As the most valuable American tech company becomes more dependent on Chinese suppliers, it is also bracing for trade friction between the U.S. and China.

Rare Earth

China is the largest global producer which is vital for many American industries including high growth sectors such as the electric car and wind turbine production.

The United States imports close to 80% of rare earth from China, according to US government data. The one rare earth mine operating in the US, sends it ore to China for processing and faces a 25% import tariff.

Last year, the US Geological survey designated these minerals critical to the economy and national defense.

China is seriously considering ristric†ing rare-earth exports to the US. Rising tensions have led to concern that Beijing will use its dominant position as a supplier of rare earth. Back in 2010, China restricted Rare Earth exports to Japan in retaliation over a territorial dispute.

A representative of China powerful National Development and Reform Commission again hinted at the possibility of action on rare earths. “What I can tell you is that if anyone wants to use products made of China’s rare earth exports to contain China’s development, the people of Ganzhou and across China will not be happy with that”.

If rare-earth exports are brought into the trade war this could have a major impact on US industries worth trillions of dollars. Chinese state media has published a warning “Don’t say we didn’t warn you”.

President Trump has spared tariffs on Chinese rare-earth exports. Beijing however, has raised tariffs on US rare earth metal ores from 10% to 25%

Conclusion

A lot of elements play into the trade war, which will be economically damaging to the people, businesses, and countries globally.

Well business declines in China, buyers need to find new suppliers in developing countries. These developing countries have a growing trade deficit with the USA. The deficit will decrease with China but it will grow in other developing countries.

China is an emerging economy and will soon be the largest global economy; the long-term effects will be damaging to the overall US economy.

“If a trade war between the United States and China contributes to a global slowdown, the spillover effects on emerging market and developing economies could be profound,” warned Shantayanan Devarajan, the World Bank’s senior director for development economics.

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