2019 forecast: the US-China trade war to drag on

2019 forecast: the US-China trade war to drag on

The stand off between the economic giants will continue unless an unlikely win-win solution is found.

On June 15, 2018, the Trump administration ordered its first round of tariffs against China, a rate of 25% on 818 imported Chinese products valued at $34 billion. China took retaliatory action by imposing tariffs of a rate of 25% on 545 US goods valued at $34 billion.

Since June, the US and China have levied tariffs against each other in a tit-for-tat manner in what many have called a “trade war”. To date, the total value of tariffs the US has applied exclusively to China stands at about $250 billion, while Chinese tariffs against the US value at about $110 billion.

China wants a return to the status quo ante tariff-free trade relationship, but the Trump administration claims it will not cease imposing new tariffs until China pledges to go the negotiating table over the major US issue of concern, intellectual property (IP) rights.

IP AND A CHECK ON CHINA’S ECONOMIC CLOUT IN THE WORLD

One of President Donald Trump’s 2016 campaign promises was to “get tough” on unfair Chinese trade practices. He was mostly referring to Chinese practices regarding IP. The Trump administration and others have accused China of violating the legal protections of IP — from counterfeiting famous brands and stealing trade secrets to pressuring international companies doing business in China to share technology with local companies to gain access to China’s vast market.

While the Trump administration has legitimate grievances over Chinese IP practices, the White House’s trade war is also what it perceives as a nonmilitary means of combatting China’s growing economic strength in the world. China’s GDP was $23.12 trillion in 2017, based on purchasing power parity. On this measure, it is the world’s largest economy, with the US economy falling to third place, behind the EU.

MEASURING VICTORY?

It is unclear whether or not 2019 will see a “winner” to the trade war, or even how victory will be measured.

For the US, “victory” could possibly entail China conceding to go to the negotiating table privately and the US securing enough IP concessions to justify revoking some or all of the tariffs currently in place. Slowing fixed asset investment in China and growing Chinese debt suggests China’s economy is under pressure. Even if the headwinds are not directly attributable to the tariffs, Beijing may be motivated to start negotiating.

For China, a “victory” would likely consist of the US abstaining from imposing more tariffs or revoking the tariffs already in place without any formal negotiations over IP. The potential adverse effects of tariffs on the US economy — such as higher input prices for American businesses and inflation — might be enough to cause the Trump administration to scale back the tariffs. But given Trump’s decades-long support for tariffs, this is unlikely to eventuate.