The US - China Trade War Explained
The trade war between the US and China is one of the most significant economic events of the past decade. It has affected the global economy, trade patterns, and consumer prices. But what are the causes and consequences of this conflict? And what are the prospects for a resolution? In this post, we will try to answer these questions and provide some insights for savvy investors.
What is the trade war?
The trade war is a series of escalating tariffs and other measures imposed by the US and China on each other’s goods and services. A tariff is a tax on imports that makes them more expensive and less competitive in the domestic market. The US and China are the world’s two largest economies and trading partners, so their trade war has a huge impact on the global economy.
The trade war started in 2018, when the US accused China of unfair trading practices, such as stealing intellectual property, subsidizing domestic industries, and manipulating its currency. The US demanded that China make structural changes to its economic policies and reduce its trade surplus with the US. China denied the accusations and refused to comply with the US demands. The US then imposed tariffs on hundreds of billions of dollars worth of Chinese goods, and China retaliated with tariffs on US goods. The trade war has since expanded to include other issues, such as technology, security, and human rights.
What are the effects of the trade war?
The trade war has had negative effects on both the US and China, as well as the rest of the world. Some of the effects are:
- Reduced trade and growth: The trade war has reduced the volume and value of trade between the US and China, as well as their trade with other countries. This has lowered the global demand and supply of goods and services, and slowed down the economic growth. According to the International Monetary Fund (IMF), the trade war could lower the world GDP by 0.8% by 20201.
- Higher prices and inflation: The trade war has increased the prices of imported goods and inputs for domestic producers, leading to higher costs and lower profits. This has also raised the inflation rate and reduced the purchasing power of consumers. According to a study by the Federal Reserve Bank of New York, the trade war could cost the average US household $831 per year in higher prices2.
- Uncertainty and volatility: The trade war has created uncertainty and volatility in the financial markets, as investors are unsure about the future of the trade relations and the economic outlook. This has increased the risk premium and reduced the confidence and investment. According to a survey by the US-China Business Council, the trade war has resulted in the loss of 245,000 jobs in the US3.
- Geopolitical tensions: The trade war has also worsened the geopolitical tensions between the US and China, as they compete for influence and leadership in the world. The trade war has spilled over to other areas, such as technology, security, and human rights, and increased the risk of a military conflict. According to a report by the Council on Foreign Relations, the trade war could lead to a new cold war between the US and China4.
What are the prospects for a resolution?
The trade war has been going on for more than two years, and there have been several rounds of negotiations and agreements, but none of them have been able to resolve the core issues and end the conflict. The most recent agreement, the so-called “phase one” deal, was signed in January 2020, and it included some commitments by China to increase its imports of US goods and services, and to strengthen its intellectual property protection and market access. The US, in return, agreed to reduce some of the tariffs it had imposed on China. However, the deal did not address the structural issues, such as China’s industrial subsidies and state-owned enterprises, and it left most of the tariffs in place. The deal also faced challenges in implementation, as the COVID-19 pandemic disrupted the trade flows and the economic activity.
The prospects for a resolution depend on the political will and the economic interests of both sides, as well as the external factors, such as the global health crisis and the public opinion. The US and China have different goals and expectations for the trade relationship, and they have different views on the role and rules of the international trade system. The US wants China to change its economic model and to abide by the US-led rules and norms. China wants the US to respect its sovereignty and to accept its rise as a global power. The trade war is not only a matter of economics, but also of politics and ideology.
The trade war is unlikely to end soon, as both sides have strong incentives to maintain their positions and to avoid concessions. The trade war could continue for years, or even decades, unless there is a major shift in the balance of power or the public opinion. The trade war could also escalate to a more serious confrontation, or it could de-escalate to a more cooperative relationship, depending on the actions and reactions of both sides. The trade war is a dynamic and complex phenomenon, and it requires a careful and comprehensive analysis and strategy.
What are the implications for investors?
The trade war has important implications for investors, as it affects the performance and valuation of different assets and markets. The trade war has created opportunities and challenges for investors, depending on their risk appetite and time horizon. Some of the implications are:
- Diversification and hedging: The trade war has increased the correlation and volatility of different assets and markets, making it harder to diversify and hedge the portfolio. Investors need to be more selective and flexible in choosing the assets and markets that can offer the best risk-return trade-off. Investors also need to be more aware and prepared for the potential shocks and scenarios that could arise from the trade war.
- Sector and country allocation: The trade war has affected different sectors and countries differently, creating winners and losers. Investors need to be more attentive and responsive to the changes and trends in the sector and country performance and outlook. Investors also need to be more proactive and strategic in adjusting their sector and country allocation, based on their views and expectations of the trade war.
- Value and growth: The trade war has created a divergence between the value and growth stocks, as the value stocks tend to be more sensitive and exposed to the trade war, while the growth stocks tend to be more resilient and insulated from the trade war. Investors need to be more discerning and balanced in choosing the value and growth stocks, based on their valuation and growth potential. Investors also need to be more dynamic and adaptive in switching between the value and growth stocks, based on the market conditions and sentiment.
- Active and passive: The trade war has created a challenge and an opportunity for the active and passive investors, as the trade war has increased the dispersion and differentiation of the returns and risks of different assets and markets. Investors need to be more informed and involved in making the investment decisions, based on their objectives and constraints. Investors also need to be more skillful and efficient in executing the investment strategies, based on their resources and capabilities.
Conclusion
The trade war between the US and China is a complex and evolving phenomenon that has profound implications for the global economy, trade, and finance. The trade war is not only a matter of economics, but also of politics and ideology. The trade war is unlikely to end soon, and it could have various outcomes and impacts. The trade war has created challenges and opportunities for investors, and it requires a careful and comprehensive analysis and strategy. The trade war is a test and a chance for the savvy investors to demonstrate their knowledge and skills, and to achieve their goals and dreams.
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