Updated on February 8, 2021.
As trade tensions between the United States and China intensify, it is becoming harder and harder to see where the silver lining “opportunity” might lie within the ongoing crisis. The prevailing impasse leaves many of us scratching our heads and asking where this is all leading and why these trade tensions are escalating in the first place. Although the answers are complex and multilayered, I’ll do my best to answer them from a 30,000 foot view.
For an updated overview on the U.S.-China trade tensions since the Biden administration took office, check out this article.
But first, what is a tariff?
Simply put, a tariff is a tax that is imposed on either imported or exported goods between two sovereign nations. It is often used as a means of protecting a valuable and/or vulnerable domestic industry or business sector. Historically, tariffs were also used as a means of fattening government coffers while spurring growth of a specific domestic industry.
How and why did the trade tensions start?
In early July of 2018, President Trump’s administration in Washington, D.C. imposed a series of tariffs on goods imported from China. As often is the case, these tariffs have been met with retaliatory measures by Beijing. Many of these retaliatory tariffs have hit close to home, as agricultural exports to China, including corn and soybeans, have felt the brunt of the Chinese response to Washington.
The current administration in Washington has relied on several longstanding issues in Chinese trade policy with the United States to justify initiating the tariff tit-for-tat. Certainly, these are very valid grievances that deserve addressing. Principal among them is the massive trade imbalance between the two countries and China’s reluctance to open their market to more U.S. goods and industries.
Further arguments include Chinese restrictions on ownership of joint ventures and business operations, forced surrender of intellectual and trade secrets upon entering the market, the rampant theft of U.S. intellectual property, technology and trade secrets, as well as continued currency manipulations that provide an unfair subsidy for Chinese exports worldwide.
What is the impact of the U.S. and China trade tensions?
Unfortunately, the continued escalation of the tariff wars has not been good for the U.S., Chinese, or the global economy in general, with collateral damage that could easily be long-lasting, if not permanent. In most cases, the cost of tariffs imposed on imports from China has been passed on to the consumer, meaning higher prices for many of the goods we buy every day.
Furthermore, Chinese components make up a significant portion of the global supply chain. These components go into many U.S. manufactured products that are then sold domestically and exported around the world. The disruption of the global supply chain has wreaked havoc on U.S. manufacturing, as component sourcing and pricing are in a state of limbo, meaning uncertainty both from a supply and cost-control standpoint.
Closer to home, we see the loss of lucrative grain markets for our farmers, as China looks to South America and other agricultural countries to source their grain and bio-chemical needs. These can be difficult markets to win back once they have switched to a competing supplier.
But perhaps the most unsettling aspect of this ongoing tariff tit-for-tat is potential for rising tensions between the U.S and China to escalate into greater geo-political arenas, including possible military confrontations. This alone is reason for cooler heads to prevail and see a return to the bargaining table.
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“A danger foreseen is half-avoided.” – Cheyenne proverb.