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The world’s two largest economies are on the verge of a trade war. The United States announced plans to slap tariffs on about $150 billion in Chinese imports. Beijing vowed to respond proportionally. The dispute threatens to upset the global economy, yet the two superpowers so far has not held any formal trade talks to ease the tension.

The trade row started in early April, when Washington proposed tariff increase on $50 billion worth of Chinese goods. US President Donald Trump argued that the tariffs will push Beijing to change its intellectual property practices. According to an investigation initiated by the US Trade Representative (USTR), China’s policies intentionally „coerce American companies into transferring their technology and intellectual property to domestic Chinese enterprises.”

Based on this report, the Office of the USTR unveiled a plan to levy 25 percent tariffs on 1300 industrial technology, transport and medical products from China – with the stated goal to cause maximum harm to the Chinese economy, while minimizing the potential damage on US consumers.

Beijing, however, has chosen not to respond to the allegations about its policies on intellectual property. Instead they framed the dispute as part of the bigger conflict between American protectionism and free trade, linking the issue to the recently imposed US tariffs on solar panels, washing machines, aluminium and steel imports.

Thus China asserted that it is well within their right to retaliate. Within one day of Washington’s announcement, Beijing proposed a matching plan with import taxes on $50 billion of American products, including beef, soybeans and whiskey. These countermeasures appear to be designed to damage President Trump politically as they mainly target rural communities – the traditional voting base of the Republicans. If the tariffs go into effect, they could potentially weaken governing party ahead of the midterm elections in November.

Responding to the plans, Donald Trump decided to raise the stakes. Calling out ’China’s unfair retaliation’ the US President instructed officials to consider tariffs on an additional $100 billion worth of Chinese goods. Beijing almost instantly signaled that it is fully prepared to do the same against American imports.

Analysts, however, point out that China would be hard-pressed to tax $150 billion of American imports as last year the United States exported only $130 billion to the country. Meanwhile, Washington has plenty of rooms of maneuver as $505 billion of Chinese goods were shipped to the US at the same time.

In addition to the proposed tit-for-tat tariffs, other trade frictions emerged between the two superpowers. Washington imposed a seven-year-ban on selling products and services to Chinese mobile phone producer ZTE, because it reportedly violated sanctions against North Korea and Iran. The White House also plans to limit Chinese investment in technologies which they deem ’sensitive to national security.’ Meanwhile, China introduced a 179% import duty on American sorghum (a popular type of grain), after a probe found previous shipments were unfairly subsidized, damaging local producers. According to Wall Street Journal Beijing also intentionally slowing reviews of multibillion-dollar takeover deals pursued by American companies.

Financial markets so far only reacted mildly to the escalating trade row. International bodies, however voiced their concerns about the potential impacts on the world economy. Managing Director of the International Monetary Fund, Christine Lagarde has reportedly identified the dispute as a threat to global confidence and investment. Admitting that the direct impact of the increased tariffs would be modest, she warned that they might lead to an erosion of confidence. This kind of uncertainty would be detrimental to investments, a key driver of rising global growth.

„When investors do not know under what terms they will be trading, when they don’t know how to organize their supply chain, they are reluctant to invest.” – said the IMF Chief.

Investors around the world thus hope that the United States and China will reach a mutual understanding – preferably before any significant harm is done to the global economy.

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The GLOBS is the only magazine in Hungary that focuses on global affairs and trade. The topics cover the different aspects of social life, business and culture (especially business culture), research and development, investment opportunities, charity initiatives, and the everyday life of the diplomatic delegations.
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