1

The Trade War: The U.S., China and What We Need

to Know

Bipan Gurung, Tanner Garrard

The University of Texas at Dallas

Abstract:
This literary review aims to explore the necessary material associated with the trade war between
the United States and the Republic of China. The purpose of this piece is to explain how the
United States has dealt with similar trade war situations in the past, identify the history that has
led to the current relationship between both countries, how the trade war affects the population
overall, and create suggestions for future research. By researching literature, data libraries, and
government updates on the circumstance, we were able to identify the current trade situation and
what the population should know about this fiasco that started in early 2018. The study is
original, as it will guarantee to provide a deeper understanding of how both the United States and
China have been impacted and how bystanders, whom are consumers, have been left to pick up
the pieces.

Keywords: Trade, Trade War, The United States, China, World Trade Organizations,
History, Tariffs.

Introduction
Technically, trade can be defined as an act of buying and selling goods. While trade war
is an act where countries try to damage each other’s trade by imposing tariffs or by limiting the
quotas. Weapons in a trade war are everywhere, it’s the food we eat, the car we drive or the
phone we use. Trade flows could reduce the risk of escalation by increasing the range of costly
signals of resolve in a crisis (Morrow, 1999). Empirical analysis indicates that trade increases the
probability of alliance formation in major power—minor power dyads and decreases the chance
that alliances will dissolve (Fordham, 2010). Even though the countries all over the world rely so
much on trade, they often get involved in a trade war.
Let’s suppose two countries, Country A and Country B manufactures the same Product Z.
If Country A produces the Product Z at a low cost and sells them at a low cost as well, Country B
would be understandably upset. Then Country B tries to negotiate with Country A or/and
imposes the tariff to Country A. Now, Country A retaliates Country B by proposing even more
tariffs on Country B’s products. If the disagreement goes back and forth and escalates with even
more tariffs, that is considered to be a trade war. It is like a chain reaction and goes further and
beyond hurting each other if both sides do not act wisely. There are many possibilities to start the
trade war.
i. A country wants to keep out other countries imports so the domestic products can
flourish.
ii. Country A is doing something Country B doesn’t want them to, Country B can use tariffs
as a way of inflicting a degree of economic pain on Country A.
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A trade war is harmful to almost everyone involved – particularly for poor consumers.
Rising prices in a trade war can have a ripple effect. When people must spend more money on
basics like clothing and food, it means they have less money to spend on other goods and
services. Which can dampen the pace of the economy. A trade war hurts consumer, but it also
disrupts production. As supply chains have become more integrated (and efficient) across
borders, more business is taking the side of consumers over special interests (Lemieux, 2018).
Interestingly, the countries uninvolved in trade war may be benefitted as the side effect of it. If
Country A and Country B stop trading with each other and both start trading with Country C,
Country C will be benefitted by getting new trading allies.
When the General Agreement on Tariffs and Trade was signed by 23 nations in 1947, the
goal was to establish a rules-based world trading system and to facilitate mutually advantageous
trade liberalization (Baldwin, 2016). Over the time GATT gradually changed its image from
GATT to now famously known as WTO (World Trade Organization). The main goal of the
WTO was to create a leveled playing field by setting and enforcing the rules so that the 164
countries who are currently members can trade with one another. The key features of WTO are
as follows:

i. Rules are created or altered through a majority vote.

ii. When disputes arise between countries, WTO resolves the problem through negotiation.
iii. If necessary, the WTO can even impose sanctions on the countries that break the rules.

However, WTO receives criticisms for doing its designated job. The 146 nations of the
World Trade Organization recently came to an agreement that will allow poor nations to avoid
patent restrictions and import generic versions of urgently needed medicines, but this accord has
been met with criticism from international aid organizations (Novak, 2003). First, some citizens
believe letting the WTO create rules that their country has to follow is undemocratic. Second, in
certain cases, the WTO risk hurting people to protect the business interest. For example, Poor
countries that cannot afford expensive medicine such as HIV had to wait until past expires before
producing or buying cheaper generic version. Third, the WTO ends up being accused by
businesses. For example, Pharmaceutical companies which complain that if countries declare a
national emergency to bypass patent regulations for more and more drugs they cannot recover,
the money they invested to innovate and create these drugs and as such research and innovation
are discouraged. As a result, international trade issues revolving around the globe revolves
around the WTO as well.
This paper addresses past and present trade-related issues, controversies and involvement
of the United States with the foreign countries and the impact on the U.S. and its consumers.

Literature Review

A short history of U.S trade wars

The Boston Tea Party is one of the oldest trade conflicts. In 1773, it was a protest
against government control when the Americans learned that they had to buy all of Britain’s East
India Company’s tea. The tea act was passed by the British government which created a
compulsion to the Americans. As the colonists were furious for taking away their right of choice
to buy from, the protesting members dumped 343 chests of tea into Boston Harbor. American
leader John Adams called it “the grandest event since the controversy with the British began!”.
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Therefore, Boston Harbor was closed until the tea was paid for, free elections were halted in
Massachusetts and required colonists to house British troops on demand. Benjamin L. Carp
addresses more interesting facts about the Boston Tea Party in his article called, “Did Dutch
Smugglers Provoke the Boston Tea Party?”. Atlantic smugglers trading with the Dutch and other
European nations, as much as any Boston merchant, politician, or shoemaker, created the
conditions for the Boston Tea Party and helped provoke it (Carp, 2012).
The Hawley-Smoot act of 1930 was signed into law on June 17, 1930. The reason to
pass the law was to increase protective tariffs and to increase rates on imported goods. The law
did not work well and instead, it backfired. This law failed in two ways. First, the results indicate
that Smoot-Hawley Tariff had a small effect on the level of protection (Hayford & Pasurka,
1991). Second, the consequence of Hawley-Smoot was that Britain, Germany, and France began
to make regional and barter arrangements with smaller client states (Conybeare, 1985). Which
resulted in European countries to impose a tax on American goods and making it very expensive
to buy in Europe. As a result, American goods were restricted in Europe. Eventually, Hawley-
Smoot act contributed to the economic crisis of the Great Depression. After 9 decades of this law
had been passed, this act is still considered as the biggest failure in the history of the U.S. and the
trade. Even today, the act is referred to as a notorious measure that should not be repeated again
(Koyama, 2009).
The Chicken Tariff War of the 1960s, by the early 1960s, the switch to factory farming
methods had been adopted in the United States, turning chicken into a mass-produced
commodity. France and Germany – still recovering from World War II – didn’t take kindly to the
market being flooded with cheap American chicken. In 1958, sales reached 2.5 million dollars;
in 1959, 12.5 million; in 1960, 23.0 million; in 1961, 35.5 million; and by 1962, 50 million
dollars in sales were expected (Galloway, 1972).
To restrict the cheap American poultry products in Europe, the tariffs on American
poultry products were introduced. In retaliation, the U.S introduced tariffs on several goods that
were imported from Europe at the time (e.g. Brandt and Volkswagen Trucks). When the two
parties finally decided to put a term to their part of the Conference business by formally settling
what they could and carrying over the rest, the only aspect of the poultry argument disposed of
was that the united states had not been satisfied (Walker, 1964). According to Walker, even
though the terms and conditions were signed on an agreement for the trade and especially for
American poultry products, the United States was not satisfied with the European Economic
Community (EEC).
The 1987 Trade War with Japan: Those wishing to import a luxury Toyota or Honda
automobile will have to match the substantial price-tag with an equal payment to US Customs
(“US bucks rules”, 1995). Addressing to Japan’s failure to comply with the agreement between
two countries, in 1987, President Ronald Reagan doubled the imported price of Japanese
automobiles, computers and other electronics. The calculation is that hankerings after expensive
Japanese cars will simply melt away; people will settle for a Cadillac (or a Mercedes) instead
(“US bucks rules”, 1995). Addressing to the world free trade system, Japan didn’t attack back on
the United States. However, the imposed new double tariffs didn’t slow the United States trade
deficit. Japanese cars dipped 3 percent in sales in America and an estimated $53 billion more
were paid by American consumers due to the new tariffs applied.
Canada-U.S. Lumber Wars was the U.S.- Canada dispute over softwood lumber.
Canada harvests the wood on public land and the market price is decided by the government.
Whereas, in the U.S. the wood is harvested in the private land and the price is decided by the
 4

competition in the market. In 1982, the United States argued and filed a complaint against
Canada for unfairly subsidizing its softwood lumber. The petitioners asked for a duty of 27% on
Canadian imports to offset the effect of the alleged subsidy (Hipel, Fang, & Kilgour, 1990). Due
to the dispute between two nations over softwood lumbers, the price volatility was presented by
Zhang and Sun. The results show that softwood lumber prices were more volatile in the 1990s
than in the 1980s, with the period between 1991 to 1996 being the most volatile (Zhang and Sun,
2001). The dispute lasted long and plenty of consequences were faced by both nations. Canada
was expected to pay millions in softwood tariffs in 2018 alone. However, U.S. consumers also
faced a very high price as the home construction industry boomed. According to the publication
Random Lengths, which covers the lumber industry, the cost of western Canadian lumber was up
around 40 percent by 2018. Also, variations were seen on the stock prices of lumber-using firms.
We find that the news of events leading to the Softwood Lumber Agreement had significant
negative impacts on the stock prices of industries using softwood lumber. The average reduction
of stock prices for our sample of firms was approximately 5.42% overall the events considered
(Malhotra & Gulati, 2010).
The 1993 Banana Wars was the dispute between the United States, Europe, and Latin
America. This dispute over the banana lasted almost for two decades. The EU banana import
regime has been controversial during years and years and it deserves to be looked at (Valencio,
Battistuzzi, & Azcaráte, 2015). American companies still own many banana farms in Latin
America. In 1993, the United States complained against Europe when Europe was imposing high
tariffs on the fruits coming from Latin America. The United States defended the imposition of
tariffs on EC goods asserting that it is an acceptable compensation for the losses suffered due to
the EC banana regime (Williams, 2000).
The motive of Europe was to provide advantages on its former Caribbean colonies over
Latin America. Caribbean banana farmers were granted special access to first British and then
the Single European Markets under successive rounds of the Lomé Conventions (Kurtz, 2004).
To take the revenge, the United States imposed tariffs on European imported items such as
French handbags, British linens, and Danish hams. Finally, after eight complains with the World
Trade Organization, the European Union, in 2009, agreed to gradually ease the tariffs. The
banana war was finally over in 2012 after almost 2 decades.
The 2002 Steel Tariff: The conflict was between the United States and the European
Union. The primary tools were steel and oranges. With a vision to boost the economy, George
W. Bush imposed temporary tariffs up to 8 – 30 percent on steel imports. Mexico and Canada
were exempted due to NAFTA rules. Therefore, the European Union quickly reacted by
imposing tariffs on Florida oranges, American cars, and other items. Also, a complaint against
the United States was filed with the World Trade Organization, where the U.S. was found
violating the tariff rate rules. Roughly 1 year from U.S. presidential elections, President Bush
was caught in a tough spot between the steel producers, steel consumers, and industries being
threatened by the retaliatory (Jensen, 2007). The plan was to impose for 3 years but just after
eighteen months, Bush ended the imposed tariffs. As, a consequence, the move was considered
as a wash by the economists. The tariffs led to higher prices and consumers were directly
affected. According to the Institute for International Economics, the loss of up to 26,000 jobs in
steel-using industries (Valenciano, Battistuzzi, & Azcaráte, 2015).
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Current Conflict of US and China

The first relation of the United States with China began under George Washington, which
leads to the 1845 Treaty of Wangxia. In the spring of 1843, after several lively and often heated
debates, the U.S. Congress approved funds for the first U.S. mission to China (Keliher, 2007).
During the Pacific war, the United States allied with China. However, the relation was broken
between these two nations for 25 years when the communist government took over, until Richard
Nixon’s 1972 visit to China. The United States banned trade with China until the early 1970s.
Afterward, the trade grew rapidly. China-U.S. economic relations have expanded substantially
over the past three decades, their mutual total merchandise trade rose from $2 billion in 1979 to
$579 billion in 2016. China now is the U.S’ second-largest merchandise trading partner, the third
largest export market, and the biggest source of imports (Li, He, & Lin 2018). Now, U.S. imports
more products from China than any other country in the world. The U.S. imported $505 billion
worth of good in 2017 only sending $130 billion of goods to China creating a gap of $375
billion.
On 8 March 2018 Donald Trump, the President of the United States of America,
announced global steel and aluminum tariffs to protect local producers; many nations were
exempted, but not China (Liu, 2018). China then hit back at the United States with 15 to 25
percent tariffs on the US $3 billion worth of American goods. The Trump Administration has
presented three major reasons to justify the initiation of a China-US trade war: China's large
trade surplus against the US, China's failure to comply with World Trade Organization (WTO)
commitments and China's unreasonable acquisition of US technology and theft of intellectual
property rights (Yu, 2018).

Defining International Trade

In order to compare trade statistics between the United States and China, we first need to
define and conceptualize International Trade. According to Market Business News’ financial
glossary, International Trade is “the buying and selling of goods and services across borders;
from one country to another” (Nordqvist 2018). The process of buying and selling goods can be
categorized into two different groups: Imports and Exports. Imports are goods or services
flowing into a country from abroad, while Exports are flowing out of a country and sold
overseas. Businesses that have a surplus of products, can look towards other nations to strike a
deal for goods that are in high demand, but of low supply in their country. However, both
countries tend to charge tariffs on certain imports to make domestic products look more
appealing. A tariff is a tax put on certain products to alter the imbalance between foreign and
domestic products. The United States tries to be fair with every trading partner, however, China
is the complete opposite with their tactics. If it’s not China’s way, they’d rather you hit the
highway. To discuss these ideas into further detail, we will analyze the United States’ and
China’s trade statistics from the year 2014 to 2017 as well as the history leading up to tariff’s
being issued by President Trump’s Administration in September of this year.

United States vs. China Trade Statistics and History

The United States and China are currently in what people call a “trade war”, where both
sides keep leveraging tariffs on imports needed to sustain their economy. Before breaking down
the trade war fiasco, it’s mandatory to first analyze historical trade statistics from the
International Trade Administration for both countries which are displayed on (Figure 1) below.
 6

Figure 1. China and United States Imports: 2014 -2017

($ in Billions)
600

505.47
500 483.20
468.74 462.54

400

300

200
123.65 129.89
115.87 115.55
100

0
2014 2015 2016 2017
China United States

Source: ITA (International Trade Administration Imports and Exports 2018)

(Figure 1) displays that for the last four years, the United States has been at a clear disadvantage
to China in the imports market. In 2017 alone, China imported a staggering 505 billion dollars’
worth of goods into the United States while the states only imported 130 billion into China. That
puts the United States at a noticeable deficit of 375 billion dollars of product in 2017 alone.

To close the gap between both countries and establish an ethical playing field, the United
States issued “The Findings of the Investigation into China’s Acts, Policies, and Practices
Related to Technology Transfer, Intellectual Property, and Innovation under Section 301 of the
Trade Act of 1974” in March of 2018. According to the Office of the United States Trade
Representative (USTR), China’s acts, policies, and practices have been restricting U.S.
commerce for years, such as using “joint venture requirements, foreign investment restrictions,
and administrative review and licensing processes to require or pressure technology transfer from
U.S. companies” (Office of USTR 2018). Practices such as the one disclosed above drastically
effect domestic technology companies and overall growth. Instead of intellectual property
staying within the U.S. and increasing development domestically, those technologies are
presently overseas and sold back to the United States and other countries, leading to an increase
in China’s market share in certain sectors. China did not constructively reflect on the U.S
concerns, so in the summer of 2018, the USTR mandated a tariff on 50 billion dollars’ worth of
 7

products imported from China in response to their unfair trading practices related to the forceful
transfer of technology and intellectual property. To respond to the United States’ decision, China
decided to raise tariffs on certain products imported from the U.S. This action by China created a
domino effect which led to the USTR establishing another round of tariffs, 200 billion dollars to
be exact, meaning that nearly 50% of China Imports into the U.S would counter with a tax
increase of 10% starting as of September 24th, 2018 and eventually increase to a high of 25% at
the start of 2019 (People’s Republic of China 2018). To summarize the trade war domino effect
in a more concise manner, Figure 2 below shows a chronological timeline hitting the main
events of the United States vs. China Trade War discussed above.

Figure 2: United States vs. China Trade War Timeline

March China investigation by United States under Section 301 of the Trade
2018 Act of 1974

July & United States Trade Representative issues tariffs on

August $50 billion worth of Chinese goods/ China Retaliates
2018

September 10% tariff placed on $200 billion worth of

2018 Chinese goods

January
Tariffs will increase from 10% to 25% on the
2019 $200 billion worth of Chinese goods

Consumers in the Cross Hairs

Since tariffs are being increased on almost $250 billion worth of Chinese products, where
does that leave consumers? That will give the consumer in the United States two options, decide
to pay for higher priced items or look for a supplier other than China. According to the Nature:
International Journal of Science, the US-Chinese trade war has the potential of putting certain
sectors such as scientific research in the middle of the fight. Back in July of 2018, President
Trump put a 25% tax on 818 goods imported from China which is displayed in the timeline
above in Figure 2. Scientist like Thomas Lapen, a geochemist at the University of Houston, are
worried that the equipment and supplies needed for research will squeeze their budget even
further. Lapen notes that equipment and supplies are the second-largest expense for his research
and parts such as electrical motors that drive centrifuges are on the newly assigned tariffs list.
The 25% tariff not only affects China but the end consumer which can end up being programs in
the United States such as Lapen’s situation. Lapen and the University of Houston can decide to
pay the increase in prices due to tariffs or find another trade partner that falls in a country where
trade ethics are more balanced towards the United States (Silver, A 2018).
The United States may not be the only country affected in this exchange. A professor by
the name of Ruibang Luo from the University of Hong Kong says that if the Chinese government
interprets tariff items literally, the taxes could pertain to a plethora of US-made reagents,
research devices, including such tools as DNA sequencers. To counter that argument, Brian Xu,
a toxicologist at ACTA, a scientific consulting firm in New York, has claimed that the proposed
tariffs will not have much of an effect on China’s scientific research. He notes that scientists in
China import a small number of chemicals from the United States each year as of now and that
 8

they China can always switch to another countries product such as Germany or Japan if they
have to, which offer similar price and quality (Silver, A 2018) Brian made this argument in June
of this year, meaning that the new tariffs that hit at the end of September may have made that
hypothesis void of any truth. Regardless of the result in the situation above, we can conclude that
consumers are the bystanders in this trade war.

Analyzing and Findings

After analyzing multiple incidents of a trade war in U.S History and diving into the
present relationship between the United States and China, we can conclude that at the end of the
day, the consumer is the one hurting, not the country. We know that the United States is at a
clear disadvantage every year in commerce with China due to unethical practices according to
the United States, but should the consumer need to pay for it? In a perfect world, no, but
countries would rather shove that cost to the consumer than decrease their bottom line. Both
parties in the trade war are trying to maximize market share globally and it might lead to a less
than par result. The war has created a domino effect on both teams leading to higher and higher
tariffs. What once was a theory of trade war, has now become a reality. The United States has
another $250 billion worth of goods to leverage against China in the following year, so we can
only wait to see what the outcome will be. If China or the United States do not want to get along
with one another, then there is a possible chance of another region like the European Union
stepping in and picking up more market share. Until China decides to change their unethical
practices and policies, both sides will see a markup in multiple industries that use any of the
products disclosed in each of the tariff lists. Until then, consumers will need to pick up the slack
with additional costs and research other ways to solve these issues.

Limitations and Future Research Directions

This paper is concentrated more on the consequences of historical trade war of the United
States than analyzing the future consequences. Experts suggest the consequences of ongoing
U.S. – China trade war will be even worse than predicted. Author of “Economic Interdependence
and Peace: a Case Comparison the US-China and US-Japan Trade Disputes”, Yaechan Lee
compares the current conflict of U.S – China with past conflict of U.S. – Japan and predicts the
current conflict will leave both the nation with severe pain. How the conflict between the US and
China will weave out in the future is yet unclear, but considering the high level of relative
interdependence, conflicts will persist, with China being more aggressive than Japan which may
indeed lead to higher intensity of conflicts in the future (Lee, 2018). Therefore, future research
can be done on predicting the possible consequences of current U.S. – China trade war in a
deeper and broader perspective. Philippe Martin and his colleagues Thierry Martin and Marthias
Thoenig believe the research must be done based on the products as well. One could more
precisely test the impact of trade on war through the information channel by following Rauch's
distinction between differentiated and homogeneous products (Martin, Mayer, & Thoenig, 2008).
The whole world heavily relies on the trade. Therefore, the World Trade Organization (WTO)
was formed to regulate international trade smoothly. However, WTO frequently faces the
criticisms. Similarly, the Arms Trade Treaty (ATT) also came into action to regulate
international trade in conventional weapons. Also, ATT is always a target for the criticisms for
the controversial deals. According to the UN, such firearms are responsible for 90% of the
300,000 yearly deaths from violent conflict (Burki, 2012). Therefore, future research can be done
on international trade on firearms and its consequences. Regarding GATT/WTO negotiations and
 9

the tariff, Ralph Ossa created his new model to test the WTO’s tariff regulations and suggests
still more room available for further research. While tariffs have already been cut substantially as
a result of GATT/ WTO negotiations, the model suggests that there is still room for further
Pareto-improving tariff changes (Ossa, 2011). Regarding the Canada-U.S. softwood lumber
dispute, the authors mention the limitations on their graph and address a possible future
extension. The graph model combined with a solution concept is logically equivalent to but
much simpler than, a deterministic extensive game. A possible future extension of the graph
model would be to incorporate probabilistic information into the representation (Hipel, Fang, &
Kilgour, 1990). While my exposition here represents only a preliminary engagement with role-
playing, further investment in developing role-plays for use in geography instruction seems
likely to reap significant teaching and learning rewards (Kurtz, 2004). Here we look at the
aggregate effects of these contrary tendencies but, in the future, it would be useful to hypothesize
about the conditions under which trade increases immediately after war and to test these
hypotheses against the evidence (Barbieri, & Levy, 1999)..
This is clearly a demanding research agenda, but one in which our understanding not only
of Fair Trade, but also of business ethics, both in theory and in practice, should be enhanced
(Moore, 2004). Nathan Jensen ends his article with a footnote for the future research. A fruitful
avenue for future research is to explore stock price movements of other firms affected both by
trade protection and retaliatory tariffs. By exploring how markets respond to tariffs, WTO
announcements, and announced retaliatory tariffs, we can build a more complete picture of how
the World Trade Organization affects trade policy and trade disputes (Jensen, 2007).
Authors Nisha Malhotra and Sumeet Gulati hint their data and analysis was based on a limited
number of industries only. While we believe that our sample covers a significant share of the
relevant industries, it is important to remember that the sample is not comprehensive. If we could
include all firms that used softwood lumber, the cumulative negative effect is likely to be larger
still (Malhotra & Gulati, 2010). Therefore, if future research could cover several industries, more
relevant data can be expected.
 10

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