Submission of Summative Assessment

Assessment Details

EC5002NI International Business and

Module Code and Title
World Markets
Course Title BA (Hons) Business Administration
Level Level 05
Cohort Autumn 2021
Credit Year long
Component # Comp 002
Weight 20%
Individual Written Coursework (2000
Assessment Title
words)
Module Lecturer Mr. Rupak Aryal

Submission Details

Student’s Name/s University ID

Lakpa Tshering Sherpa 20048579

Date of submission (DD-MM-YYYY) 2022 March 30

Word count # 2016
ABSTRACT

The essay analyses the timing of the trade war between the United States and China,
as well as the causes and potential consequences. The reasons for the greatest trade
conflict in history between the two economies, all of which are related to US intentions:
a) to reduce the bilateral trade deficit and increase the number of jobs; b) to limit
access of Chinese companies to American technologies and prevent digital
modernization of the PRC's industry; c) to prevent China's military strength from
growing; and d) to reduce the federal budget deficit. There is no winner in trade wars,
as has been proven. The US-China trade war will come amid a decline in global
production and international trade, based on the two nations' GDP scale and export
quantities. Based on scenario approach, the article examines the outcomes of the
trade conflict. By establishing assumptions regarding the response pattern and
conjectural variation in bilateral economic relations, the paper proposed four
scenarios. The protectionist policy of the United States has a political dimension. One
of the tools for slowing China's military and economic power rise is bilateral trade
sanctions.
Table of Contents

INTRODUCTION .................................................................................................................................. 1
ANALYSIS ............................................................................................................................................. 3
CONCLUSION ...................................................................................................................................... 8
REFERENCES ..................................................................................................................................... 9
INTRODUCTION

The topic of this essay is the trade war between US and China. A trade war happens
when one country retaliates against another by raising import tariffs or placing other
restrictions on the other country's imports. Trade wars can commence if one country
perceives that a competitor nation has unfair trading practices. Domestic trade unions
or industry lobbyists can pressure politicians to make imported goods less attractive
to consumers, pushing international policy toward a trade war. Also, trade wars are
often a result of a misunderstanding of the widespread benefits of free trade. The US
and China imposed additional tariffs on goods imported from the other country,
meaning buyers in the opposing country would need to pay higher import taxes to
bring their purchases into the country. At its peak at the end of 2019, the US had
imposed tariffs on more than US$360 billion worth of Chinese goods, while China had
retaliated with import duties of their own worth around US$110 billion on US products
(Clear Tax, 2022).

The trade war between the US led by Donald Trump and China and its President Xi
Jinping started in July 2018. The US and China signed a phase one trade deal in
January 2020, with China committing to buy US$200 billion of goods and services over
the next two years. US President Donald Trump promised during his 2016 presidential
campaign to reduce the large trade deficit with China, which he claimed was based in
large part on unfair Chinese trading practises, including intellectual property theft,
forced technology transfer, lack of market access for American companies in China
and an unlevel playing field caused by Beijing’s subsidies for favoured Chinese
companies. China, meanwhile, believes the US is trying to restrict its rise as a global
economic power. However, that trade was lopsided, with the US running a large and
growing trade deficit with China, which became a major political issue in the 2016 US
presidential campaign. The US trade shortfall rose to US$375.6 billion in 2017 before
the start of the trade war, from US$103.1 billion in 2002. The deficit rose further to
US$378 billion in 2018, before easing slightly to US$345.6 in 2019 after the start of
the trade war, according to the Office of the US Trade Representative. According to a
model-based assessment by the Bank of Finland, tariff increases currently in place will
slow global GDP growth by around 0.7 of a percentage point. The trade dispute has

1
already diminished trade flows between the United States and China. The growth of
uncertainty has been reflected in investment sentiment, and manufacturing purchasing
manager indices have fallen globally. News updates on the current negotiation
situation have caused volatility in share prices and securities market risk premia, but
significant disruptions on the financial markets have so far been avoided. In an
adverse scenario calculated by the Bank of Finland, further escalation of the trade war
and subsequent widespread disruptions to the financial markets would slow global
GDP growth by a further two percentage points (Nakakeeto & Gertrude, 2020).

2
ANALYSIS

Both China and the United States have had a long history of trade with each other.
China’s trade with the United States was sluggish before the 1980s; however, trade
ties picked up and grew especially after China opened up its markets to the world in
the late 1970s. While both countries look at each other as strategic partners, the trade
journey for both nations has been far from smooth, and more so from 1979 onwards
when they have both witnessed conflicting trade concerns. Both the countries face
several political, economic and social challenges. ‘There are daunting economic,
political, and social challenges that China has to meet now and in the near future’.
Both the nations have resorted to trade protection measures on several occasions in
the past. Trade protection measures are sought by countries when they feel
threatened by the other country or countries they are in trade with. These measures
result in increasing trade barriers, anti-dumping laws and other non-tariff barriers
(NTBs); however, their application has also become a means to avoid competition.
The United States alleges that China resorts to dumping in a few sectors such as
textiles, steel, and others. In the case of textiles, the United States witnessed a surge
in imports of textiles from China since the year 2005. In the year 2005, the WTO
abolished the quota system that put a limit to the amount of goods a country could
export.2‘Under the WTO Agreement on Textiles and Clothing (ATC), all textile and
clothing(T&C) quotas maintained by industrial countries under the now defunct Multi
Fiber Arrangement (MFA) would be removed over the period 1995-2005’.3This
enabled China to make inroads into the US market (Wu, 2018).

The mercantilist approach is based on the idea that surpluses in international trade
are desirable. This became a core guiding principle behind recent US trade policy, and
was especially visible with regard to trade with China. This paper sheds light on some
of the main energy market impacts of the US-China trade war. In particular, we
investigate the current and potential future impacts on the US current account,
focusing on the US exports of energy and energy-related commodities. We argue that
the trade war led to a number of distortions that reshaped the US balance of trade in
energy-related commodities. Even prior to the disruption caused by the COVID-19
pandemic, US economic growth has been relatively slow in recent decades. According
to the World Bank, China could surpass the US to become the largest economy in the

3
world by the middle of this century. In combination with other factors, such as
geopolitical interests and the two countries’ polar opposite political systems, this has
led to an increasingly adversarial posture between the two economic superpowers,
especially as China establishes itself on the world stage. It is worth pointing out that
the US deficit with China is the result of trade in goods, as the US runs a net surplus
in services (Ezell, 2013).

These outcomes, however, do not fully encapsulate the risks that further trade
tensions could bring. For example, consider the rapidly evolving global LNG market,
in which the US and China are playing fundamental roles on the emerging supply-side
and demand-side of the market, respectively. As concerns over the ability to trade long
term with China mount, US export project developers may find it increasingly difficult
to secure long term agreements with Chinese importers. This could be especially
problematic given that China is projected to be a major source of demand growth
globally for natural gas, most of which will be sated by waterborne supplies. As
indicated in Fig. 1, LNG (Liquefied Natural Gas) exports from the US to Northeast Asia
have declined from 2018 to 2019. The destination of US LNG exports tells an
interesting story. Average daily deliveries of US LNG to Japan and South Korea have
actually increased from 2018 to 2019, while deliveries to China have declined
dramatically. This is even more striking when juxtaposed against all LNG deliveries to
Northeast Asia. In sum, LNG deliveries to Asia have been virtually flat from 2018 to
2019, and Chinese LNG imports have actually increased. This highlights two important
points. First, a reduction in US LNG deliveries to China has resulted in increased
deliveries from other LNG exporters. Second, the reduction in US LNG deliveries to
China has resulted in an effective swap of cargoes to other Northeast Asian
economies.

4
Fig. 1. Ne Asia LNG imports from US, 2017–2019,

Free trade provides several advantages over mercantilism for individuals, businesses,
and nations. In a free trade system, individuals benefit from a greater choice of
affordable goods, while mercantilism restricts imports and reduces the choices
available to consumers. Fewer imports mean less competition and higher prices. While
mercantilist countries were almost constantly engaged in warfare, battling over
resources, nations operating under a free-trade system can prosper by engaging in
mutually beneficial trade relations. In his seminal book "The Wealth of Nations,"
legendary economist Adam Smith argued that free trade enabled businesses to
specialize in producing goods they manufacture most efficiently, leading to higher
productivity and greater economic growth. Today, mercantilism is deemed outdated.
However, barriers to trade still exist to protect locally entrenched industries. For
example, post-World War II, the United States adopted a protectionist trade policy
toward Japan and negotiated voluntary export restrictions with the Japanese
government, which limited Japanese exports to the United States (Davis, 2005).

China has been regarded as a nation which pursues Neo-mercantilism. Comparing

the degree of Mercantilism around the world. (2014) China ranked (scoring 35.5) on
the top of all 55 nations in the Global Mercantilist Index. China’s Neo-mercantilist
strategies include promoting nationalism, patriotism and technologicalism, stockpiling

5
gold and foreign reserves, striving for a favourable balance of payment via exchange
rate manipulation, tariff, export subsidies and other trade protection. The Chinese
government also controls population growth for national development and social
control, initiates “Belt and Road” project and the Asian Infrastructure Investment Bank
to counter American and Western influences, and deploys strategic expansion in
Africa, South Asia and Latin American countries.

Although the overall quantity of US exports of oil, gas, and petroleum products has not
been significantly encumbered by the US-China trade dispute, the distribution of
exports has changed. This can be attributed to a number of factors, including trade
tensions, shifts in regional commodity prices (especially for natural gas), and different
rates of demand growth around the world. As indicated in Fig. 2, US exports of oil,
petroleum products, and gas (LNG) to China, Korea, and Japan are currently a
relatively small fraction of total US exports of each of those commodities. However,
Asia constitutes a particularly interesting area of potential future growth, particularly
because the region is growing rapidly and must rely upon significant energy imports.
Recent trade tensions had a negative impact on US volumes exported to China, but
the flows were largely redirected. As seen in Fig. 5, the value of exports shifted away
from China in mid-2018, due to the US-China trade dispute. However, Japan and
South Korea fared differently.

6
Fig. 3. US Exports of Oil, Oil Products and Gas, Jan16-Sep19. Source: Data from US
Energy Information Administration, author conversions to BOE/d.

7
CONCLUSION

From the above essay we can conclude that US and China both were vulnerable
during the trade war between them which caused both the countries to lose their
economic and political health. The imports and exports between China and US not
only degraded the economy but the people during that time had a bad time as the
price of goods rose and the quantity was not sufficient to fulfil the needs of the
individuals. The imposition of tariffs on imports from a specific trade partner should, all
else equal, result in a “reshuffling of the deck” of imports rather than a massive decline
in imports, provided there are opportunities for low-cost switching. Hence, the realized
price impact of a bilateral tariff is not necessarily the tariff itself; rather, it is the change
in price to the substituted commodity. In this way, the domestic welfare impacts are
mitigated, but not completely avoided. Moreover, it highlights the manner in which the
impacts of bilateral trade policies can be overstated, especially when they do not fully
account for import-source substitution opportunities. It is confirmed and concluded that
trade wars have no winners. Taking into account the two countries' GDP scale and
export volumes, the US-China trade war will come amid a slowdown in the global
production and international trade. In the early part of the 21st century, albeit on a much
grander scale, the rise of china presents ‘Sputnik’ like challenges to Americans
perceptions of themselves and their leadership roles in the world. As the book goes to
print many American hands are writing about China’s rise. Whether the United States
rise to China’s challenges and uses it as an opportunity to build its capacity for future
leadership will say much about whether it will continue to lead. On balance, China’s
rise could turn out to be a good thing for the united states.

8
REFERENCES

Clear Tax. (2022, March 11). ClearTax. Retrieved from

https://cleartax.in/g/terms/trade-war

Davis, M. (2005, December). Retrieved from

https://www.nber.org/digest/dec05/china-mercantilist

Ezell, S. (2013, July 24). IndustryWeek. Retrieved from

https://www.industryweek.com/the-economy/public-
policy/article/21960801/chinas-economic-mercantilism

Nakakeeto, & Gertrude. (2020, December). Texas Tech University. Retrieved from
https://ttu-ir.tdl.org/handle/2346/86790

Wu, S. (2018). THE MERCANTILIST ROOT OF THE US. Pluto Journals, 315-329.
Retrieved from
https://www.jstor.org/stable/10.13169/worlrevipoliecon.9.3.0315