In the recent months, President Donald Trump stated that China has ripping American off due to the large trade deficit between the two countries. Trump has consistent argued that the increase level of trade deficit should be managed by imposing tariffs coming from China. Trump has targeted steel and aluminum products with the aim of protecting the local steel workers. Trump implemented a 25% and 10 penalty on steel and aluminum imports respectively. Trump explained that China’s unfair trade practices were the cause of the large trade deficits with the U.S.
Initially, China called for negotiation talks to resolve the trade issues between the two countries. However, today, China has implemented retaliatory measures adopting tariffs on agricultural products. Beijing implemented new tax duties not exceeding 25% on 128 American imports mainly agricultural products. The tariffs were imposed on products of close to $50 billion in value.
According to Beghin, Disdier and Marette(2015), they argued that trade wars have negative impact on global trade. Both countries involved in the trade wars suffers as investment and trade activities is hampered due to the additional costs of tariffs. Similarly, global trade would also suffer from trade wars involving key trade actors in the global commerce. Trade wars can be beneficial in the short-run with short-lived trade balances between the countries. However, the long-term effect of the trade wars is worse.
According to Shellock(2018), the Trump’s tariffs have negative impacts on the stock markets and industries in both the U.S and Chinese markets. In the U.S markets, the stock market commodities were down after the tariffs were announced due to the increase in market volatility (Crooks, 2018). In the Chinese markets, the commodities and stocks went down reacting to the tariffs, which is an indication of worse trading outcomes. Similarly, stock markets in Asia and Europe were slightly down reacting to the tariffs. Generally, all stock markets were concerned with the long-term outcome of the tariffs.
The global reaction on the implications of tariffs on the global trade matches the available literature on the presence of market imperfections. Such market perfections such as political regulations and tariffs create restrictions on the success of global trade.
Beghin, J. C., Disdier, A. C., & Marette, S. (2015). Trade restrictiveness indices in the presence of externalities: An application to non‐tariff measures. Canadian Journal of Economics, 48(4), 1513-1536.
Crooks, E. (2018, March 22). US businesses react with alarm to Trump’s China tariffs. Retrieved from https://www.ft.com/content/8f825846-2dfb-11e8-a34a-7e7563b0b0f4.
Shellock, D. (2018, March 23). Wall St sell-off resumes as trade worries dominate. Retrieved from https://www.ft.com/content/de0a8794-2e38-11e8-9b4b-bc4b9f08f381