US-China Trade War: 3 Things May Happen Soon

If you want to know the broad impact of the new US taxes on Chinese imports, here is how you can think of it – Nearly 1 in every 3 products imported from China are being impacted. This number is huge considering the magnitude of trade in billions of dollars between the two countries.

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A trade war may or may not have a winner. Here are three possible scenarios that may result. (The third scenario is both interesting and an optimistic one while the first two will have a winner and a loser.)

1. Increased Costs In The US

The biggest fear of US businesses is that the taxes may hurt local costs. A lot of American business import from China. An increase in taxes is going to hurt the pricing power of the American businesses.

For example, telecommunication is a field where lots of imports are happening. Taxes on devices, parts, chips, etc. will invariably affect the cost of operations for the firms operating in the US. Such concerns are not far fetched. The possible scenario has been expressed by industry giants including Cisco, HP, and others in a communication to Robert Lighthizer. The concerns include a possible increase in the price of accessing the internet because the network and routing devices are going to cost more.

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Not just network giants, but other organizations like National Retail Foundation has expressed concerns of potential price rises that could affect US manufacturers, farmers, and others.

2. China’s Debt (To GDP) May Increase Further

Chinese investments into projects especially the state-funded may be heavily impacted. Several reports suggest that the debt to GDP ratio currently stands at well over 200% (2:1). The government is taking several measures to contain the ratio. However, the trade war is not going to help the measures rather make them difficult.

The increasing debt will force the Government to cut down spending on various projects including the infrastructure. That situation is certainly not desirable for an investment-driven economy. For those who do not know, investments contribute close to half of Chinese GDP. According to the CEICDATA report, the debt to GDP ratio for China during the years 2015, 2016 and 2017 are well above 4:10 (or 40%).

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3. Bilateral Trade May Reach A Positive Equilibrium State

The third scenario we are going to see is a positive one – not just for the US or China but for the global economy as a whole. Problems and pressure present opportunities. They open new doors for the economy to thrive and grow. Let us hope the trade war stops after further 2 to 3 rounds of mutual taxes. Below are the positives could be faced by the US.

After a certain time, US business will start adapting to the new conditions. They may attempt to step up the in-house manufacturing rather than relying too heavily on imports. Even if they are not able to contain imports, they may use technology to cut prices on the end products manufactured. The innovation may root from factors like a redesign of components, optimal use of resources and efficient transportation of goods.

Now let us see some potential positives for the Chinese economy. Firstly, China will be forced to take stringent measures to bring down the Debt to GDP ratio. The measures though may cause short-term pain will benefit China in the long term in the path to becoming an economic superpower. Secondly, to counter the potential losses the exporters will be exploring more exporting partners. The Government may negotiate better with several countries especially with Asian powers including India. Thirdly, the Chinese ecosystem will further be pressurized to cut the manufacturing costs. This may lead to technological and logistic innovation.

Conclusion

Hopefully, you would appreciate the three scenarios that may result from the ongoing trade war. Just like anyone else, we (Netcials) hope the third scenario becomes real. However, there is a prerequisite. The third win-win scenario depends upon a smooth ending to the mutual taxation in near future. If the taxation and counter taxation becomes a vicious cycle, the global economy will have to bear the brunt.

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