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US China Trade War

Solution Id Length Case Author Case Publisher
2098 2436 Words (7 Pages) Alberto F. Cavallo, Mariana Cal, Anne Laski Harvard Business School : 719034
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US-China trade war started in 2018, when the US administration highly increased the tariff rates on some of the Chinese goods and services, reasoning that China has resorted to unfair trading practices, and has violated the intellectual property rights regime. Both countries were important trading partners of each other before the imposition of a heavy tariff rate (Arès & Boulanger, 2019). Over a period of time, the trade deficit between both the countries has increased to a great extent towards the favour of China. This has caused great concern for the US economy, and its administration recognized that radical steps are needed to shift the balance towards the betterment of the economy (Iqbal, et al., 2019). This report explores the impact of the war on globalization in general and trade volumes in particular. Furthermore, it also looks at the damages it has accrued to the sustainable business practices around the globe.

Following questions are answered in this case study solution:

  1. Introduction

  2. Trade War Impact on Globalization and Global Trade Volumes 

  3. Conclusion

Case Study Questions Answers

US-China Trade War Impact on Globalization

US-China trade war created a great level of concern in the international community. Both countries are major economic powers on a global scale. The imposition of heavy tariffs on the Chinese goods by America and the subsequent reaction from the Chinese end had a great repercussion on the international community. After the end of World War 2, a number of international institutions came into being. These include World Bank (WB), the international monetary fund (IMF), General Agreement for Trade and Tariff (GAAT), and others. The primary purpose of the institution of these forums was to make the countries interdependent to promote cooperation and coordination between different countries in the world. Globalization received a great impetus after the end of the cold war, as then widespread economic reforms took place in different countries, paving way for further cooperation between countries (Steger, 2017). World Trade Organization (WTO) came into being in 1995, and it was formed for the purpose of facilitating the smooth flow of trade by establishing a global legal framework for trade operations. This formalizing of the international trade regime helped in developing confidence in the global community with respect to trade and cooperation between different countries.

Economic cooperation is a vital aspect of globalization. Globalization has helped people to come close to each other and cooperate for mutual development and progress. The global trade regime has made it possible to trade various goods, services, and technology that are important for the economic development of different countries (Iqbal, et al., 2019). Establishment of free trade zones like the European Union (EU) and NAFTA provided examples of extremely close trade relations between countries that united countries towards achieving progress and prosperity.

US-China trade war disrupted that environment and had an overall negative impact on the environment of cooperation and coordination. America has taken aggressive steps to ensure that its huge trade deficit with china is substantially mitigated. China achieved great milestones after it officially became the member of the WTO in 2001 and went on to become a major economic power on a global scale. The world community suffered a great set back after the 2008 financial crisis, yet the rapid globalization in the digital age helped the world economy to come back to its rhythm (Jadhav & Chaudhari, 2019). After the financial crisis, investment soared but did not come up to the level as it was in the pre-crisis time. Global debt has also soared to a great extent, adding further problems for the economy. Amidst all this, uncertainty due to the US-China trade war created problems for the global economy. The world economy was also growing at a steady and slow rate post-2017.

Furthermore, this trade war also worsened the geo-political tensions that existed between the US and China. This might bring great suspicion among the international community, and trade and cooperation is likely to be negatively impacted (Mahadevan & Nugroho, 2019). However, some countries have also benefited from this economic war, as different companies moved their investment from China to other countries. For instance, US Company, GoPro, producing US-bound cameras, moved their production facility from China to Mexico.  

It is now pertinent to understand the effect of this war on the volume of trade.

2. Trade War Impact on Globalization and Global Trade Volumes 

Trade War Impact on World Trade

Trade war negatively impacted the volume of global trade. Before the inception of a trade war, trade between two countries, according to the US Census Bureau, was $660 billion in 2018. After the start of a trade war, tariffs were heavily imposed by both the countries on each other. America and China were the largest trading partners of each other in 2018, but in the next year, Mexico and Canada became its top trading partners (Mor, 2018).

America usually exported lower value commodities to China, for instance, crops, oil, and forestry products. On the other hand, China exported relatively higher-value goods to the US. This is the major reason behind the high level of trade deficit between the countries. This is creating an impact at a higher level, as trade between China and the EU also got impacted. Within a year after the beginning of the economic war, the growth rate in trade fell from 5.5% in 2018 to 4.1% in 2019. This shows that although the economies of both countries have suffered, other countries across the world like Canada, Japan, and other countries of the developed world, which play an important role in steering the global economy towards a higher level of growth (Qiu, et al., 2019). A lot of multi-national companies are based in these two countries; it is quite obvious that their operations are impacted as a result of this war.

There were countries like Taiwan, Malaysia, Mexico, and Chile that benefited from the war. For instance, Malaysia from semi-conductors’ exports to China, Brazil, from soya beans export to China, and other various evolving trading arrangements. It is to be kept in mind that there are experts on the issue that have called these advantages as short-term. The global economy is growing at a slower rate, and in 2019, the prospected growth rate hovered around 3%. This indicates that tensions between two major economies can create further problems for this stagnant performance of the global economy (Steger, 2017). Tensions between other countries can also get escalated as a result of this episode of conflict in the trade arena. Although both countries have negotiated on a number of occasions regarding the issue, a lot needs to be done to combat the negative impacts of this war on the overall economy of the world.

Trade War damage to Sustainable Businesses and the Resulting Inequality

Globalization has resulted in the close interconnectedness of the international economy. Many multi-national companies have outsourced their production facilities in other countries, and this resulted in a highly evolved global supply chain. No one is oblivious to the fact that businesses in both countries have been negatively impacted as a result of this so-called war. Moody's analytics- an American economic research firm- reported that by the end of 2019, 300000 American have lost their job due to this trade conflict (Sukar & Ahmed, 2019). This can help ascertain the impact of this conflict on the various sustainable businesses.

Different sectors of the US economy are heavily impacted as a result of the protectionist measures taken by the Trump administration. Tariffs have gone up from an initial 10% to 25% for most of the products. There are different sustainable businesses in all the major sectors of the economy that suffered economically to a great extent. US Automobile sector, for example, had to bear the increase in tariff from 15% to 40% by the Chinese government. America exports most of its automobile to the Chinese market. In the longer run, it could disrupt the smooth operations of different US-based automobile giants like Tesla (Swenson & Woo, 2019). This has a far-reaching impact as related industries; for instance, auto parts sellers can also be negatively impacted as a result of this.

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