Category: China

Factors Contributing to China’s Economic Growth and Constraints to Future Growth

China’s economy has undergone extraordinary growth over the past four decades. The country was one of the poorest nations worldwide in 1978 with its real per capita gross domestic estimated to be one-fortieth of the US level. However, the nation has become a vital economic power since it opened up to the world following the end of Mao’s rule (Yang, 2013). The country’s real per capita GDP increased from 5.5% of the US level to around 25% in 2014 (Zhang, 2017). “Through economic reforms, China has become a major trading partner and the second largest economy worldwide” (Zhang, 2017). Dissolution of Soviet-style system, the growth of total factor productivity (TFP), trade liberation and foreign investment has supported China’s rapid economic growth, but the country may face challenges in maintaining the growth due to a labor shortage, aging population and over-reliance on foreign investment.

Dissolution of the Soviet-Style System

The dismantling of the Soviet-style system supported economic growth in China by reducing government intervention. Morrison (2014) notes that China experienced economic downturns before 1978 under Mao’s leadership, particularly, during the Great Leap Forward and Cultural Revolution, periods characterized by massive famine and political chaos respectively. During Mao’s rule, the country-maintained policies that kept it centrally controlled, stagnant, and isolated from the global economy. Besides, the nation limited foreign trade to obtaining products not produced locally from Soviet bloc countries only (Yang, 2013). These policies led to stagnation of the economy because the central government managed and ran most of the economic aspects; hence, there were few incentives for farmers, workers, and firms.

The implementation of free market principles in 1978 opened up China to international markets. The government under the leadership of Deng Xiaoping launched several economic reforms to increase its legitimacy by raising the living standards and economic performance. According to Morrison (2014), economic reforms that started in 1979 improved efficiency and increased output as well as resources for additional investment. The implementation of market reforms made China the fastest growing economy with an average growth of about 10% of gross domestic product (GDP) per year from 1979 to 2012 (Esmail & Shili, 2017). The transition to the free-market economy increased China’s competitiveness by increasing non-state-owned firms.

Total Factor Productivity (TFP)

The adoption of an economic system governed by market forces to replace the collective system contributed to TPF (increased labor productivity) growth, which in turn led to economic development. Iida, Shoji, and Yoneyama (2018) argue that China would not have achieved rapid and sustained economic growth without significant growth in TFP. Under the collective system, farmers’ efforts were not a determinant of income; hence, producers did not have the incentive to put extra efforts, which in turn decreased productivity leading to severe food crises. The government made three changes to reform agriculture: the introduction of a household responsibility system, liberalization of the markets for agricultural products and increased prices of agricultural products (Yang, 2013). China introduced a household responsibility system in 1978 to allow farmers to sell a proportion of the produce at official prices to the government and the excess under market prices. The price system reforms stimulated production, which in turn helped the country to resolve the food deficit. According to Esmail and Shili (2017), China is the largest agricultural economy and the largest producer of cotton, tea, rice, wheat, pork, and fish worldwide. The country produces about 20% of the world’s food and 18%. Around 50% of world vegetables, 29% of meat and 18% of cereals come from China (Esmail & Shili, 2017). The growth in agricultural output alleviated subsistence food constraint and improved economic growth by increasing productivity.

China’s agricultural sector experienced extensive market liberalization, which motivated farmers to adopt new technologies leading to TPF growth. Liberalization of the agricultural markets helped farmers to make their decisions with fewer restrictions and less intervention from the state officials with regard to input. TFP increased from 5.1% to 3.1% from 1978 to 1997 resulting in a substantial increase in the production of grain, which helped the country to reallocate workers to other sectors (Zhang, 2017). According to Yueh (2015), establishment of joint ventures for transfers of technology and knowledge increased GDP by 0.43% to 1% annually. A shift to house responsible system helped the country to meet food demand with a smaller number of farmers than before due to growth in productivity. As a result, some workers relocated to non-agricultural sectors, which increased the aggregate productivity. Over 49 million employees joined other sectors, which led to substantial efficiency gains and enhanced productivity (Morrison, 2014). Most of the workers moved to rural industrial enterprises known as township and village enterprises (TVE) established by the township and village-level governments. TVE is more efficient and competitive in the international markets comparable state-owned enterprises because they are market-oriented and pursue more productive activities.

Heavy reliance on production led to TPF growth. China’s TFP increased by about 3.5% annually from 1978 to 2011 (Zhang, 2017) and accounted for around 40% of the country’s GDP growth (Yueh, 2015). The annual TFP growth in the non-state agricultural and non-agricultural sectors was 4.01% and 3.91% respectively from 1978 to 2007. On the contrary, the growth rates of TFP in the sectors controlled by the government was 1.68% during the same period. According to Iida, Shoji, and Yoneyama (2018), state-owned firms decreased from 10,000 million in the 1990s to 300,000 by the early 2000s due to privatization. The privatization of state-owned enterprises has contributed to an increase in the aggregate TFP level.

Trade and Foreign Investment

Constant opening up was an indispensable factor that explains the massive economic growth. The removal of trade barriers and price controls increased competition of the Chinese firms. The country has entered into several trade agreements with many countries particularly those in Asia. In 2000, the government implemented a strategy that encouraged local firms to invest in foreign countries to obtain management skills, technology, and global recognition to improve their competitiveness. In 2001, China joined the World Trade Organization (WTO), which led to a significant decline of tariff rates and the expansion of trade rights. WTO membership helped the non-state enterprises to enter domestic trade sectors resulting in a significant reduction in trade costs and enhanced productivity (Morrison, 2014). “The government introduced four economic zones to attract foreign investment, boost imports and exports” (Morrison, 2014). Besides, the state designated additional regions at the coastal areas as developmental zones and open cities to offer trade and tax incentives and allow the Chinese to implement free-market policies.

International trade and investment have facilitated Chinese economic growth by boosting imports and exports. Esmail and Shili (2017) note that the value of China’s merchandise imports increased from $18 billion to $ 2 trillion with a growth rate of 16.6% per year from 1979 to 2014. The exportation of merchandise rose from $14 billion to $23 trillion with an annual growth rate of 18% during the same period. “China became the largest holder of foreign exchange reserves in 2013 due to large-scale foreign investment, large purchases of foreign currencies, and merchandise trade surpluses” (Morrison, 2014). Furthermore, trade and investment reforms increased the volume of foreign direct investment (FDI), boosting the growth of domestic enterprises. The annual FDI inflows increased from $2 billion to $108 billion from 1985 to 2008 but decreased by 12.2% in 2009 due to the global economic recession (Yang, 2013). However, China recovered from the economic downturn faster than developed nations, and its FDI flows reached $112 billion in 2012, making it the second recipient of FDI after the US (Morrison, 2014). The number of foreign-invested enterprises in China increased from 2.3% to 35.9% from 1990 to 2003 but dropped to 27.1% by 2010 (Morrison, 2014). In 2011, the foreign-invested enterprises accounted for 49.6% and 52.4% of imports and exports directly (Morrison, 2014). FDIs led to inflows of new processes and technology that led to TFP growth and improved economic efficiency.

Large scale capital investment generated from foreign investment and large domestic savings contributed to a large extent to rapid economic growth in China. Huge savings fostered investment, which in turn supported long-run economic growth. At the onset of economic reforms in 1979, domestic savings was 32% of the GDP in 2008, which far exceed that of the US (9%). Profits of the state-owned firms generated the most savings which were used for local investment (Morrison, 2014). Decentralization of economic production increased both household and corporate savings significantly. Due to this policy, the country’s gross savings reached 53% of the GDP resulting in growth in domestic investment. China’s gross domestic savings are higher than its levels of local investments, meaning that the country has accumulated trade surplus making it a large lender globally.

Constraints to Future Economic Performance

China may face challenges in sustaining its economic growth in the future. According to Zhang (2017), China’s economic growth decreased from historic 10% average annually to 6.9% in 2015, and it is predicted to drop to 3.6% from 2021 to 2030. Morrison (2014) claims that countries with high economic growth rates are likely to slow down when they reach the middle-income level (per capita income that ranges from $1,006 to $12,275). China’s per capita GDP reached $7,575, and thus if it falls it may experience a middle-income trap. Yang (2013) notes that the current economic model has led to negative outcomes such as industrial policies that cause inefficiencies in many sectors, cheap labor, and over-reliance on fixed investment that may affect future economic growth. “Cheap labor and investment have been the key drivers of China’s rapid economic growth, but due to demographic changes, China is currently experiencing labor shortages and rising wages” (Zhang, 2017). The percentage of individuals aged 15 to 65 years increased steadily but began to fall in 2010, which may lead to a decrease in capital returns and labor shortage (Zhang, 2017). The country will experience a decrease in savings due to an increase in the aging population.

Over-reliance on capital investment is another indicator that China may get stuck in the middle-income trap. Fixed investment accounted for more than 60% of GDP growth from 2001 to 2008 which was an increase of 20% from 1990 to 2000 due to high saving rates (Morrison, 2014). Over the last decade, the country’s output ratio has increased meaning that Investment is becoming less efficient. The country has been experiencing a decrease in investment since 2012 due to debts and excess capacity. Besides, private consumption decreased from 48.8% to 36.3% of the GDP from 1990 to 2012 making it the lowest of all major economies (Morrison, 2014). An incomplete transition from centrally-planned to the free market has contributed to over-reliance on investment. Although the country allows the use of free market forces, the government is a key player of economic growth. The number of state-owned firms decreased significantly following the implementation of economic reforms, but they are dominant in several sectors such as transportation, utilities, and telecommunications which protect them from the competition. Banks have made loans easily accessible to state-owned firms while making it difficult for private firms to gain sufficient capital funding to thrive. Industrial policies have also limited the growth and competition of the private sector by lowering the cost of land, water, capital and energy below the market levels (Yang, 2013). The government must encourage rebalancing and a shift towards higher consumption to maintain economic growth.

China’s ability to implement economic reforms, particularly, on collaboration between markets and government to hasten the transition of the country to a free market economy, will help to sustain its rapid economic growth in the future. Yueh (2015) contends that China requires not only human capital and technological improvements but also re-balancing of its economy and reform of the government’s role to sustain growth in the future. Rebalancing will involve boosting local demand (government spending, investment, and consumption) to ensure that it grows more than exports to shift the economy away from agriculture and towards services. Zhang (2017) notes that the Chinese government is making an effort to transform the nature of the economic growth from relying on exports and investments to being driven more by innovation and domestic demand. The country has implemented measures and policies to promote indigenous innovation and reform to bring new drivers for productivity and economic growth.

Conclusion

Economic reforms towards a free-market economy and TPF growth contributed to the rapid and persistent economic growth in China. Reallocation of capital and labor from agricultural and state-owned sectors to non-agricultural and non-stated controlled sector support TFP growth. Trade liberalization and accumulation of capital from huge savings and foreign investment are significant drivers for economic growth. Rising foreign investment, trade liberation, the growth of labor inputs and increased spending in innovation will help China sustain its economic growth in the future. However, the declining growth rate of the labor force, aging population, and over-reliance on foreign investment may limit economic growth over time. The government needs to alter its current economic growth model to increase efficiency and boost competition.

References

1. Esmail, H., & Shili, N. (2017). Key Factors of China’s Economic Emergence. Mediterranean Journal of Social Sciences, 8(3): 251-257. 10.5901/mjss.2017.v8n3p251.
2. Iida, T., Shoji, K., & Yoneyama, S. (2018). What Drives China’s Growth? Evidence from Micro-level Data (No. 18-E-19). Bank of Japan. Retrieved from http://boj.or.jp/en/research/wps_rev/wps_2018/data/wp18e19.pdf
3. Morrison, W. M. (2014). China’s Economic Rise: History, Trends, Challenges, and Implications for the United States. Retrieved from http://www.refworld.org/pdfid/52cfef6b4.pdf
4. Yang, L. (2013). China’s Growth Miracle: Past, Present, and Future. United Nation Research Institute for Social Development, 7. Retrieved from http://www.unrisd.org/80256B3C005BD6AB%2F(httpAuxPages)%2F2893F14F41998392C1257BC600385B21%2F$file%2FChina’s%20growth%20miracle%200808.pdf
5. Yueh, L. (2015). China’s Growth: A Brief History. Harvard Business Review. Retrieved from https://hbr.org/2015/12/chinas-growth-a-brief-history

Informative Essay on the Globalization of Starbucks in China

Introduction

It is quite apparent that globalization is an aspect of modern-day capitalization. Economically, it connects parts of the world through capital investment and product movement. For example, this means that someone in Canada is able to purchase items from the United States and receive them in as early as one-two business days with the transportation technologies available for shipping goods today. Currently, in literature there are conflicting stances on globalization. There are three viewpoints expressed by William Norton and Michael Mercier in ‘Human Geography’ (2016). These include, the hyperglobalist, skeptic, and transformationalist theses. The hyperglobalist thesis is pro-globalization, taking an optimistic look at globalization. Hyperglobalists believe that civilization is founded upon global capitalism and government authority. In between, skeptics are mainly anti-globalization, the central features being that regionalism creates a less interconnected world compared to the nineteenth century. Lastly, the transformationalist thesis is anti-globalization along with the central feature being thick globalization, focusing on the intensity of globalization (Norton & Mercier, 2019). The relationship between economic globalization and China represents the hyperglobalist thesis. It is because of the popular global company of Starbucks opening stores in this country, that lead to the Chinese government having increased job opportunities, health insurance available to more citizens, and a better market that strengthens the nation-state.

The Starbucks Corporation is American based with many subsidiaries all over the world. With the help of international companies and shipping, this coffeehouse is one of the most popular on a global scale. This coffee chain began in the late 90’s, opening its first store in Seattle, the US. Gradually new stores began to open up in more and more cities around the world. Today, there is a Starbucks in almost every city across Canada, and in countries you would not even imagine one to be in. For any business, employees and a steady income are needed to keep it running. Many believed the coffee store would be unsuccessful in China due to the lack of popularity coffee has in that country. Ingrained in Chinese culture is tea drinking. Starbucks took this into consideration while making their stores in this area. This resulted in the company altering their stores to be more of local business, catering to the differing preferences of the citizens in China compared to America. They brought entirely new beverages that were coffee-free, and designed the stores for local consumers. In the United States, Starbucks is designed to be more of a stop and go, single shop, and in Asian countries, the stores cater to larger groups with increased moveable seating available. Additionally, with the advancement of the Starbucks app, it is known to be consumer centric, allowing customers to gain rewards and personalize drink suggestions. Moreover, in the Yunnan province of China, the Starbucks chain teamed up with the Chinese government to create a thriving coffee industry. In the New Statesman article (2010), it was stated that the Memorandum of Understanding (MOU), the Yunnan Academy of Agricultural Science (YAAS), along with the People’s Government of Pu’er City came to an agreement that local farmers were to be supported with the “promotion of responsible coffee-growing practices and development of localized coffee” (p. 1). Starbucks claimed that this goal would be reached with the help of their investments from “a coffee development center, coffee farmer support center, and coffee processing facilities in Pu’er” (p. 1). The company claimed that this would create a vaster availability of coffee in the country. Overall, this initiative helps the future of local farmers and the environment and communities they live in. The job opportunities available, not only for the physical Starbucks stores themselves, but for the local farmers, provided an economically thriving coffee industry that once began in the United States, and now caters to China.

Not only were there more job opportunities for the Chinese citizens, but benefits came along with them. Recently in 2017, Starbucks in China started offering health insurance for the parents of the employees. Starbucks holds an annual employee meeting that involves parents and from there, they began offering health insurance to those individuals. This insurance plan is known to cover treatment for over 30 illnesses, including cancer, and select surgery costs. McGregor (2017) believes these benefits given out have helped approximately “10,000 parents of Starbucks workers in China” (p. 1). This insurance plan arose when there were over 2,600 Starbucks stores in the country. This promoted further growth for this company and helped many lives across overly populated China. At this time, American-Chinese tensions were high, politically, and these benefits show the support from a thriving American business to struggling Chinese parents. “The idea for the Starbucks China Parent Care Program, as the new benefit was called, grew out of a fund Starbucks operates in four major markets, including China, that provides financial assistance to employees and their families in times of need” (McGregor, 2017, p. 2). The company found out through discussions with their employees that over 70 percent of Starbucks employees were worried about the health of their parents and the lack of financial strength they have to assist them. The people who are eligible for this health insurance are those who have worked for the company for a minimum of 2 years and those whose parents are younger than 75, and residing in China. “It is intended to complement the country’s government-run health insurance, which provides basic coverage” (McGregor, 2017, p. 2). Furthermore, in McGregor’s article, lead chairman of the Starbucks franchise, Howard Schultz, said “there isn’t one rule for how to build a company or how to lead an organization, many times you have to customize your leadership style for what it is you’re trying to do and make it as relevant as possible to the people you’re trying to lead and manage” (p. 3). Thus, the decision to release this health insurance plan for elder people in need, strengthens the nation state’s health and improves the living conditions.

It is no surprise that Starbucks began to thrive in China, as it does in many other parts of the world. The capitalist circuit learned from lecture can be used to describe how the market increased as a result. The money invested into building Starbucks and altering it to meet the needs of Chinese culture, required manual labor power, skills and a means of production for things like the raw materials. Putting everything together in a factory to become commodities is part of the production process that creates a whole new commodity that did not exist prior to production. What comes out of this entire cycle is the money surplus, sustaining so many people’s jobs and allowing an insurance plan to be in place. Starbucks is a prime example of economic globalization in action because there are stores across the world with products that are globally produced. Overall, the de-concentration of these processes to different parts of the world allows for an integration among national borders.

The economic globalization of Starbucks strengthens the nation state of China more than just politically. It is through the numerous job opportunities available, older citizens in need being able to receive health insurance, and the coffee market thriving for farmers and distributors, that makes this company a positive attribute for China’s government and its people. Starbucks being able to alter their beverage options to cater different cultures and tastes of people all over the world makes the consumers feel as though the company “never feels like an impersonal American corporate giant” (Animucka, 2015, p. 1). Generally, the globalization process that goes into each and every Starbucks drink, in terms of production, technology, transportation, and money, the process strengthens the nation state while improving the coffee industry that is consumed globally by society. The international scale Starbucks has grown to, having approximately 20,000 stores within 63 countries as of 2015, proves that the capitalist circuit is constantly in action to meet the needs of individuals around the world (Starbucks, 2015). Starbucks provides an interconnectedness in various places in the world through economic, political, cultural and ecological processes.

Overall, the nation state of China has enabled economic globalization with the company of Starbucks deciding to reach this population with the help of local coffee farmers and government connections and agreements between the United States and China with a sense of imperialism, control over the weaker nation-state of China, through the more powerful one of the U.S.

China’s Response to US-China Trade War: An Essay

The economic relations of US and China started shaking in mid-2017 when US President Donald Trump increased tariffs on Chinese imports and from the beginning of the first day of 2019, the trade war between US and China takes a point from where, resolving the problem seems next to impossible. Despite the US tariffs taking their toll on Chinese economy, the response shown by China is regarded as relative restraint.US trade representative office formed a list of $200 billion worth of Chinese goods that can be exposed to 25% increase in duty, instigating China to threaten further retribution.

Here is a look on China’s reaction in form of both international and domestic reforms:

Expanding Trade and Free Trade Agreements

Chinese exporters are bewildered with heightened tariffs when selling to US while the importers of US goods are strangulated with China’s own retaliatory tariffs. Since the trade war emerged, China has been hit with additional tariffs ranging from 5% to 25% on US$110 billion worth of US exports, this has pushed the Chinese consumers and businesses to face an extra cost on almost every product imported from US. In response to this China’s imports from US has declined at a rate of 25% year on year reflecting China’s efforts to bond with other trade partners like Sri Lanka, India, Bangladesh, South-Korea and Laos. Beginning from 1 july2018 the tariffs on a total of 8549 targeted goods imported from five Asian countries have been reduced or cut to zero. China has also upgraded its free trade agreement with Singapore, i.e. CSFTA, in November 2018, finally closing a series of back and forth negotiations for three years.

Tax Reforms and Incentives

For companies who are considering trimming due to the wrath of trade war, China has recently announced incentives to help them lower the unemployment insurance obligations. To ease the tension on China based importers, who are hardest hit by the tariffs – China first increased the export tax rebate for 397 products and later announced the export tax rebate increase more broadly. Along with this China has also expedited its individual income tax reform to lower the pressure on low- and middle-income earners and increase the consumption. “The aim of new IIT law is to ease the burden on low to middle income earners while taking a tougher stance on both foreign workers and high-income earners” (China Briefing, September 2018).

Enticing Investment to Pawn the Trade War Effects

China has made great efforts in improving its business atmosphere over the past year and with trade war speeding up its forecasted improvements. Some of the highlighted measures are:

• New policies to facilitate investments and trade like streamlined custom procedures.
• Response by regional governments in the form of policies like one-time cash rewards, infrastructure investments and reduced business costs at both provincial and municipal level.
• China has taken significant steps to improve its intellectual property (IP) rights, a major issue in US complaints against China. Changes in this regard are the creation of a special court for intellectual property rights at the national level and stricter penalties for intellectual property infringements.

Encouraging China’s Economy

To tackle the ambiguity caused by the trade war, China has fast-tracked the stimulus to splurge the nation’s economy to some extent. An example of this is the decision by China central bank to provide RMB 10 billion (US$1.4 billion) in credit support to enhance private lending and previously announced infrastructure spending increases. Also, strenuous efforts are being made to boost small and micro businesses through extended financial support and lending by government departments. Instead of these rigorous efforts, China is unwilling and somehow unable to take large steps to improve the economy, the reason being the large debt due to massive spending during the global financial crisis. “Data suggests that China’s total debt surpassed 300 percent of GDP IN Q3 2008” (Institute of International Finance). This has led to a dilemma for local governments and financial institutions between boosting lending and reducing debt. Although the priorities are unclear at the local level, still the Chinese government had made sure not to overspend and be precarious and more goal oriented.

Speeding up Domestic Reforms

Measures like export tax rebates and incentives to avoid layoffs are mainly focused on interim relief for firms affected by tariffs and trade fiction. On the other hand, policies such as RCEP, tariff and tax cuts and IIT reforms that were already planned are being fast-tracked in order to speed up governments pre-existing reform agenda due to the trade war. These policies can reduce the pain felt by the companies hurt by the trade war but don’t compare to the scale of governments response to its massive economic challenge last year. This strategy of the Chinese government to move forward with a structural transition towards domestic consumption and high-tech innovation have high dividends in the mid to long term.

Conclusion

President Donald Trump’s lack of diplomacy and aggressiveness and business-like approach is noteworthy on the other side the assertive approach of Chinas president Xi Jinping repents the new era of US-China trade relations. With taxes and restrictions China tried to repatriate all the belongings of the American nation with protectionist measures. The Chinese government choose a nifty way to go around tariffs by letting the Yuan weaken against the US dollar. At this point it is difficult to make speculations about who will come out as a winner, but currently US-China trade war is a significant threat to rule based multilateral trading system. China’s targeted and more conscious measures also indicates the lesson learned by them during the global financial crisis which made the nation indebted due to pouring billions in financial stimulus. Trade war has also affected the goals set by Chinese government for the national plan ‘Made in China 2025’. The main concern growing out of trade war is for China’s intellectual property environment. This has led to an urgent need to reform China’s IP system from different aspects. As the time passes the impact of trade war gets more real and shorter-term emergency measures could jump up high in the agenda.

US Trade with China: Pros and Cons

To constructively engineer the threshold of this scholarly piece, it’s quite apt to quip that trade which ordinarily means buying and selling is the heart of every nation and country. It is so germane for the growth of any Country, that’s the reason it can be noticed that the countries that are dominating are actually countries that are well established in commerce. Seeing then the salient vitality of trade, over the years there has been a ‘trade war’ and of course, this trade war has reverberated on global politics in no small measure. Hence, this paper accords the privilege to have this topic distilled and jurisprudentially fine-tuned

Sequel to this, it is an undeniable fact that no nation can actually exist independently of the rest because everyone relies on the other for technological, material, and even Intellectual importation, and it must be stressed that not even the acclaimed U.S.A. exists independently of international interaction. In lieu of this, it is apparent that trade actually comes to the fore in other for each nation to exchange its legal tender for commodities.

At this juncture, it is applaudable that swift attention is given to the political underpinning of international trade. Even before nation A trades with nation B, no matter how much A needs the commodity from B, the latter must be in political Concordia with the former. Hence, it’s not an overstatement to say the biggest molecule in trade is the political factor.

Before further procession in this very resourceful and realistic piece, the term trade war should be given intellectual demystification; trade war in International Law is a political cum economic situation of hostility between two countries that fire up policies against the product of one another in each of their countries.

Over the years and even at present, the prime countries whom everyone is interested in their trade war are U.S. and China. This is no longer news to anyone who is internationally aware of current events. Actually, this war has been from years back. Throughout history, trade wars have been hardly uncommon, with numerous precedents between the US and China. To date, the US has launched five ‘Section 301′ investigations’ against China since 1991, probing into areas of intellectual property rights, unfair trade barriers, and clean energy[footnoteRef:1]( Understanding) [1: Understanding China-US Trade War; Causes, Economic Impact and the Worst-case Scenario by Terence Tai-Leung Chong and Xiaoyang Li]

America as a country has been feeling intimidated by the sudden rather than gradual rising into dominance in trade. According to Comtrade (2018), in 2017, the US trade deficit with China increased to $363 billion, the highest bilateral trade deficit on record. It represents 42% of the total US trade deficit of $861 billion. And President Trump is trying his best possible to get rid of the trade deficit encountered by the Country, this has been the reason the US has been levying a heavy tariff on Chinese products. Hence, the reason for US protectionist measures as well as China’s retaliatory[footnoteRef:2] [2: Comtrade]

On this note, it behooves to note that, stringent tariff plans in the international economy are most times levied to discourage the products from a Country so that the latter will pay an unnecessarily higher price to get the goods in and as a result, would need to hike the price after the goods are in… These unavoidably hiked prices by the former would frustrate the consumers of such products and at the long run; the latter would be more frustrated to trade with such Country. Such tariff increment in this case was borne out of political insecurity and commercial intimidation.

America as she is doesn’t want to lose her as the World Power to China and she actually has all the reasons to do that. Recently, the Chinese Government made a vision for China 2025 with one of the aims being that the Yuan would be the most valuable currency in the world currently China has received the Most Favored Nation status which poses clearer competition with America’s dominance. Out of the 3 trillion that America gains in a minute, China has a 200 billion- 47% deficit[footnoteRef:3] [3: Youtube.com/David Pet-David/ Valuetainment/ Trade-war]

After two years of practical hostility, China and US agreed to sign ‘Phase One Agreements’ where China halved tariffs on 1,717 goods she imported from the US and boost them by $200b. A closer look at China’s net exports reveals that a significant portion of them comes from the trade surplus with the US. The reliance on US trade leads to concerns that China might suffer substantial losses from the trade war. This uncertainty weighs on market sentiments and results in capital flowing out of China, which in turn suppresses its asset prices. Some journalists and commentators also suggest that the China-US trade war might eventually evolve into a new Cold War, which will severely imperil the stability of the global political and economic environment[footnoteRef:4] [4: Understanding China-US Trade War; Causes, Economic Impact and the Worst-case Scenario by Terence Tai-Leung Chong and Xiaoyang Li]

Now shall proper attention be given to the political side of the whole trade war, because it has been said that really more often than not, the real motives behind a trade war are beyond economic reasoning while they appear to be related to economics, they are in fact politically driven[footnoteRef:5] America has always been positioning itself as the World Power, this has been seen so many times where anything had gone wrong and America would send troupes to such locations? However, on the other hand, countries like Russia, Japan, and China are making headway in technological advancement and commercial dominance, but the most threatening of them all is China. It is no hidden truth that America is afraid of how China might later come to take her place in global politics and all… And of course, it should be borne in mind that as this war started in 2018, if it is not properly curtailed, it would lead to a full fledge war, which would have another drastic impact on global friendship and even global health, or has the bombing at Hiroshima and Nagasaki hastily forgotten? [5: Understanding China-US Trade War; Causes, Economic Impact and the Worst-case Scenario by Terence Tai-Leung Chong and Xiaoyang Li]

China from her side is vehemently making moves to totally dominate the world economy, even now; the Chinese Yuan is being preferred at the exchange table gradually. And strangely, statistics and intelligence report has shown that ever since the beginning of this trade war, both countries had started plumbing more funds for military and technological research. Meaning that both countries are at the shells ready to drop bombshells at the slightest moment… All this plumbing of more funds into security came about as the trade war is being cultured, hence, it is obvious that the trade war has a resounding effect on global politics.

On this political note, it is noteworthy that the successful buoyancy of China despite harsh measures of America is already making certain nations who depend on America economically and politically see the possibility it can be done without as China is currently doing… So it is apparent, that really, this trade war though mumbling voices in the economical room, is echoing in thousands of decibels in the whole estate of politics.

After much-intensified research, the major solution to this Trade war is that given by Gene and Elhanan[footnoteRef:6]. This has of course proved to be efficient right from time; the shadows of these conflicts in the 90s were solved by diplomatic means. First of all, Stiglitz had submitted that actually the US deficits are caused by low savings; therefore, the solution is to increase American savings[footnoteRef:7]. Hence, it is the submission of this paper that the only solution which would save the world from a real war is for the two to seat at a table and settle scores and interests, fine-tune everything man to man. [6: Trade Wars and Trade Talks by Gene Grossman and Elhanan Helpman] [7: Joseph Stiglitz, “The US is at Risk of Losing a Trade War with China”, Project Syndicate, July 30, 2018, https://www.project-syndicate.org/commentary/trump-loses-trade-war-with-china-by-joseph-e–stiglitz-2018-07?barrier=accesspaylog]