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Yelian Garcia Explains the Trade War Between the U.S. and China

When current United States’ administration took office, a lot of people were a little unsure of what to expect. The switch from a Democratic presidency to a Republican one and vice versa is always met with skepticism by some and hope by others. The current administration is certainly unconventional and seems to pride itself on being the exception to a lot of rules, most of which have served us well in their intact form.  The rise of Trump certainly got a lot of people interested in seeing just how things would turn out in areas like international policy, taxation, regulation, small business opportunities, and much more. 

Soon after taking office, the president set his focus on many of the persistent trade deficit that the U.S has been running vis-à-vis its main trading partners. Specifically, he focused on China’s contribution to these trade deficits. And somewhat rightly so. China has just recently surpassed Canada as America’s number one trading partner with the as much as $636 billion in value traded. More importantly, however, the deficit within this trade was $375 billion during 2017, more than a billion dollars a day. Trade tensions between the U.S and China are nothing new, but with Trump and advisors like Peter Navarro the sporadic tensions and talks have escalated into a definite trade war; one which is presently among the most popular and relevant topics in geo-politics and global finance.

A War on Inequality

In order to reduce the deficit, the administration decided to initiate a trade war with the sole purpose of equalizing the playing field. To do so, they slowly started implementing various tariffs on imports that come from China. So, companies that bring in their goods to the United States were now forced to pay a higher price that included the added tariff. In theory, doing something like this made perfect sense as it was a common practice that many countries utilized in the past. Even the previous Democratic administration had instances where it implemented tariffs in order to punish certain nations or make it a more leveled playing field. Unfortunately, China’s reaction was also quite predictable. 

Tit-For-Tat Situation

After undergoing tariffs that made it less profitable for Chinese exporters to deliver to the United States, China’s government created their own tariffs. To better understand the timeline of the events, consider the following: 

  • The very first tariff implemented by the U.S. on China happened on February 7th of 2018;
  • The next important development came in March when the U.S. created a 25-percent import tariff on steel;
  • China responded with a tariff on 128 products that amounted to $3 billion.

The events kept unfolding and numbers kept growing until eventually reaching tens of billions of dollars in tariffs on both sides. 

Effects on Ordinary People

According to a successful investor and CFA candidate, Yelian Garcia, the trade war’s most concerning consequences are those that the ordinary citizens must endure. Given that the import prices of China’s goods went up, China and importers simply passed on most of these costs. They did so by increasing selling prices and making the end-users in the U.S. pay more. Thus, someone who may be running a business here in Peoria who requires steel to create their product would now have to pay 25 percent more to get their raw materials. This affects their own business as well as the consumers who would be charged more to compensate. In the end, import tariffs are a tax which is payed by the domestic consumer.

Potential Resolution and Further Escalations

After reaching over 100 billion in combined tariffs, the two nations agreed to negotiate in Berlin in the first week of May in 2018. Sadly, these talks resulted in no tangible solution to the problem as the demands from each side were too far apart to settle on a compromise. As Yelian Garcia points out, however, end-users in the United States kept paying higher prices during this time and a lot of their businesses were nowhere near as profitable during that quarter. The drama continued until the very end of 2018 when U.S. officials finally established contact with Chinese representatives. No action has taken place since then, however, as the tariffs are still active. 

The Arrest of Meng Wanzhou Further Complicates Matters

As the CFO of one of China’s largest companies, Huawei, Meng Wanzhou holds an important role that affects nations all over the world. So, when the news about this company’s payment acceptance from Iran broke out, they were in clear violation of worldwide sanctions. This led to the arrest of Wanzhou who was visiting Canada. Now, the Canadian government must decide if they will extradite the CFO to the U.S. or China for prosecution. Expectedly, both nations want to be the ones to take charge of the case. If the United States gets Wanzhou, however, it is fair to expect that the relations between the two countries will become even worse since China will like seek immediate retaliation.

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