Trade War, China US

China and the United States of America (the “USA”) have been engaged in an ongoing trade war since the 1990s which was recently escalated in 2018 resulting in higher tariffs and duties on imported goods in both countries.

trade war

 

China-US trade war

The underlying claims by the USA against China, such as its abuse of the American economy and competitive markets on the grounds of currency manipulation, tax evasion, stealing intellectual property and misreporting the trade data, is not new. Moreover, the recent escalation in the trade war between the two countries is rapidly reshaping the global market and economy.

This article argues how trade wars have a direct correlation with the concept of price elasticity of demand. Where, the consumers are the ultimate payers of the increased costs of final goods.  

Research on tariffs and the consumer price index

Evidence-based research shows that “the full incidence of the tariff falls on domestic consumers, with a reduction in U.S. real income (which results in added welfare cost) of $1.4 billion per month by the end of 2018” while finding similar negative effects on net income of consumers of those countries that have entered into a trade war with the USA. Data illustrates that tariffs had an immediate effect on prices in the USA. For instance, with imposing tariffs on the washing machine, the CPI of appliances rose sharply reversing its failing patters from previous years).

Price elasticity of demand

Looking at the theory of price elasticity of demand in light of an increase in the prices, the demand will fall on imported products. Where the mentioned demand will be elastic on goods imported and subject to tariffs.

trade war

Elastic and inelastic products

The price elasticity of the demand rate is different for elastic and inelastic products. For example, in the case of an inelastic product such as crude oil, imposed 5% tariffs on the US is likely to increase in price. however it does not result in significant changes in the quantity of demand. In this case, consumers experience the financial pressure and are the true payers of the tariffs. On the other hand, elastic products have higher sensitivity to price changes as a result of tariffs which decrease the quantity of demand.

The fact that elastic products have a higher potential to be substituted by third countries or local suppliers. For instance, imposed tariffs on Chinese shoes will lower the demand for these products and may improve the market situation for local suppliers.

Summary

In summary, research studies on the effects of imposed tariffs and duties illustrate that the final consumers are the main payers of trade war. While studies suggest that China suffers more from this trade war. Additionally, the global markets and the US economy are closely dependent on the Chinese economy; As such, a decrease in demand in the US or China will negatively impact the other country’s economic environment.

References :

[1] Amiti, M., Redding, S. J., & Weinstein, D. (2019, March). The Impact of the 2018 Trade War on US Prices and Welfare. NBER Working Paper No. 25672

Saleh Shahriar. (2019) The Belt and Road initiative: what will china offer the world in its riseAsian Journal of Political Science 27:1, pages 152-156.

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