How Is the US-China Trade War Impacting Emerging Economies?
Emerging Countries and the Effects of the Trade War between US and China Since 2018, the multilateral trading system has faced significant challenges due to unilateral trade policies imposed by the United States, particularly with China. A major factor driving these actions was the growing U.S. trade deficit, especially with China. In 2017, the U.S. trade deficit with China reached a record $363 billion, accounting for 42% of the total U.S. trade deficit of $861 billion, according to Comtrade (2018). U.S. President Donald Trump has repeatedly criticized this large deficit, blaming it on China’s “unfair” trade practices, such as protectionism and intellectual property violations. In response, the U.S. Trade Representative (USTR) launched an investigation, which concluded that steel and aluminum imports posed a threat to national security under Section 232 of the Trade Expansion Act of 1962.
The USTR’s report, delivered to President Trump in January 2018, recommended imposing tariffs of 24% on all steel imports and 7.7% on aluminum products. Following this recommendation, Trump enacted a 25% tariff on steel imports and a 10% tariff on aluminum in March 2018. Additionally, in April 2018, Trump announced a tariff list targeting $50 billion worth of Chinese products. China retaliated by imposing tariffs on U.S. goods, including a 25% tariff on U.S. soybeans, and notified the World Trade Organization (WTO) of its measures.
While there have been few studies analyzing the impacts of the U.S.-China trade war due to its recent nature, some research, such as that by Ciuriak and Xiao (2018) and Bollen and Rojas-Romagosa (2018), has already highlighted the detrimental effects of increased protectionism, particularly on the U.S. and China. These studies focused on the trade and welfare losses in the countries directly involved in the trade war, especially sectors like steel and aluminum.
This article aims to broaden the scope by analyzing the impact of protectionist measures on emerging countries such as Argentina, Brazil, and India, and examining sectors of particular interest to these countries, such as soybeans and dairy. The shift in demand caused by the trade war presents potential benefits for emerging economies not directly involved in the dispute, as they can exploit their comparative advantages in affected sectors. Therefore, while the trade conflict may cause overall welfare and trade losses for the U.S., China, and the global economy, certain sectors in emerging countries may stand to gain.
The study uses a computable general equilibrium model based on the GTAP version 9 database to estimate the economic effects of the U.S.-China trade conflict. The analysis considers two scenarios: one where only U.S. tariffs are imposed, and another in which Chinese retaliation is also accounted for. The model evaluates the impacts on trade balances, production, and welfare, focusing on sectors where emerging countries have a competitive advantage.
The results show that, in both scenarios, U.S. production would increase and its trade deficit would reduce, which aligns with President Trump’s objectives. However, these benefits are accompanied by a welfare loss due to inefficient resource allocation in the U.S. economy, and this loss is even greater in China. For emerging countries not directly affected by the trade war, there would be gains in exports and welfare, particularly in competitive sectors like agriculture and manufacturing.
The remainder of this paper is structured as follows: Section 2 presents the methodology and simulation details, as well as the protectionist measures adopted by the U.S. and China. Section 3 analyzes the results of the two scenarios, with a focus on international trade and welfare. Section 4 compares the findings with the limited existing literature on the subject. Finally, Section 5 concludes the paper.
Abstract:
The trade war between the United States and China has caused ripple effects across the global economy, particularly in emerging markets. This article explores how the trade conflict impacts developing economies, examining both the challenges and opportunities for these countries. With shifting trade dynamics, emerging economies must navigate complex economic shifts to survive and thrive in this evolving landscape.
Understanding the US-China Trade War and Its Global Impact
The U.S.-China trade war began when the U.S. imposed tariffs on Chinese goods, citing unfair trade practices and intellectual property theft. China retaliated with tariffs on American products, and both countries engaged in a series of tit-for-tat trade restrictions. These actions caused significant disruptions in global supply chains and altered the flow of goods, services, and capital across borders.
Key Points of the US-China Trade War:
- Tariffs and Trade Barriers: Both nations imposed heavy tariffs on hundreds of billions of dollars worth of each other’s goods, impacting global trade dynamics.
- Global Supply Chains Disrupted: The reliance on China as a manufacturing hub for goods has caused companies to rethink their supply chain strategies, looking for alternative suppliers.
- Uncertainty in Global Markets: The ongoing trade conflict has created volatility in financial markets, increasing economic uncertainty for countries that depend on international trade.
Effects on Emerging Markets: Risks and Opportunities
Emerging countries, often reliant on exports, foreign direct investment, and global supply chains, have experienced various impacts as a result of the U.S.-China trade war. The effects can be grouped into both negative and positive aspects.
Negative Effects of the US-China Trade War on Emerging Economies
- Trade Disruptions and Reduced Exports: Many emerging markets, such as those in Southeast Asia, Africa, and Latin America, are closely tied to China for trade and supply chain integration. Disruptions to global trade flow and tariffs on Chinese goods can result in reduced demand for exports from these countries, hurting their economies.
- Rising Costs and Inflation: With increased tariffs on goods imported from China, some emerging countries face higher costs for raw materials and finished products. This can result in inflationary pressure, making essential goods and services more expensive for local consumers.
- Reduced Foreign Investment: The trade war has created economic uncertainty, discouraging foreign investment in certain regions. Investors may hesitate to put capital into markets that are directly affected by global trade tensions, leading to a slowdown in growth.
Positive Effects of the US-China Trade War on Emerging Economies
- Opportunities for Trade Diversification: As China and the U.S. shift their trade patterns, emerging countries have the opportunity to fill gaps in global supply chains. Nations in Southeast Asia and Latin America, for example, have seen increased exports to the U.S. as companies look to source goods from new locations outside of China.
- Shift in Manufacturing Hubs: Some countries in Asia, such as Vietnam, India, and Bangladesh, are benefiting from companies moving their manufacturing operations out of China due to higher tariffs. These nations are becoming more attractive as alternative manufacturing hubs, creating job opportunities and boosting local industries.
- Stronger Regional Trade Agreements: The trade war has pushed many emerging countries to strengthen regional trade agreements and alliances, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) or the African Continental Free Trade Area (AfCFTA). These agreements can help reduce dependence on China and the U.S., providing more stable trade relationships.
How Emerging Countries Can Navigate the Trade War
While the U.S.-China trade war presents challenges, there are strategies emerging economies can use to mitigate risks and capitalize on new opportunities:
- Diversifying Trade Partners: Emerging economies should focus on diversifying their trade relationships with countries outside of the U.S. and China. Building stronger ties with regional partners can reduce the impact of global trade disruptions.
- Boosting Domestic Industries: By investing in domestic industries and encouraging local production, emerging countries can reduce their dependency on global supply chains and build more resilient economies.
- Attracting Foreign Investment: To compensate for the potential slowdown in investment due to trade uncertainties, emerging markets can offer incentives to attract foreign investment, particularly in sectors like technology, infrastructure, and manufacturing.
- Strengthening Regional Cooperation: Enhancing regional cooperation through trade agreements, such as the African Continental Free Trade Area or the Regional Comprehensive Economic Partnership (RCEP), can help create more stability and reduce reliance on the U.S. and China.
Conclusion
The U.S.-China trade war has created a new global trade environment, one that is unpredictable and challenging for emerging economies. While these nations face significant risks—such as reduced exports, inflation, and investment uncertainty—there are also opportunities for growth. By diversifying trade relationships, attracting foreign investment, and fostering regional cooperation, emerging countries can navigate the current trade tensions and position themselves for future success.
FAQ
1. How does the US-China trade war affect emerging economies?
The trade war creates both risks and opportunities. Negative effects include trade disruptions, rising costs, and reduced foreign investment, while positive effects include trade diversification and stronger regional trade agreements.
2. Which countries benefit from the trade war?
Countries like Vietnam, India, and Mexico are benefiting from the shift of manufacturing away from China and increased demand for their exports.
3. What sectors are most impacted by the trade war in emerging markets?
Sectors like manufacturing, agriculture, and technology are most affected, with disruptions to supply chains and changing demand for goods.
4. How can emerging countries protect their economies during the trade war?
Emerging markets can diversify trade partners, invest in domestic industries, attract foreign investment, and strengthen regional cooperation through trade agreements.
5. Does the trade war create long-term opportunities for emerging economies?
Yes, countries that adapt to new global trade dynamics, such as by increasing exports to alternative markets or becoming manufacturing hubs, can capitalize on long-term growth opportunities.
6. How can emerging countries reduce reliance on China and the U.S.?
By building stronger regional trade partnerships and pursuing economic policies that focus on domestic industries and diversification, emerging economies can reduce dependency on China and the U.S.