The Trade War: What's it all about?

The Trade War: What's it all about?

By acchabaccha

Just about 75 years back the very concept of war immediately brought to one’s mind a clash of humans, bayonets and bloodshed, bullets and bombs, guns and grenades. But with the “progress” of humans over the past several decades, war has now spread over a larger field of play. The “progress” has brought into existence newer concepts in warfare. There is now social warfare, political warfare, war against terrorism, cyber warfare etc. to name a few terms that have cropped up recently. Even space, which was clean and clear, has now become a new territory for warfare. However, within this ever-expanding battlefields, an economic warfare has become the focus of world attention these days. It is the Trade War. Two major economic giants are face to face possibly in a tit-for-tat economic war. The countries are the USA and China.

What is a Trade War? : It is an economic conflict resulting from extreme protectionism in which states create tariffs or other trade barriers against each other. This is usually in response to trade barriers created by the other party. It is a situation where countries try to damage each other’s trade.

Has there been Trade Wars earlier? :  History is replete with stories of trade fights. The First Anglo-Dutch War and the Second Anglo-Dutch War were fought between England and the Dutch during the 17th and 18th centuries for control of sea routes. The First Opium War was fought between the Qing Dynasty and the British Empire between 1839 and 1842 over ban on trafficking of substance. The Smoot-Hawley Tariff Act 1930 was introduced to protect the US farm sector. Retaliatory measure took place from other countries led to dip in US exports. In the early 1960s. France and Germany imposed tariffs on imports of chicken from the US leading to what got termed as Chicken Wars. The US retaliated by imposing higher tariffs several commodities including French brandy and Volkswagen buses. The Ronald Regan administration was involved in a trade fight which got named as the Pasta War.  In 2002 George W Bush introduced tariffs to revive the US steel industry. It backfired and led to job losses in the US.  

How the current trade stand-off between the US and China began? : US President Donald Trump had complained about China’s since before he took office in 2016. The US launched an investigation on China’s trade policies in 2017. It imposed tariffs on billions of dollars’ worth of Chinese products and the Chinese retaliated in kind. Both countries decided to halt further tariffs to allow for talks. Optimism grew on the prospect of a deal. That soon faded. The US has now more than doubled tariffs on 200bn of Chinese products. China retaliated by tariff hikes on 60bn of US goods.

Tit-for-Tat: The US has hit where it hurts most by going after Huawei which it suspects of being in bed with China’s military. The United States threatened to cut supplies of US technology needed by this Chinese telecom champion. If it does so, it would be taking the hatchet to Huawei’s heart. Huawei is the largest telecommunications-equipment manufacturer in the world. It is the second-largest manufacturer of smartphones in the world behind Samsung.  But Beijing has a powerful weapon it could use in this escalating tech war. It’s called Rare Earth.

What is Rare earth? : Rare earths are 17 elements critical to manufacturing everything from lightbulbs and cameras and televisions and smartphones and computers to guided missiles. They are the bedrock of electrical manufacturing and form the key components in the manufacturer of above items.

How rare is Rare earth? : While the name sends an indication that this item is “very rare”, the facts are just the opposite. There are several countries that have this mineral deposit. Australia, the US, Myanmar, Russia, India are among them. For much of the last century, the US dominated rare earth production. But mining this mineral creates a huge amount of toxic waste. In 2003 California’s Mountain Pass mine, the sole US miner of rare earth ceased production. China filled in the void. China now dominates the global supply chain. According to some sources, it is said that it meets over 95% of the world demand. While rare earths are mined in several other countries of the world, but for a variety of reasons -- including ample natural supply in China, production quotas imposed by the Chinese government over time, supply chain relationships, lax regulations and lower costs -- China wound up with a virtual monopoly on rare earth production. 

Where is this trade war heading to? : China has been sending cryptic warnings that rare earths could be its next weapon. If China chose to embargo this mineral, it could virtually shut down every automobile, computer, smartphone aircraft assembly line outside its own borders.

Impact of this trade war? : A quote often attributed to the 19th century French economist Frederic Bastiat, goes: “When goods do not cross frontiers, armies will.” That would not be the situation in the current trade war between the US and China. As for now, the effect of trade tensions is being felt mostly among manufacturers. The war has already entered a dangerous phase and it looks more likely to be long, messy and expensive. An escalating trade war would impact foreign exchange markets. Financial markets are already wobbling with each new trade-war headline. The fallout would spread well beyond the world’s two biggest economies. While consumers have shown little alarm over the trade row, a protracted trade war will likely have an effect and drag down the consumer economy. What we may be witnessing in the future is a “high tech cold war”.

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