China Escalates Trade War

Photo of author

( — August 7, 2019) — The US-China trade war has been going on for more than a year now, and it has been a war to remember. The victims of the war have been many, but most notably, it has been the global economy that has suffered the most. The largest economies in the world, including Europe, Canada, Australia, all of which have not been participating in the trade wars directly, have seen the damage done to their rate of growth over the past year. The damage was not done to international industries either. What has been most damaged is the rate of spending by consumers. This means that retail and entertainment industries have seen some of the biggest declines. According to this gaming blog, the film industry, the gaming industry and even the casino industry have all seen huge declines in consumer spending. A crisis is approaching, according to the representatives of this blog. 

So, when the trade talks resumed two weeks ago, the world was ready to use an end, a conclusion or at least an abatement of some of the biggest tariffs and bans associated with the trade wars. But then Donald Trump, the President of the United States, decided to impose, unexpectedly, new tariffs on Chinese imports. These bans amounted to around $300 Billion in tariffs. The expectations, as a result, were for China to retaliate, which is exactly what happened on Monday morning. The Chinese side has decided to retaliate by introducing policies that would be incredibly damaging to the US economy, the political situation currently in the country and businesses from the US that operate with China. 

US crops ban

The first thing that the Chinese government announced on Monday was that it was going to request from the agricultural companies operating within the mainland that they do not buy soy and corn crops from the US. The largest companies have been told personally, but the policy is applied to all of the other companies that operate within the country. This is a direct hit to the US economy and political climate, as China is looking to cause problems for the American economy in retaliation to the tariffs. The Chinese policymakers are hoping that this retaliation will cause a lot of trouble to the US. 

The strategy is expected to work as expected, as the situation with the soy and corn growers within the US is already complicated. Trump, not one month earlier, had promised that after the trade talks are completed, China would be buying more soy and corn from the US than ever before. Currently, China is not going to be purchasing anything in the near future. The broken promise is going to mean that the farmers are going to be very disappointed in the Trump administration and might express this in the 2020 voting. But, there is more to the decision than just affecting the political situation within the country. The fact that US-based farmers will not be able to sell their crops around the world, means that many will lose savings or will not be able to earn anything for the year. This means that the US economy is going to see a surplus of production and a deficit of consumption, which is going to negatively affect the already dangerously slowing economy of the US. 

Yuan exchange rate lowered

China does not intend to only hit the average farmer or the agriculture industry within the US though. Combined with the ban to purchase US crops, China has also decided to look into changing the exchange rate between USD and Yuan. As a result, Yuan was set to above 7 for the first time in a very long time. This has some very negative implications for businesses and traders around the world. Those US companies, such as apple, who had done a large amount of trading with Chinese clients and have failed to convert their financial assets to US currency will be considered to have made less money so far. Furthermore, the lowering of the exchange rate will directly impact the purchasing ability of the local Chinese population, decreasing the likelihood that people will buy goods such as phones or even America cars, because of the exchange rate. Finally, if the US was stockpiling a certain amount of Yuan in the past, it will now discover that it has way less money than it had before. 

Potential for retaliation

The Chinese decision to escalate the trade war has been met quite negatively by the rest of the world, but there are those who are fearing the retaliation of the US even more. While the US administration deliberates what their retaliation will be, which means imposing some more tariffs on Chinese goods and possibly banning certain goods all around, the effects on the markets are going to be very negative, damaging the economies of both countries a great deal in the near future.