What is a trade war, and is America acting fairly against China?

THREATS are building between China and the United States with both countries unveiling more tariffs on each other’s goods. So should we be worried?

Economists are worried that tariffs being imposed by US President Donald Trump are politicising trade between the US and China. Picture: Mandel Ngan/AFP

A FULL-blown trade war between China and the United States could be devastating, with some suggesting its impacts could be worse than the Global Financial Crisis (GFC).

This week more fears were raised that the dispute between the superpowers was getting out of hand, with both countries announcing more tariffs designed to hurt each other.

The Dow Jones industrial average plunged 501 points on Wednesday after China announced it would retaliate against measures announced by the US — although it has since recovered.

Many countries are worried about the impact to the world economy, which one report suggested could be as bad as the GFC in 2009.

Here’s what’s going on.

WHAT IS A TRADE WAR?

Essentially a trade war happens when countries start imposing tariffs (taxes) on each other’s products.

Putting a tax on something discourages these products from being brought into the country as it makes it more expensive.

In the past countries have embraced tariffs to protect local jobs and the profits of businesses.

“Basically the idea is that if you import goods from another country, you are not producing them yourself,” Lowy Institute International Economy Program director Roland Rajah told news.com.au.

But, he said, most economists agree that this way of thinking generally ignored the benefits of bringing in cheaper products from overseas.

“Open trade is a good thing and has played an important role in raising living standards,” he said.

This is because people are able to buy things more cheaply and can also have a wider range of products to choose from. Local producers also benefit because they can buy components for things they want to make at a cheaper price.

WHAT HAS CHINA DONE?

The trade war tit-for-tat began after America introduced tariffs on things like aluminium and steel imports, suggesting it was a punishment on China for allegedly stealing US technology.

American businesses have been complaining about the theft for years and last year US President Donald Trump ordered an investigation into Chinese practices.

On March 22, the findings were released and confirmed China had been trying to steal US technology and intellectual property. China has denied it steals or pressures foreign companies to hand over technology.

China announced a $3 billion list of US goods including pork, apples and steel pipe on Friday that it said may be hit with higher tariffs in a spiralling trade dispute with President Donald Trump that companies and investors worry could depress global commerce. Picture: Mark Schiefelbein/AP

The US has suggested tactics used included pressuring American companies to partner with Chinese companies and share their technology if they wanted to gain access to the Chinese market, forcing them to license their technology in China on unfavourable terms and even hacking into computers to steal trade secrets.

One example was the conviction in January of Chinese wind turbine manufacturer Sinovel Wind Group of stealing trade secrets from American company AMSC and nearly putting it out of business.

In 2014, a Pennsylvania grand jury also indicted five officers in the Chinese People’s Liberation Army on charges of hacking into the computers of Westinghouse, US Steel and other major companies to steal information that would benefit their Chinese competitors.

Mr Rajah said the US investigation of China recommended about $US50 billion ($A65 billion) worth of tariffs be introduced as a form of punishment, but he wasn’t sure all of the practices mentioned were improper.

While stealing technology was a legitimate concern and China’s investment in American technology companies could be seen as a strategic threat (but not an economic one), Mr Rajah wasn’t sure forcing US companies to partner with Chinese firms and licensing technology could be described as “unfair”.

“Every country is entitled to implement their own policies,” he said. “Is it predatory behaviour or just a state-led economic model?”

Another concern was that Mr Trump seemed to be acting unilaterally to punish China, instead of trying to resolve the problem through the World Trade Organisation.

“This creates more tension and means trade spats can get more political,” he said.

Mr Trump’s justifications were also often mixed, with some critics pointing to his concerns about America’s trade deficit with China.

“So he often has a protectionist tone rather than concern about what China is doing — so that’s a concern,” Mr Rajah said.

‘A GAME OF CHICKEN’

Many experts don’t believe a trade war is the best way to make trade with China fairer and the US announcements of tariffs on steel and aluminium imports from China have sparked a strong response.

Beijing quickly unveiled plans for duties targeting US products which depend on the Chinese market including soybeans, aircraft and autos — some of which send nearly 60 per cent of their exports to China.

America hit back on Wednesday, announcing a 25 per cent tariff on 1300 Chinese products including flat-screen televisions, medical devices, aircraft parts and batteries.

Chinese border police officers watch the arrival of a container ship at a port in Qingdao in eastern China’s Shandong province. Picture: Chinatopix via AP

“I think China is perfectly happy to play a game of chicken with the United States on this because they believe the US will blink first,” a trade policy expert at the Centre for Strategic and International Studies told AFP.

But it’s important to remember most of these tariffs may never come into effect.

Other than tariffs on steel and aluminium, the US will have a 30-day comment period before determining the final list of Chinese goods on the hit list, and China is also holding off pending talks.

“It’s basically a negotiating tactic,” Mr Rajah said.

“America is seeing practices that it doesn’t like and it is imposing tariffs unless China addresses those practices. It is now in a process of negotiation between the US and China.”

‘WORSE THAN THE GFC’

But experts are warning about the devastating impacts that a proper trade war could have on the world economy.

This week, modelling from KPMG found that a 5 percentage point increase in tariffs by all countries on manufactured goods could throw the UK, Canada and the European Union into recession. It could also slow Australia’s GDP growth by 0.8 percentage points.

“While this scenario results in a GFC-like impact, the world economy would probably take even longer to recover, given the increased levels of protectionism compared to a decade ago,” KPMG Australia chief economist Brendan Rynne told the Australian Financial Review.

Fortunately, Mr Rajah said we were still quite far away from this scenario, and a full-blown trade war was often defined as a conflict that saw a 5-15 per cent increase of tariffs on average across all goods.

He said even if you add up all the actual and threatened threats made recently by the US and China, they would still only cover a little over 1 per cent of global trade.

“Right now we are not in what I would call a ‘trade war’ situation,” he said.

“But the issue is there are still costs and these will fall on particular parts of the economy (if the US and Chinese measures go through).”

While the measures announced so far were still quite modest, they could snowball if both countries continued to retaliate and announce even more tariffs.

“Things can also escalate very rapidly and that’s the concern,” he said.

COULD AUSTRALIA ACTUALLY BENEFIT?

From Australia’s perspective, even if all the measures announced so far did go through, Mr Rajah believed the impact would be “marginal”.

This is because most of the goods exported to China from Australia were consumed domestically in China (such as iron ore and coal) and did not end up in America.

US commentators are also saying a trade war could actually help Australia — at America’s expense.

CNBC noted that when US wine imports to mainland China fell last year, Australia’s rose 63 per cent to $848 million.

Wine from the United States is displayed next to Chinese wine at a supermarket in Beijing. Picture: Mark Schiefelbein/AP

Exports of Australian tree nuts to China have also been growing, and China may look to Australia instead of the US to fill its demand for coal.

Mr Rajah agreed a trade war could have some side benefits for Australia, but it’s likely they would be quite small.

“If China can’t export their tech products to the US they are going to look for other markets, which may include Australia, and we could see lower prices for these products,” he said.

Australia could also get cheaper products from the US for the same reason.

But Mr Rajah said Australia should be concerned about the implications for world trade and it should support the resolution of the dispute through the World Trade Organisation, as it uses a legal and technical approach — rather than a political one.

“We should care about the future of the WTO and want to see the rules adhered to and strengthened,” he said.

“There is a lot of hardball negotiation, particularly out of the US and China, and there’s probably more negotiation to come,” Mr Rajah said.

“It will take some time to play out so there will be tension and threats, and just a bumpy ride for a little while yet.”

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