How did Trump’s trade war with China start?

Is President Donald Trump protecting free trade, or is he harming American workers with his trade war with China? Critics and supporters alike struggle to figure out how Trump’s long-term strategy for trade in the nation will play out. The tit-for-tat tariffs that have taken place between the U.S. and China in the past year have left investors confused and the stock market in a state of fear.

While the U.S. and China battle over fair and free trade, the global economy is beginning to respond. Growth is slowing down internationally as countries prepare to rearrange supply chains. Several financial research institutions predict that the trade war may negatively impact global economies for years to come, and some economists fear that a global recession is becoming increasingly likely. So what is this trade war all about, and what does winning the trade war look like?

How President Trump’s Trade War Got to This Point

Long before President Trump took office, investors and major corporations have complained that Chinese foreign trade laws make it difficult for U.S. companies to gain a foothold in the country. Additionally, many corporations have accused China of stealing American intellectual property in order to increase the success of Chinese businesses.

Starting Talks With China

When Trump campaigned for the presidency, he promised to reform free trade agreements and tackle unfair relations with numerous countries, including Mexico, Canada and China. After rewriting the North American Free Trade Agreement (NAFTA), the president turned his attention to China. After a 100-day trade talk failed to produce a satisfactory U.S.-China trade agreement, he threatened tariffs.

Talks Fail and Tariffs Begin

By April 2018, President Trump began imposing significant tariffs on Chinese products imported into the country. China responded with its own hefty round of tariffs. Although the countries began negotiating a new trade deal in May, Trump announced even more tariffs in June set to go into effect by July.

By this time, the stock market began fluctuating, indicating that investors were fearful about how far the trade war would play out. China responded with an additional round of its own tariffs.

In August, Trump ordered even more tariffs to go into effect, then threatened to add more in September. China retaliated.

Negotiations Continue

Negotiations did not resume in any concrete form until December, where Trump sought a China trade truce with Chinese President Xi Jinping. Negotiations went on long enough that Trump announced in February he would delay some tariffs set to go into effect in March, prompting a positive response from the S&P 500 Index.

Once again, however, the talks failed to produce a trade deal. Trump announced more tariffs in May. In June, the two countries once again agreed to begin trade talks ahead of the G20 summit scheduled for the end of the month. The S&P rebounded in kind. But after two days of negotiations produced little consensus, Trump announced another round of tariffs of $300 billion worth of Chinese products.

Stocks Take a Hit

In August, the S&P plummeted when China halted agricultural purchases from the U.S. and its yuan weakened significantly. This caused PresidentTrump and the U.S. Treasury to accuse China of manipulating its currency.

After a series of missteps, both countries enacted more tariffs in the beginning of September. Virtually no progress has been made on improving trade relations since then, and tariffs have not yet fixed the trade deficit with China. Today, the U.S. has imposed tariffs on $450 billion worth of Chinese imports, while China has imposed tariffs on $170 billion worth of U.S. imports.

How Trump’s China Tariffs Affect the Economy

In recent months, President Trump has voiced a reluctance to impose additional tariffs, citing a desire not to interrupt the holiday season. Some economists have viewed this as the first major admission from the president that tariffs are affecting consumer prices.

Trump has repeatedly claimed that China, not the U.S., is paying for tariffs even as Americans retailers have said that tariffs force them to increase prices on goods. However, economists have long warned that tariffs would raise prices for U.S. consumers, forcing them to shell out more for the same goods thanks to tariffs on Chinese products.

Additionally, alternative products are likely to come not from American manufacturers, but from other foreign producers like Vietnam. According to J.P. Morgan, Trump’s Chinese tariffs could cost the average household an additional $1,000 a year.

Even as Trump’s tariffs are raising prices on consumers, American farmers and businesses are having economic troubles of their own. Numerous retail stores have seen their stocks plummet as a result of the tariffs, including Deere, Bed Bath and Beyond, PPG Industries and Harley-Davidson. Some companies may move production overseas in order to avoid retaliatory Chinese tariffs, despite Trump’s demand that companies halt business with China and return to the U.S.

How China Is Dealing With the Trade War

While the U.S. is isolating itself from China, China is working on building international coalitions and diversifying its economic partners. In recent months, the country has set up numerous free trade zones that could enable it to import and export products without additional customs fees. These have been set up in provinces that border key allies like Vietnam, Russia, South Korea and Japan.

Chinese officials say these foreign trade zones will help the country with its long-term plans to facilitate its Belt and Road initiatives, a global infrastructure investment strategy meant to help it form strategic alliances around the world.

Meanwhile, the drop in the value of the yuan has bolstered China’s foreign exchange market as more businesses turn to the increasingly affordable Chinese currency. The lower the yuan falls, the cheaper Chinese products become, which makes it easier for consumers in other countries to afford them. If the yuan remains low, then it would be easier for China to find other countries to export its products to, making Chinese companies less dependent on American consumers.

Despite this improvement for China, however, it has not yet come close to toppling the U.S. dollar in global currency trading. The dollar retains the top spot in current markets, followed by the euro and the Japanese yen. President Xi Jinping has advised citizens to prepare for a “new Long March” in the trade war, indicating that the country’s strategy is to persevere through the financially tumultuous times that may lay ahead for the nation.

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