People have traded goods for thousands of years proving Adam Smith´s saying that “truck and barter” is a fundamental part of human nature. (Pomeranz et al, 2013). Therefore, it isn’t surprising that for a long time the world economy has developed into an interdependent one. Globalization has accelerated rapidly in recent decades, this as a result of different factors, but a substantial one being international trade.
However, “a new era in American trade policy” was announced by Trump on February 2018 consisting on tariffs as well as an “aggressive nationalist agenda” in different areas targeted at the rest of the world, including the EU and China (Alvstam et al, 2019). China and the US are the biggest trading partners in the world and even the WTO has not been able to regulate the trade barriers imposed by the US on Chinese goods, both countries have taken matters into their own hands provoking a trade war.
The US-China trade war is an economic conflict that emerged from trade protectionism from the US (Deutch, 2018), specifically China raising targeted tariffs on imports from the US in retribution for US raising targeted tariffs on their imports. Since the start of his election campaign, Trump has publicly portrayed his perception that the trading practices of China are unfair and threatening the US economy. Specifically, due to Chinese intellectual property violations and technology appropriation polices consisting on foreign companies sharing their intellectual property to be able to enter the Chinese market, violating WTO rules (Deutch,2018).
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In addition, Trump plans to decrease the trade deficit as the US imports more from China than it exports (The Balance, 2019), possibly resulting in more products being manufactured in the US increasing the industry as well as creating more jobs. Trump´s choice of remedy being targeted tariffs, showing his misconception of the extensive benefits that free trade produces. However, as predicted by Kobrin (2017), China retaliated with their own tariffs, starting a trade war. An agreement with the help of the WTO has yet been reached.
Nonetheless, the real dispute isn’t concerning trade. Below the surface of the “trade war” lies the battle for global dominance in innovation and technological domain. The US biggest concern is China’s threat to US global supremacy in the innovation economy portraying their growing competitiveness over the future of innovation. China, the world’s largest capitalist communist party has escalated to number 17 in the GII 2018 (WIPO, 2018), challenging the nature that centrally planned economies are extractive (Acemoglu et al, 2013).
This is portrayed in the progress its economy has endured influenced by their new government policy focused on R&D investment in innovation. China with “Made in China 2025” is arranging to develop into a “world manufacturing power” by 2025 (The Economist, 2015). This indeed challenging US, who retreated to the sixth position in the GII 2018 (WIPO, 2018).
According to Bernanke (2011), “Innovation and technological change are undoubtedly central to the growth process of economies”. Meaning that it is innovation and technological change what makes countries rich. Both governments of US and China spend a lot on R&D. China´s spending has increased faster throughout the years than those of US indicating a decline of the comparative global competitive positon of the US (Deutch, 2018). China is both fostering and creating creative destruction in technological areas dominated by the US and could possibly outperform them.
“International trade has made people around the world better off on average” (Meyer, 2017). Therefore, a trade war between the US and China, the largest trading partners and economies of the world will not just impact their respective domestic economies, labor markets and social well-being, but probably the whole global economy and political order. Goods will become more expensive with the implemented tariffs. Therefore, producers would have to pay more and consequently leading to higher prices for the consumers.
However, not only the Americans and Chinese consumers could be affected, as the trade war could possibly also affect global integrated supply chains, as well as stock markets all over the world. So, there aren’t really any winners in trade wars. However, there are some that could benefit. These being countries that are able to supply competitive goods to China and the US. For example, the European exports of agriculture to China might increase, replacing goods once obtained from the US.
Regarding innovation, the tariffs imposed on China has mainly affected their technological industry as these are targeted at hurting Chinas attempt to innovate with their industrial policy “Made-in-China 2025”. However, it does not matter who ends up being the leader in innovation, because it is all the world who ends up benefiting from more innovation regardless the origin.
The implemented tariffs could be a temporary tool by the US to enforce a fairer arena where both countries can benefit from trade or a way to threaten Chinas incrementing innovation. In addition, there is no questioning that the US produces the best leading technology and it will probably take China several years to advance this. However, it has to be emphasized that it is open international markets and free trade that are the keys to global economic growth, therefore Trump is simply part of the scarce group of world leaders today who consider that free trade, as well as globalization have more disadvantages than benefits.
