Understanding the Tariffs in the Trade War

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Understanding the Tariffs in the Trade War

Introduction

After the collapse of the Soviet Union, the United States became the global hegemony and stayed in this position for a few years. However, many global powers gained the ability to threat the American hegemony, among these countries, China is the main one. Their extensive territory, huge population, investment in technology and education, strong military, and especially the openness to international trade allied with protectionism within the country were some of the factors that made possible for China to compete with America head-to-head. Because of China’s rapid expansion, the US felt threatened and realized that it was being left behind in the deals with the Asian country, which lead to the trade war. The actions of both countries can be explained by Peter Gouvevitch’s article in the textbook (Frieden, Lake, and Broz 2017).

Gouvevitch explains what are the factors that influences the imposition of tariffs in international trade. He divides the explanation into 4 different approaches: economic explanations, political system explanations, international system explanations and economic ideology explanations. He then evaluates and compares which ones are better at clarifying why sometimes tariffs are imposed and why sometimes they aren’t.

First, it’s important to understand the background. According to Trade Economics, China’s GDP in 2010 was 6087.16 billion US dollars, in 2018 their GDP was 13608.15 billion US dollars. In only 8 years, China’s GDP more than doubled. In addition to that, the US is the main responsible for China’s economic development, since China is the American biggest trade partner. According to World Atlas, in 2016, the US exported goods worth $115,775 million From the Chinese country, and imported goods worth $462,813 million. In another words, the US was sponsoring their major competitor in the international system thanks to their free trade policy, while the Chinese were actually gaining from both exports good and imported goods, because they have always imposed heavy tariffs to foreign products. As a form of retaliation, the US decided to impose tariffs to China.

Applying the 4 explanations in the Trade War context

Gouvevitch explains his theory with a totally different context to which we are analyzing here. He concludes that economic and political explanations are the ones that better describe why one country will decide to impose or not tariff on another state. In this section, each one of the explanations will be applied to the US-China issue in order to better understand the pattern of response in terms of tariffs (Frieden, Lake, and Broz 2017).

Economic explanation: The reasoning behind this one is related to the domestic interest. Some groups need tariffs to survive or compete with international goods, while others are better suited without any form of protectionism. This balance is what shapes the economy of a country. If done right, the economy of the country will be translated into good public policy that benefits all citizens within the country. It’s possible to see this happening in the Trade War between China and US as well. The farmers, who couldn’t compete fairly with Chinese goods, are very confident that protectionism will be beneficial for them, 78% of them believe that the Trade War will have favorable outcome for the U.S. agriculture (Purdue University, 2019). In the other hand, the government decided to not touch the video game industry, which its market is very dependable on imported good from China (Forbes, 2019).

Political explanation: This justification is associated with domestic institutions, usually groups of interests within the country that will be benefited from protectionism and will loose in case of economic openness. In the US, many interest groups have already pressured the government, and used their political influence to make the government impose tariffs on imported good that rivals with the national product. The biggest example is the steel industry. John Ferriola, Nucor CEO (steel company) gave an interview to CNN where he says that “All in all, we’re very happy with tariffs”. His company profit more than doubled thanks to the tariffs imposed by the American government (CNN, 2018). But why would the US government listen to the steel industry? The steel sector was in decline in the past years, making people very dissatisfied with the government, and pushing for change. It’s important to say that the steel segment is very big. They account for $520 billion in economic output and nearly two million jobs (American and Iron Steel Institute, 2018), which explains why they are so influent, and why Trump decided to impose tariffs to protect this field.

International system explanation: This explanation focusses on interactions among countries. How well they are positioned in the global system, considering factors such as the economy, independence, political stability and military strength. Gouvevitch thinks that even though there are international justifications for imposing tariffs, it isn’t the main reason why one would impose a tariff. However, realists’ theorists would disagree with him. According to them, it’s important to consider the relative gains when trading with a partner, because your own money can be used to hurt you in the future, and that is what they would argue in this case. China is the second major power today, with a strong army and strong economy, and the US is literally sponsoring them. For this reason, the government would impose tariffs to defend their self-preservation. However, I disagree with this statement, because who actually start the Trade War was China (Wall Street Journal, 2018). China was the one who started to steal intellectual property and the first one to impose tariff on American goods, if they didn’t do that, America would be more than happy to continue their free trade agreement.

Economic ideology explanation: As the name states, it’s referred to which ideology is present in that country, or to be more specific, in that government. Gouvevitch also thinks that this explanation isn’t crucial to decide if one will impose tariffs. And he is right in the context of the Trade War as well. Not only America is a capitalist country, but the party in power is right-wing, which usually will defend free trade and less protectionism, so why is America imposing tariffs on Chinese goods? Because of the reasons previously explained.

Conclusion

In conclusion, Gouvevitch system to explain the level of tariffs can still be applied today. Tariffs aren’t an easy subject, and it in order to understand the reasons behind it can be very challenging, but Gouvevitch has proven that his method survives through time, and even though economic ideology and the international system have some influence in this subject, they major explanations are still economic and political.

Work Cited

“Economic Impact Study.” American Iron and Steel Institute, 2017, https://www.steel.org/economicimpact

Egan, Matt. “’Happy with Tariffs’: Steel Industry Emerges as Trade War Winner.” CNNMoney, Cable News Network, 2018, https://money.cnn.com/2018/07/29/investing/stocks-week-ahead-steel-tariffs-trade/index.html

Frieden, Jeffry A., David A. Lake, and J. Lawrence Broz. 2017. International Political Economy: Perspectives on Global Power and Wealth. Sixth edition. New York: W. W. Norton & Company.

Ip, Greg. “China Started the Trade War, Not Trump.” The Wall Street Journal, Dow Jones & Company, 23 Mar. 2018, https://www.wsj.com/articles/china-started- the-trade-war-not-trump-1521797401

Mintehttps://www.wsj.com/articles/china-started- the-trade-war-not-trump-1521797401rt, James, and Michael Langemeier. “Confidence in the Ag Economy Soars; Producers Confirm Large Prevented Plantings of Corn and Soybeans.” Purdue University, 6 Aug. 2019, https://ag.purdue.edu/commercialag/ageconomybarometer/confidence-in-the-ag-economy-soars/

Pham, Sherisse. “How Much Has the US Lost from China’s Intellectual Property Theft?” CNNMoney, Cable News Network, https://money.cnn.com/2018/03 /23/technology/china-us-trump-tariffs-ip-theft/index.html.

Work Cited

Sawe, Benjamin Elisha. “The 20 Biggest Trade Partners Of The United States.” WorldAtlas, 10 Feb. 2017, https://www.worldatlas.com/articles/the-20- biggest-trade-partners-of-the-united-states.html.

Thier, Dave. “PS4, Xbox One And Nintendo Switch Are Safe From Trump’s Tariffs…For Now.” Forbes, Forbes Magazine, 13 Aug. 2019, https://www.forbes.com/sites/davidthier/2019/08/13/ps4-xbox-one-and- nintendo-switch-are-safe-from-trumps-tariffs-for-now/#3fbc792a3a64