It is crucial to understand the history of the two major world economies to find out how the president of the United States, Mr. Donald Trump is doing good by increasing tariff on imports from China and other countries. In an economic system, a benefit to one entity can be a disadvantage to another.
There are two characters which drive the world forward a leader and a challenger. Before the end of the cold war and dissolution of the USSR, there was a struggle between the United States and the Soviet Union to be called as the world leader.
After the 1991 dissolution, United States emerged as the world leader and no other country posed as a tough challenger to the supreme world power. As the Millenium began China which opened its door for the world market in late 20th century started making big leaps of growth and evolved as a challenger to the United States.
Being a leader of the world and the world’s richest country, the United States became less attractive as an investment destination as compared to China. The population dividend helped China in becoming one of the world’s cheapest manufacturing hub.
Those who understand economics know that as a country becomes rich, the growth rate slows down. Thus, China continues to be among the fastest growing economies whereas the growth rate of the United States has remained below 4% in the last one decade.
The 2009 sub-prime crises turned the thing worse for the United States. The growth rate went negative.
“What does a negative growth rate mean?”
Negative growth rate represents a decline in the gross domestic product of a country. Thus, the loss in earnings.
“What happens when a company earns less?”
The company recruits fewer or no people. Perhaps, it also reduces the hired staff to sustain in the market. It results in increased unemployment and further consequences are predictable.
The United States faced quite a similar situation in 2009, and it is still meeting the impact that your mind is mapping after reading the information provided above. On the other hand, cheap labor and abundance of raw materials are helping China to produce more, thus export goods to other countries.
The cheap labor and raw material make the goods produced in China far less expensive than the locally manufactured goods of some countries. The best example is a smartphone, a smartphone made in China excessively cheaper than a smartphone constructed in the US.
When Mr. Trump became the president of the US, the situation was the same as it is discussed above. Now he talks about ‘making America great again.’
By securing the market of America for Americans.
He believes that other countries which trade with the US are not fair with their tariffs and trade rules.
China is a communist country. It is controlled centrally by one party. China has put a lot of restrictions on the
product and services supplied by international providers. The most popular limitation is the use of social media giant Facebook. Similarly, there are other Silicon Valley service providers who are not allowed by China in its territory.
While, on the other hand, the United States imports most of the hardware of the industry whose tech-giants are not allowed to carry out business in China.
The services sector is one example, the other industries are also biased towards China. Thus, the trade deficit that the US suffers is humongous, $375.2 billion in 2017.
In simple terms, the US doesn’t earn enough to balance trade with China. And, China is making huge profits.
Now, let us come again to the leader and challenger roles. If you were a leader, would you allow your challenger to take advantage of yourself?
Mr. Trump is doing the same. He doesn’twish to make policies that allow China to leverage inconsistency in the trade and pose as a threat to the dominance of the United States in the world.