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The U.S. - China Trade War

By: Alberto F. Cavallo, Mariana Cal, Anne Laski

On December 1, 2018, U.S. President Donald Trump and China's Leader Xi Jinping faced each other across a dinner table during a G20 meeting in Buenos Aires, Argentina. After what Trump called an…

  • Length: 32 page(s)
  • Publication Date: Feb 11, 2019
  • Discipline: Economics
  • Product #: 719034-PDF-ENG

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On December 1, 2018, U.S. President Donald Trump and China's Leader Xi Jinping faced each other across a dinner table during a G20 meeting in Buenos Aires, Argentina. After what Trump called an "amazing and productive meeting," the two leaders announced a truce in the ongoing trade war between their countries, following months of accusations, tariffs, and mounting retaliation. The U.S. agreed to postpone for 90 days an increase from 10% to 25% in tariffs applied to a large number of Chinese goods, which had been initially scheduled for January 1, 2019. In exchange, the White House announced that China would purchase a "very substantial" amount of agricultural and other products from the United States, adding that it expected the two nations "to immediately begin negotiations on structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services, and agriculture." The Chinese government simply stated that it was "willing to expand imports according to the needs of the domestic market" and that it hoped to "reach a concrete agreement on mutual benefit and win-win as soon as possible." Despite Trump's assurances that China was sending "very strong signals" after the meeting, the outcome of the negotiations was highly uncertain. Would China provide enough concessions to satisfy the demands of the U.S.? Would the U.S. back down? Or would the trade war escalate, causing unprecedented disruptions-and opportunities-in global trade patterns?

Learning Objectives

International Macro concepts: The case introduces several technical concepts in international macroeconomics. First, students should understand how exchange-rate interventions can impact a country's international competitiveness. Second, students should be able to distinguish the main components of a balance of payments, in particular, the trade deficit. Finally, students should understand the intuition behind the incidence of a tariff, and identify who can potentially win or lose in a trade war under different assumptions. Protectionism vs. Free Trade: The case provides an explicit contrast of ideas of free trade with protectionist policies, and, in particular, neo-mercantilist arguments that favor exports over imports. Students should recognize the dangers of tit-for-tat escalation and increasing antagonization that often characterize bilateral trade conflicts.

Details

Pub Date:

Feb 11, 2019 (Revised: Jan 10, 2022)

Discipline:

Economics

Geographies:

China, United States

Source:

Harvard Business School

Product #:

719034-PDF-ENG

Length:

32 page(s)