The US-China trade war was initiated by the US because President Donald J Trump believes that America’s trade deficit, especially with China, is not good for its economy. He believes that China’s rise in recent decades has been at the United States’ expense. The trade war between the US and China is more so because of this conviction, and less due to material reality. President Trump thinks that trade with China has led to the loss of factory jobs in America, and China also uses unethical practices like artificial devaluation of the currency to get an edge in the US-China trade. But Trump’s ideas are largely misplaced. And the trade disputes between the largest and second-largest economies is not just hurting their respective economies, it is taking its toll on the health of the global economy as well.

Trump supposes that cheap imports from China are hurting US manufacturing jobs, and therefore by adopting protectionist policies, he can restore employment numbers. If trade with China did reduce the number of available jobs, the US should have experienced a steady job loss. But that has not happened. From 2008 to 2009, the unemployment rate rose to 10 percent from 4.4 percent. But since then the unemployment rate had decreased to 5.5 percent in 2015. As a matter of fact, jobs in the United States rose to 138 million in 2012 from 71 million jobs in 1970. In another instance, the US factories shrank for the first time in three years in the middle of the trade war. The fact is that, despite America imposing protectionist measures, the manufacturing sector is shrinking.

President Trump also frequently complains about China is running a huge trade surplus with the US, which is challenging American dominance in the global economy. There are two parts to this problem. First, the problem is structural. The US cannot have a trade surplus and the dollar as a global currency at the same time. This phenomenon is called the Triffin Dilemma. In order to keep the wheels of the global economy moving, the US needs to infuse a huge amount of currency into circulation. US dollar is a popular reserve currency as compared to other currencies. This leads to a high exchange rate, which in turn leads to less competitive domestic industries. Thus, a trade deficit is a built-in feature of the US economy. However, the question arises, how much trade deficit is acceptable? In 2018, the US trade deficit with China was $418 billion. In 2018, the overall trade deficit of the US was $878.66 billion. This implies that the US’s trade deficit with China is almost half of its total trade deficit. The figure at first seems alarming and needs immediate attention, but closer scrutiny will reveal that the figure gives an incomplete picture.

Adjusting the trade balance to reflect the value-added content of Chinese exports would cut down the US trade deficit with China to half, which would be almost equivalent to the US trade deficit with the European Union. An often-cited example in this regard is the shipment of the Apple iPhone from China. The import of iPhone from China at a factory cost of $240 is added to the huge US-China trade deficit. According to one estimate, the import of the iPhone 7 and iPhone 7 Plus added $15.7 billion to America’s trade deficit with China in 2017. However, this figure does not account for how much value is added by China. The most important and valuable components of the iPhone, like screen display and processors, are sourced from Japan, Korea, the US, and Taiwan. Of the factory cost of $240, China gets $8.46 for the labour and the battery used in the iPhone. Since the final assemblage is done in China, the factory cost of $240 is added to the Chinese export, which wrongly reflects in the US-China trade deficit. Interestingly, the biggest part of value addition in the process of retailing and distribution of iPhone is pocketed by Apple Inc. Not only are Chinese exporters are hit by the trade war, but American companies operating in China are also affected by the ongoing trade war.

China being an important player in the global supply chain is not the only one affected. The trade war is hurting the economies of Korea, Japan, and Southeast Asian countries. The effect of the trade war is not just limited to China and America, in fact, a global economic slowdown is looming if the current situation is not addressed.

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