Wondering how to read the Sino-US trade war and its impact? What’s the next move and what are the underlying motives and possible outcomes? US corporate lawyer Dennis Unkovic has moulded a lifetime career in international trade and investment, and here he shares his views

The US and China, like two alpha elephants trumpeting at each other, are currently engaged in their most protracted economic and political conflict in 40 years. This latest confrontation has escalated to the point where the Trump administration has levied high tariffs on most Chinese manufactured products destined for American consumers. In retaliation, China has imposed its own set of tariffs on US exports to China. So, why do things seem to be going from bad to worse? And what can we expect next?

Trade war
Dennis Unkovic

The first sign of trouble came more than two years ago, when US President Donald Trump, shortly after his inauguration, abruptly, and to many unexpectedly, withdrew the US from the Trans-Pacific Partnership (TPP). The following year, as the US trade deficit worsened, the Trump administration announced the imposition of a first round of tariffs on selected Chinese-manufactured goods coming into the US.

The Chinese retaliated. Since then, three rounds of negotiations between Chinese and US trade officials failed to resolve the rift, which has blossomed into a full-blown crisis.

America’s massive US$351 billion trade deficit with China in 2018 is the primary justification behind the Trump administration’s targeting of China and its trade policies, including charges of the theft of American intellectual property and technologies by the Chinese. China exported about US$521 billion worth of manufactured goods to the US in 2017, while the US only exported about US$170 billion worth of goods and agricultural products (such as soybeans) to China. It is worth noting that this US$351 billion deficit only applies to the sale of goods and products; the US in 2018 had a favourable balance in selling services to China.

Obviously, the trade deficit did not occur overnight – it first began to accumulate in the 1980s, when many American manufacturing companies decided to abandon the US in order to set up their manufacturing operations in China, hoping to take advantage of China’s lower-priced labour market. Many of those Chinese-made goods were exported back to the US. Over time, manufacturing in the US went into decline and the trade deficit with China grew larger.

Frankly, there is no short-run solution that can erase the China-US trade deficit because the three largest sectors of US exports to China are aircraft (US$17 billion), soybeans and agricultural produce (US$12.25 billion), and motor vehicles (US$10.3 billion). Each of these sectors can be replaced by competitors of US companies coming from other countries around the world. For example, Airbus would gladly supplant Boeing as the major supplier of aircraft to China’s enormous aerospace market.

trade war

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Dennis Unkovic is a partner at US law firm Meyer Unkovic & Scott. He has extensive experience in negotiating transactions, foreign and domestic, on international investments, and advising on inbound and outbound direct foreign investment projects. He works for both US companies and foreign entities with their international activities and investments, and has travelled to 64 countries in the past 35 years, with significant involvement in transactions in China, India, Japan, Korea and around Southeast Asia.