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Coles College of Business

Trade Wars

Can the U.S. and China work it out?

When it comes to global trade, there are a few dominant actors, and when the two largest economies in the world won’t cooperate, it is quite likely to affect Americans’ wallets, says Govind Hariharan, professor of economics at Kennesaw State University.

The current U.S. trade war with China began when President Donald Trump hiked tariffs in May on more than $120 billion in Chinese imports and China imposed a tariff on U.S.-imported products, effective June 1.

Yuan

“Trade relations have been an ongoing issue since China began to industrialize in the 1990s,” says Hariharan, who has studied China-U.S. relations for nearly 30 years. “This particular trade war will likely be a hot-button issue for the next year,” he predicts, “but should end before the next U.S. presidential election in 2020.”

What’s behind the latest rift in trade?

1. The immense customer base
“China has dangled its 1.5 billion potential customers, and 1 billion potential workers for years,” Hariharan says. “When you look at the market that China offers, as a cheaper supplier, that’s huge – since manufacturing industries want to source at the lowest cost to stay globally competitive.”

2. Theft of intellectual property
U.S. auto exports to China were at an all-time high in the early ’90s, but joint-venture requirements forced companies like Ford and GM to have a local partner manufacture their product in China. Soon the partner was selling the same car in China, but under their own name, says Hariharan.

“There have been complaints for decades about protecting a company’s intellectual property, but it’s now at the forefront of trade talks.”

Govind Hariharan, professor of economics at Kennesaw State University

3. Geo-politics
“It’s hard to untangle but critically important when it comes to trade,” Hariharan says. China and Russia share a long border, and as China became more industrialized, it needed more energy, especially to keep 1 billion plus people happy, he says.

“It is economics that drove China into Russia, and these countries have now formed a strong coalition to block us especially since the treaty of friendship. Neglecting this and other potential coalitions could be to our peril,” says Hariharan.

What’s next?

Hariharan expects trade in services to be impacted. In fact, he says that China recently portended to stop exporting rare Earth, the purest form of magnetic material, and a component in virtually all electronics, which will make it nearly impossible for electronics to be produced elsewhere.

Hariharan also expects U.S. retailers to feel at least a slight sting from the effect of U.S.-imposed tariffs and for agriculture to continue to be a central target.

Fields

Agriculture is one of the most protected industries in every country, Hariharan contends. He says government subsidies and other support will help sustain U.S. farmers’ livelihood.

While U.S. and Chinese leaders continue to squabble, Hariharan says trade issues are nothing new and argues that if employment, intellectual property and fair access issues are resolved in these trade agreements, the hit to our wallets may be short term. Being cognizant of the power of existing and potential coalitions may help resolve these crises more quickly, he adds.

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