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The Fierce War

May 20,2024 - Last updated at May 20,2024

The global economic landscape is witnessing a fierce war between the capabilities of Chinese manufacturers and the protectionist policies of Europe and the United States.

Chinese manufacturers have proven their ability to expand production and reduce costs while continuously innovating alternative solutions, making their strategy aggressively competitive.

This dynamic allows China to rapidly increase its market share worldwide, offering competitively priced products that appeal to consumers everywhere.

In contrast, the United States and the European Union rely on protective measures as a defensive strategy, such as imposing tariffs and providing government support to local industries, in an attempt to shield their economies from Chinese market saturation.

These measures aim to curb Chinese influence and control local markets, resulting in a fierce battle between Chinese innovation and efficiency and Western protectionist measures.

The US measures to raise tariffs on Chinese goods are akin to friendly fire, potentially causing wide-ranging repercussions that directly impact the inflation that the Federal Reserve (Fed) is striving to combat.

The trade war between China, the US and the EU is not merely an economic conflict but part of a broader geopolitical competition, carrying complex economic implications that affect global markets.

Trade tensions between the US and China have been escalating for years, reaching their peak when President Joe Biden imposed 100 per cent tariffs on Chinese electric vehicles, tripled tariffs on steel and aluminum, increased tariffs on solar panels to 50 per cent and announced the doubling of tariffs on semiconductors starting in 2025.

These actions were not just a response to what Washington sees as unfair trade practices by Beijing but part of a broader strategy to reduce American reliance on Chinese technology, especially in critical sectors.

The European Union finds itself in a challenging position, seeking to avoid being drawn into the US-China trade war.

However, the redirection of Chinese shipments towards European markets due to American tariffs increases pressure on Brussels.

Projections indicate that these American measures could lead to a rise in the European trade deficit with China, complicating the EU’s efforts to protect its local industries from subsidised Chinese competition.

Brussels has been working on measures to protect local green technology industries from cheap Chinese products, but Europe’s capacity to counter the significant government support received by Chinese companies remains limited.

Under these circumstances, the EU faces a dilemma between the need to protect its local industries and avoiding escalating trade tensions that could lead to Chinese retaliation against European companies.

The persistence of inflation rates above the Fed’s target levels constitutes one of the main challenges currently facing the US economy, with the Fed prioritising efforts to combat it.

The trade war between the US and China, and Europe’s involvement in it, can exacerbate inflation in several ways.

Firstly, tariffs on Chinese goods increase production costs, as many American and European industries rely on Chinese components.

These increased costs typically translate into higher prices for finished products, leading to imported inflation.

Secondly, supply chain disruptions due to the trade war increase logistical costs and disrupt the flow of goods, causing shortages of some products and driving up prices.

This disruption directly affects consumers who face higher living costs, adding further pressure on the Fed’s monetary policies.

In the face of these challenges, the Fed finds itself with the difficult task of balancing raising interest rates to control inflation and supporting economic growth that may slow down due to trade policies.

Globally, both the US and the EU appear to be working in a coordinated manner to address what they describe as unfair Chinese trade practices, while trying to avoid escalation that could lead to a full-blown trade war.

The trade war between China, the US and the EU is not just an economic dispute but a complex struggle with far-reaching impacts on the global economy.

Its effects on inflation and the challenges it poses to monetary and economic policies require governments and central banks to adopt comprehensive strategies to address this multifaceted crisis.

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