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Financial News

Aug 5, 2019

The U.S.-China Trade War Explained

By Team Stash

Talks collapse and threats of new tariffs affect markets.

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world map with US and China flags

The trade war with China continued to intensify this week, as President Trump said he would hit the world’s second-largest economy with new tariffs.

Stock market indexes around the world dropped on Monday, August 5, 2019  as China retaliated by canceling orders for U.S. products, and by devaluing its currency.

What’s happening with the trade war with China?

  • Trade talks between China and the U.S. broke down, over an alleged agreement that China would purchase more products from the U.S.
  • The Trump administration threatened a new round of tariffs, in addition to the $250 billion it has already placed on Chinese imports.
  • In response, China has called for a halt to purchases of American agricultural products.
  • China is also allowing the value of its currency, called the yuan, to fall. It’s a little complicated, we know, but bear with us. China pegs its currency to the dollar. Very generally, that means every yuan exchanged equals a fixed amount of dollars that fluctuates with the value of the dollar. By letting its currency devalue, or fall below its current value, China makes its own goods and services cheaper in export markets.
  • Last week, the Federal Reserve also cut a key interest rate in the U.S., in an attempt to keep the U.S. economy from slowing down.

What’s a trade war again?

A trade war is when countries start waging an economic battle with each other using tariffs. One country will put tariffs on another’s goods, and the other will retaliate in kind.

A tariff, sometimes called a duty, is a tax imposed by one nation on another’s imports. (In some cases, tariffs can be “levied”–or placed–on exports.) The tariff is generally calculated as a percentage of the import’s total value, including freight and insurance charges.

Governments tend to impose tariffs on another’s goods to make their own products more competitive and affordable, and to generate revenues.

Until recently, the U.S. has generally refrained from increasing tariffs and entering into trade wars with other countries.

The trade war with China could decrease global growth by $1.2 trillion, according to recent reports. The U.S. and China are the world’s first and second-largest economies.

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Written by

Team Stash


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