Tariffs, Manipulation, & Theft: U.S. & China Trade War Explained

(lively upbeat music) – Hello, welcome to Rogue
Rocket, my name is Maria Sosyan. Over the past weekend and
actually over the last few years, you’ve likely seen
headlines like these pop up. And if you haven’t seen any of that, I’m sure you’ve come across some of President Trump’s tweets. But let’s be real, trade war, tariffs, currency devaluation, IP theft. A lot of us don’t really know what those terms actually
mean let alone how they work. But that’s where we come in. Let’s start with the
big picture, trade wars. They’re not literal wars but economic conflicts
between two or more nations. And often they’re because one or sometimes multiple countries all wanna protect their domestic economies and hope to slow down
competitors economies. In today’s world, the most prominent trade war
is between the US and China. But it’s hardly the first one, they date back to at least the 1600s. At that time, the English and the Dutch were massive merchant empires
and they feud it over trade. Unfortunately, that turned
into a series of actual wars known as the Anglo-Dutch wars that lasted for over 100 years. There’s also the infamous Opium Wars where the United Kingdom
love Chinese tea so much that it created a massive trade imbalance. The UK was buying literally tons of tea and sending a lot of silver back to China. They wanted a balanced trade deal but China didn’t need
anything from the UK. So they decided to smuggle
and sell opium in China. And it was a hit so much so that it became one of the
worst drug epidemics ever. The Chinese didn’t like
this, told the UK to stop, one thing led to another and
we got another actual war, a few of them actually. But not all trade wars end in actual wars. Throughout the 20th century, especially during the second half, countries have fought over
trade with peaceful resolutions. Take President Reagan’s
and Europe’s Pasta War, the US wanted to protect the
mighty American pasta industry, so steep tariffs were
placed on foreign pasta. The Europeans didn’t wanna be
bullied by American tariffs so in response they
issued their own tariffs on American lemons and walnuts. The war ended in a truce when
both sides lower the tariffs. This wasn’t even the first time
the two sides fought though. Back in the 60s, there was the chicken war which was a conflict
over chickens and trucks. Both sides claimed a victory and since then it’s
been largely forgotten. This often happens with tariffs as people get used to paying them. To this day, European light
trucks still face a 25% tariff imposed by the United States. So if in the post war era trade
wars are normally peaceful, how are they fought? There’s a ton of ways to fight them. But like we just saw, one
of the most common ways is with tariffs and then another
is currency manipulation. It’s not a coincidence that those are terms
dominating the headlines when it comes to the US
and Chinese trade war. So let’s unpack tariffs first. They’re attacks on imported goods. Keep in mind that Trump’s tariffs don’t often target China
specifically but any country. For example, the steel
and aluminum tariffs, China just often happens to be the country that would be most
affected by that tariff. And we should make it clear, we’re not going to get into the specifics of the US-China trade war and tell you whether we
agree or disagree with it. We’re not economists and
the effect of that trade war and its tariffs are constantly
being debated by them. Today, we just want you to understand the terms being thrown around so that when you read about the topic, you’ll be able to make
your own conclusions. So let’s say you’re an American and wanna import Chinese
made solar panels. Well in addition to the cost of the part, you’ve got to pay Uncle Sam a 30% tax. Although tariffs involve
a citizen of a country paying their own government a tax, other countries generally don’t like them. it discourages people
from importing your goods. So in order to encourage other
countries to drop the tariff, they’ll issue their own. And this is what we’ve seen
between the US and China since the US put tariffs on solar panels and washing machines in January 2018. Since then, it’s been a
series of tit for tat. The US announced the tariff
on steel and aluminum in March then an April China announced
tariffs on 128 items from the US. There was some negotiations
between the US and China and China agreed to buy
more American goods. Then in a surprise move at the end of May, the US announced a 25% tariff on $50 billion worth of Chinese goods. China retaliates in early July with a similar tariff on US goods. Four days later, the US swings back with another 10% on $200
billion worth of Chinese goods and two days after that the Chinese vowed to put tariffs on $60
billion worth of US stuff. And there was even more back and forth. So let’s fast forward to August 2019. On the first, a 10% tariff on $300 billion worth of
Chinese goods was added. On the 23rd, China applied
a five to 10% tariff on $75 billion worth of us goods. They also reinstated a 25%
tariff on autos and auto parts that was suspended during
a truce at the end of 2018. There were other tariffs
announced by both sides but you get the idea. So far, the US has tariffs on
$550 billion of Chinese goods while China has taxed $185
billion of American goods. So at the end of all that you’re probably wondering why tariffs? The two main reasons for issuing tariffs are to promote domestic production and to protect vital domestic industries. Think of things like
farming, steel manufacturing and other heavy industries. Countries don’t want to become
reliant on foreign products in case the faucet ever gets turned off. And while some tariffs like
the ones we just mentioned are common and seen as necessary, they can also be dangerous. Remember the Great Depression? Well, I doubt any of our viewers actually remember it in person, but you’ve at least read about it. There were a ton of factors
that made it a global disaster. But one driving factor was tariffs. Every country put up massive tariffs like America Smoot-Hawley Act to try and protect their own economies. But it slowed down global trade so much that they actually hurt
domestic economies. Now, let’s look at another
way trade wars are fought. Currency manipulation. We’re going to try to keep this simple. It’s the practice of
artificially devaluing a currency to make it cheaper for
people to buy your goods. There’s multiple ways to do this but it’s usually against
the rules, what rules? The rules set up by the
International Monetary Fund. So how can a country do it? There’s three main methods. Let’s say we’re China, method one is to print a ton of Renminbi also known as Yuan and
use that to pay off debts. People are quickly going to notice that you’re printing a lot of money and it will tank the value. This is a pretty risky way of doing it because it can rapidly
ruin your credibility and dry up any foreign loans, which nearly all countries
need to function. Also massive inflation
is generally disastrous to your economy on its own. Method two is buying foreign currency. To understand this, you
need to think of money not just as something
used to buy something but also something you can buy. Here’s how we, as the
People’s Republic of China, can continue to make our
stuff cheaper to buy. We use our Yuan to
purchase American Dollars and then don’t spend the dollars
and keep them in reserve. It’s actually normal for countries to have foreign currency in reserve. But how does this devalue currency? For every dollar we lock up in reserve, is one less dollar on the market but the same demand for them,
simple supply and demand. The dollar is worth more. At the same time, there’s more Yuan on the
market with the same demand lowering its value. And then there’s method three, likely the most common, exchange rates. This is a weird one to explain
but let’s look at it this way Most economically stable countries have fully convertible currency. This just means that
whatever the market says my currency is worth is what it’s worth. Think of when you’re traveling
to Europe as an American, sometimes the Euro costs
you $1.7, sometimes 1.5, sometimes 1.04. This is in contrast to
fixed exchange rates where a country claims that their money is always worth a certain
amount of say, dollars. This one’s easy to manipulate. Let’s say that today I’m
the leader of Eritrea. About 15 Nakfa is always worth $1. But I wanna increase the amount
of people buying my goods. I then make 30 Nakfa worth $1, I devalued my currency by a lot. For an American that $1 now buys double the Nakfa worth of stuff. Over time prices will likely
adjust but in the short term, it encourages other countries
to buy more Eritrean products. Then there’s a system
that’s a mix of the two. This is what China has. For years China fix the Yuan
at 8.31 Yuan per dollar. But that fixed rate was
slowing down the economy. So they changed the value of
the Yuan to 8.11 per dollar and said that it would
be allowed to fluctuate like the Yeus and US’s money. However, the People’s Bank
of China put rules in place that limited how much it could change. Eventually deciding that in a given day the Yuan’s value compared to the dollar can only fluctuate point five percent. This means the Yuan
isn’t fully convertible, its price isn’t dictated by the market. This allows the Yuan to slowly
move up and down in value but without major jumps that
could shock the economy. And now we find ourselves
at why currency manipulation is both how you can find a trade war and why a country would use
it as a reason to start one. China’s system still allows
them to revalue the Yuan, something they did this month. After the US placed another
10% tariff on Chinese goods, China let the Yuan fall over 2%. This set off alarm bells in the US, it gave the impression that
China was devaluing the Yuan in order to offset the cost of tariffs leading the US to accuse them
of currency manipulation. If tariffs make something
10% more expensive and China makes the Yuan worth 10% less, well it’s like the tariff never happened. Manipulating currency like
this is against IMF rules. The United States has long claimed that China isn’t honest
with how it values the Yuan and that suppresses the
currencies actual value to make things exported from
China artificially cheap. But it’s hardly the only reason why a trade war would be fought. A major complaint in the modern era is intellectual property theft. It takes many forms but
some of the most common are stealing a manufacturing process, the design of something or
even just making a knockoff. This can be done with corporate
espionage, cyber theft or in China’s case, a lack
of enforcement on IP rules and regulation. Foreign companies working in
China are required to reveal and share IP with a local Chinese partner. And there are supposed to
be regulations in place that stop those Chinese
partners from stealing IP. But the US Government
and American companies have long complained that
those IP sharing agreements have been abused. In March of 2019, it was reported
that seven out of 23 CFOs in North America who are part
of the CNBC Global CFO Council reported they had their
IP stolen by Chinese firm. And in 2017 report by the United
States Trade Representative claimed that IP theft by Chinese companies costs Americans between $225 billion and $600 billion annually. The current US and China trade war is largely fueled by this practice and it’s one of the key
points that the Trump and many past administrations
keep revisiting when dealing with China. From the Chinese perspective, President Xi Jinping has made moves to crack down on IP theft and he’s known for his
hard stance on corruption and theft in China. But the US is wary of any promises. However, these are just
a handful of reasons why a country might fight over trade because like we said
earlier in this video, for hundreds of years
countries have fought for a bunch of reasons. The English and the Dutch fought for better deals and markets then the British and the Chinese fought because of a massive trade deficit then the Americans and Europeans fought to protect domestic industries. And it’s always good to take
a step back and remember that this isn’t the
only trade war going on. Currently, Japan and South Korea are engaged in a massive one that has South Koreans
boycotting all Japanese products because of tariffs Japan placed. With all that said, it’s time to pass the question off to you. Were you familiar with the terms
we explained in this video? Do you feel like you have a better idea of how and why countries fight over trade? Had you heard or read about it trade wars but still didn’t feel
like you had a good grasp of what they were? If you’re an econ major, this
obviously doesn’t apply to you but for everybody else,
comment below and let us know. If you liked this video and want more, be sure to give us a thumbs up and click that subscribe button. To stay up to date on social, follow us on Instagram,
Facebook and Twitter @TheRogueRocket. My name is Maria Sosyan,
thanks for watching and we’ll see you next time.

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