More is Not Always Better: The Aftermath of the US-China Trade War

About the Author: Vicky Cheng is a first year law student at American University- Washington College of Law and graduated from McGill University. Vicky hopes to work on human rights issues and bringing awareness to various human rights violations though international transactional law, believing that the private sector can work with government to effectively and efficiently advance social policies and change throughout the entire supply chain.

 

One of President Trump’s first, and most important, priorities after entering office was to redefine America’s relationship with China. His reasoning from the beginning was that China had taken advantage of the United States on trade and intellectual property, such that hundreds of billions of dollars were lost annually.[1] Therefore, President Trump became a champion for increasing tariffs on Chinese imports.

The policy discussions in support of raising tariffs include bringing manufacturing jobs back to the U.S., ensuring reciprocal tariffs at a bilateral level, and eliminating the bilateral trade deficit. These discussions also include pressuring China to change their various adverse policies on intellectual property rights, transfer of technology, and state subsidies to domestic companies.[2] In reality, however, these policies created more uncertainty in American trade policy, because tariffs do not play a functionally significant role in changing the direction of international capital flows and trade balance.[3] Fundamentally, a country’s trade balance is defined by its capital balance, which is calculated by the difference between national savings and investments.[4] Increasing tariffs consequently increase the administrative burdens on tariff policy, and the more rigid and hostile the United States’s trade policy is, even towards one country, the more weary other international players are in trading and investing in the United States.[5]

The growing uncertainty about trade policy has affected investment decisions of both domestic and international companies. Generally, an unstable trading environment decreases countries’ willingness to trade because higher sunk costs are implied.[6] After China joined the Word Trade Organization in 2001, its economy boomed, likely because of the reduced uncertainty surrounding its trade policies.[7] After the 100-Day Action Plan failed in July 2017 and the U.S. increased tariffs on Chinese imports, the resulting trade policy uncertainty reduced overall corporate investment and interest in the U.S. by one to two percent.[8] These findings by the Federal Reserve Board were further corroborated by the Survey of Business Uncertainty.[9] Broadly speaking, U.S. economic growth slowed, business investments froze, corporate hiring initiatives shrunk, farmers went bankrupt, and the freight transportation and manufacturing sectors hit lows that were last seen in the 2008 financial crisis.[10] Before the pandemic shook the nation, Bloomberg projected in 2019 that by the end of 2020, the U.S. economy would have lost $31 billion compared to 2018.[11] These numbers illustrate how protective tariffs work against the fundamental principle of free-market comparative advantage, which underpins the American supply chain.[12] Unfortunately, the pandemic has compounded the risks of an uncertain policy environment, imposing greater burdens on American companies and the American people.

Protective tariffs shift incentives toward political objectives rather than commercial wellbeing and growth.[13] President Trump’s prioritization of a fair trade deal with China has shifted the burden of additional costs on Americans. American companies have primarily paid for the costs of increased tariffs, which lowered their profit margins, deterred wage expansions, and raised consumer prices.[14] Like other aspects of life, the pandemic has exacerbated trade tensions and socioeconomic insecurity for the lower and middle class.

Working against China is not necessarily beneficial for American industries because China is one of, if not the world’s largest, importers of agricultural products and high-value consumer goods. In response to the trade war, the Chinese State Council imposed retaliatory tariffs on $75 billion of U.S. goods, which came into effect December 15, 2019.[15] While the European Union and Brazil increased their exports of beef, pork, and soy into the Chinese market, which was valued at $133 billion in 2019, the percentage-share in trade value supplied by the U.S. remained the same or increased nominally.[16]

The trade war was put on pause with the signing of the Phase-One Agreement by President Trump and President Xi Jinping on January 15, 2020.[17] Although the year has not ended yet, the benefits of the Agreement can already be measured, particularly in the U.S. agricultural sector. A recent phenomenon in China has been an increase in pet ownership. The percentage of families who own dogs and cats have increased by 40% and 131% respectively between 2015 and 2019.[18] Therefore, China’s imports of U.S. pet food have been up 124% from January to June 2020 compared to the same period in 2019.[19] The Phase-One Agreement played a significant role in reviving and boosting trade with China because it stabilized tariff levels, and removed significant agricultural food barriers such as ingredient and ruminant testing, and onerous facility registration requirements.

COVID-19 has been a source of overwhelming loss and uncertainty, but one positive effect has been the growth of e-commerce among millennials and Gen-Z.[20] Facilitated by the Agreement, U.S. companies and industries are now presented with a unique opportunity to substantially and lucratively increase their exports and the overall U.S. market share in the Chinese market.

 

[1] Donald Trump (@realDonaldTrump), Twitter (Aug. 23, 2019, 5:00PM), https://twitter.com/realDonaldTrump/status/1165005927864512512.

[2] See WTO Economic Research and Statistics Division, An Economic Analysis of the US-China Trade Conflict (2020) (discussing the background of trade tensions).

[3] Id.

[4] Id.

[5] Id.

[6] Id.

[7] See Dario Caldara et al., The Economic Effects of Trade Policy Uncertainty, Int’l Fin. Discussion Papers 1256 (2019) (analyzing the empirical correlation of industry trade policy uncertainty and industry investment).

[8] See WTO Economic Research and Statistics Division (2020) (discussing insights from the literature on trade policy uncertainty).

[9] Id.

[10] See Ryan Hass and Abraham Denmark, More Pain Than Gain: How the US-China Trade War Hurt America, Brookings Inst. (Aug. 7, 2020), https://www.brookings.edu/blog/order-from-chaos/2020/08/07/more-pain-than-gain-how-the-us-china-trade-war-hurt-america/#:~:text=Between%20July%202018%20and%20August,%24185%20billion%20of%20U.S.%20goods.

[11] Id.

[12] See Yukon Huang and Jeremy Smith, In U.S.-China Trade War, New Supply Chains Rattle Markets, Carnegie Endowment (June 24, 2020), https://carnegieendowment.org/2020/06/24/in-u.s.-china-trade-war-new-supply-chains-rattle-markets-pub-82145.

[13] Id.

[14] See More Pain Than Gain, Brookings Inst. (Aug. 7, 2020).

[15] See Yun Li, China Will Retaliate With Tariffs on $75 Billion More of US Goods and Resume Auto Tariffs, CNBC (Aug. 23, 2019, 12:02PM), https://www.cnbc.com/2019/08/23/china-to-retaliate-with-new-tariffs-on-another-75-billion-worth-of-us-goods.html.

[16] See Hui Jiang, China: Evolving Demand in the World’s Largest Agricultural Import Market, USDA (Sept. 29, 2020), https://www.fas.usda.gov/data/china-evolving-demand-world-s-largest-agricultural-import-market.

[17] See Jadon Marianetti, Unique Opportunities for Increased U.S. Exports of Pet Food to East Asia Remain Despite COVID-19, USDA (Aug. 25, 2020), https://www.fas.usda.gov/data/unique-opportunities-increased-us-exports-pet-food-east-asia-remain-despite-covid-19.

[18] Id.

[19] Id.

[20] Id.

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