Trade War between the US and China

About the history of China-US trade

In order to better understand the whole period of interaction China and US trade we will go back to middle twenties, when the Communist Party in China came to power. At first in 1949, they adopted the Soviet political system, which is contradictious with the stance the US supports, and established People’s Republic of China under the leader of Mao Zedong. From 1949 till 2001 the trade has risen from 1 to around 121 billions of dollars, after joining to WTO in 2001 Chinese trade with US has increased at unforeseen rates reaching to $562 billion in 2013. The trade exposure continues to grow until 2018, when Chinese exporter firms started using unfair trading practices towards US, which was major concern of Trump administration at the time. These included intellectual property theft, forced technology transfer, lack of market access for American companies in China as well as subsidies given to Chinese domestic producers to dump the prices. Finally, the measures were taken by US policymakers in January 2018, specifically by president Trump, to impose import tariffs to Chinese products, at its peak end in 2019 the restrictions applied to worth of US$360 billion Chinese goods. In response for this, China had retaliated with import duties on US goods worth around US$110 billion, as a result of which has grown tension between two countries. It can be seen from the graph below that US trade deficit with China has been exacerbating.

Figure 1, simplified form of US Trade Deficit

About possible impact of trade war for US firms, consumers, and workers

As US trade deficit with China added up in recent years, Trump has promised to stop this from happening before the elections in 2016, so he directed his administration to take severe measures afterwards. As a leading figure of the country, he had borne the brunt. While there is growing evidence that the US employment and total output and consumers sectors have damaged from elevated tariffs, it is unclear to what extent the US side inflicted harm due to trade war. A US-China trade and investment transitions internally shows that total US imports from China dropped from $38.26 billion in March 2018 to $32.93 in January 2020. The products subject to highest tariffs, which were concentrated mainly in intermediate products and capital goods, have experienced steepest decline, while US non-tariffed imports remained unaffected. US companies have lost at least $1.7 trillion in the price of their stocks as a result of US tariffs imposed on imports from China. This is because of constant pressure by governments to keep overall prices low, even though imported raw materials now costing more. The US authorities did not want volatility in the domestic markets, as consumers would have arranged street meetings and strikes complaining about surging prices, thus they intervened to the market by putting pressure on domestic producers. That is, US firms have lost lots of revenue despite increased market share, as they were forced to sell at lower profit margin.

In figure 2, the diagram shows tariff impact on producers. The effects of tariffs is more mixed, with some winners and losers.

Additionally, imposed tariffs had negative impact for US consumers too, the study TTDEUSC (Trade and Trade Diversion Effects of United States Tariffs on China) demonstrates that the trade war has resulted in a higher prices for consumers. By analyzing recently released trade statistics, the study finds that consumers in the US are bearing heaviest brunt of the US tariffs on China, as their associated costs have largely been passed down to them and importing firms in the form of higher prices. However, the study also finds that Chinese firms have recently started absorbing part of the costs of the tariffs by reducing the prices of their exports. Chinese firms could maintain competitive prices roughly 75% of their exports to the US. Furthermore, tariffs did not merely bypass US workers, as US economic growth slowed, business investment froze, and companies did not hire as many people. Across the nation, a lot of farmers went bankrupt, and Trump’s actions amounted to one of the largest tax increases in years, which is major contributor for the decrease of disposable income of population. A September 2019 study by Moody’s Analytics found that trade war had already cost the US economy nearly 300,000 jobs, moreover, it is evident that trade war will cause US workers to cut wages and jobs since companies are accepting lower profit margins under strict tension by the government officials.

Figure 3, shows Distribution of NTR Gaps Across Constant Manufacturing Industries, 1999. (NTRnormal tax rate)

Future consequences of trade war

The peak of worldwide economic expansion is imminent and faces risks from escalating trade conflicts. The initiation of a trade war by the United States could result in significant negative consequences for the global economy through a rise in protectionist measures. Both the nations that impose tariffs and those affected by them would suffer a reduction in economic well-being, and even nations not directly involved would still find themselves contending adverse repercussions. If trade barriers persist, the economic detriment could become irreversible due to altered pricing signals hindering the efficiency-gaining specialization of global industries. The chances of a full-blown trade conflict are still relatively small but are on the rise. With the most to lose, it is crucial for China and the United States to forge an agreement that resolves pivotal issues like market access, the safeguarding of intellectual property, and the transfer of technology within joint ventures. The trajectory of a trade dispute will be partly shaped by the responses of monetary policies and financial markets. In reaction to heightened inflation within its borders, the United States may see its federal funds rate climb more sharply than initially forecasted. Financial uncertainty could have a negative impact on credit availability, thus hampering investment, industrial output, and commerce. Furthermore, global stock market values are predicted to fall in a climate of rising protectionism. In fact, China and the US sign a phase one trade deal on February 14, 2020. As part of the deal, China has committed to purchasing an additional $200 billion worth of goods and services from the United States over the following two years. This consensus has led to a halt on tariffs that were set to be imposed in December on Chinese imports valued at approximately $162 billion. Additionally, an existing tariff, which was at a rate of 15 percent on roughly $110 billion worth of imported Chinese products, has been reduced by half. “Semiconductor sector sales tailed off in 2022 and also may not return, due to new US export control policy’’ reports Chad P. Bown and Yilin Wang both from PIIE. Note, while the Biden Administration has promised to end many of Trump’s protectionist measures, he still kept most of the policies into effect. As of 2022, experts do not expect President Biden to reverse Trump’s protectionist trade policies. The future of relations with China, both economic and political aspects, will depend to a great degree on next President Election, at the year 2024. Approaches in America differ substantially from person to another, from one

Political Party to another.

Suggestions on how both countries can manage change in economic order

By predicting future developments not only in relationship between US and China, but also ongoing foreign affairs of other countries all over the world, as though these two countries constitute considerable part of global trade the rest of the trade-giants should not overlooked. To start with China’s position, a Western effort of decoupling from China is unrealistic since supply chains are highly complicated and interconnected. And it is not a secret that China has demonstrated an ability to overcome the impact of technological restraints in the past, the country’s vast manufacturing scale and well-established supply chains should lay a foundation for future technological innovation. The country began shifting away from low-end, labor-intensive component manufacturing to hightech, full-spectrum, and nearly automated product manufacturing more than a decade ago. What’s more, China’s domestic market is too big to be ignored by multinational companies and also the supply chain transformation taking place, this is a natural evolution of international trade and commerce. I believe China can successfully navigate coming period just as many other countries have in modern history. About US response, as Ed Luce 5 recently wrote in the Financial Times, “The world is moving into a new type of great power rivalry”. After decades of outsourcing, offshoring and globalization no matter what, the US is suddenly realizing that it needs do things again, what it has is yet not enough. My personal intuition about the prospect of US is completely positive, it is a politically and economically strong nation, though it is encountering trade barriers with China, it will eventually put up with its closest trade partner.

References

COUNCIL on FOREIGN RELATIONS. U.S.-China Relations (1949-2023).

https://www.cfr.org/timeline/us-chinarelations#:~:text=The%20United%20States%20and%20China,trade%2C%20climate%20change%2C%20and%20Taiwan

U.S.-China Relations, 2001-2015: Economic Interdependence and the Taiwan Issue by Annika

Tomzak. AABORG UNIVERSITY, DENMARK.

https://projekter.aau.dk/projekter/files/234141276/Tomzak_Annika_U.S._China_relations_200

1_2015.pdf#:~:text=Therefore%2C%20U.S.%20official%20statistics%20by,to%20%24562.16%20billion%20in%202013The US-China Economic Relationship. A crucial partnership at a critical juncture, January 2021.https://www.uschina.org/sites/default/files/the_us-china_economic_relationship_-acrucial_partnership_at_a_critical_juncture.pdf#:~:text=Following%20China%E2%80%99s%20accession%20to%20the,of%20goods%20imports%20reaching%2021.6%25