Policy Implication of US-China Trade War

By Victor Hinardi

Background 

China and the US have witnessed an escalating tension since President Trump took office in 2016. The tension resulted in a trade war which was essentially a series of tariffs on imported goods from China to the US, and vice versa. This trade war was sparked by China not purchasing American agricultural products such as soybeans as was agreed by the two countries’ leaders. The trade war instilled damage to both economies. According to  research by Columbia University, US companies lost at least $1.7 trillion in the price of their stocks as a result of US tariffs on the Chinese goods (Hass et. al). On the other hand China lost  substantial demand for Chinese goods due to the imposed tariffs. Even though in 2019, the US trade deficit to China had shrunk to $345 billion, the overall trade deficit did not. This is due to the diverted trade flows from China causing a larger US trade deficit with other countries. Even with the end of Trump’s administration, President Biden will continue to take a stand in pressuring China on their unfair trade practices (Zhen). Foreign policies are more important than ever in order to improve  bilateral relationships and reduce trade imbalances.

Table 1. Graph showing US-China Trade Deficit is Growing (Source: Statista)

Exports

• China was the United States’ 3rd largest goods export market in 2019.
• U.S. goods exports to China in 2019 were $106.4 billion. The top export categories in 2019 were: electrical machinery ($14 billion); machinery ($13 billion); aircraft ($10 billion); optical and medical instruments ($9.7 billion); and vehicles ($9.1 billion).
• U.S. exports of agricultural products to China totaled $14 billion in 2019, the United States’ 3rd largest agricultural export market. Leading domestic export categories included: soybeans ($8.0 billion); pork and pork products ($1.3 billion); cotton ($706 million); tree nuts ($606 million); and hides and skins ($412 million).
• U.S. exports of services to China were an estimated $56.5 billion in 2019, 0.9% ($523 million) less than in 2018, but 231% greater than the 2009 level. They were up roughly 952% from 2001 (pre-WTO accession). Leading services exports from the United States to China were in the travel, intellectual property (industrial processes, trademarks), and transport sectors.

Imports

• China was the United States’ largest supplier of goods imports in 2019.
• U.S. goods imports from China totaled $451.7 billion in 2019 and account for 18.1% of overall U.S. goods imports in 2019. The top import categories in 2019 were: electrical machinery ($125 billion); machinery ($92 billion); furniture and bedding ($27 billion); toys and sports equipment ($25 billion); and plastics ($18 billion).
• U.S. imports of agricultural products from China totaled $3.6 billion in 2019, making China the United States’ 6th largest supplier of agricultural imports. Leading categories included: processed fruit and vegetables ($787 million); snack foods ($172 million); spices ($170 million); fresh vegetables ($136 million); and tea, including herbal tea ($131 million).
• U.S. imports of services from China were an estimated $20.1 billion in 2019. Leading services imports from China to the United States were in the transport, travel, and research and development sectors.

Source: Office of the United States Trade Representative

Based on table 1, we could see from the year 2014 to 2018, the trade deficit has not decreased in size, in fact it was steadily increasing from 2016 onwards. Most goods that are exported from the US to China are high-tech manufactured goods such as aircraft, medical instruments, etc. Another key component of exported goods from the US to China is agricultural products. In 2019, the US exported $14 billion worth of agricultural products with Soybeans being the largest commodity ($8 billion). Based on the trade deal between the US and China, China has agreed to purchase more soybeans from the US. During the first 11 months of 2020, China managed to import 20.05 million tons of US soybeans which is a 45% increase from the previous year (2019). On the other hand, the US  largely imported low tech manufactured machines, circuits, toys and many more. 

Pros and Cons of Trade Deficit with China

Pros	Cons
Cheaper goods due to imported goods from China (lower currency and cheaper labor)	The widening of trade imbalances which could lead to high national debt
Specialization, where there is more variety of goods at the stores that are usually not produced in the US	Over dependence on Chinese made products in the US
Improving bilateral relationship if trade agreements are respected	The shrinking of Manufacturing sector in the US
Accessibility to a greater Chinese market by the US firms	Encouraged China to be a currency manipulator
Promotes American enterprises (i.e Nike, Apple, etc) that have facilities in China which made their products more competitive hence able to boost profits	Political unrest which lead to xenophobia and racism

Analysis

Trade deficits can be good for many countries if the money borrowed is used for public investments including schools, public transports, infrastrures, etc. If the investments are used largely to repay other debts, company bailouts, wars and other activities that do not necessarily boost the economy in the long term, the trade deficit can impose a long term negative impact on the economy. The US is experiencing the largest trade deficit with China due to the high demand for cheap manufactured goods from China which the US is not competitive to produce. Furthermore after the financial crisis in 2008, the US has been bailing out companies for the economy to stay afloat. As the pandemic continues to rampage the US economy, trade deficit with China will be predicted to continue to rise as the US needs more financial resources for stimulus bills. If high trade deficits continue to increase significantly with China, this can lead to overly reliant on Chinese goods which can make China have an upperhand in global power. With the recent humanitarian crisis in Xinjiang and Hong Kong, the US can potentially lose its power to control China’s behavior in the future due to the trade deficit. 

 Most of the traded goods, including machinery, toys, sports equipment, and furniture, require high manufacturing activity, which employs many low-skilled workers to create a higher profit margin. China has numerous working-age people and demands lower wages, which makes the US manufacturing sector less competitive to produce cheap goods. Even though this is true in the past, China has been aiming to transform its economy to high tech exports (i.e Microchips, Artificial intelligence, Electric Vehicles, etc) focused through a commitment called Made in China 2025 (Liu.et al). Therefore the US needs to allocate its resources to creating infrastructure and institutions that support technology advancement in order to compete in an increasingly advanced global market. The government needs to create an environment that fosters innovations in different urban areas across the country, such as Texas and New York (states with big millennial populations). More firms will utilize new technologies in their sectors such as healthcare, aircraft, automobiles, spaceship, and many more through these innovations. Trading new technologies and accessing the larger market in China will be a huge trade gain for the US. 

China is increasingly focusing on its domestic market since there are potential threats for heavily relying on exports, such as tariffs, political instability, and pandemics. With the rising GDP per capita and a stronger exchange rate of Yuan RMB to the US dollar, the Chinese market is increasingly attractive to US firms. This is a great opportunity for companies like Tesla and Boeing to increase their operation in China. The US government needs to offer greater assistance to the firms, such as subsidies and lower tariffs, to be competitive in China. Since China is pushing hard on alleviating environmental problems, Electric Vehicles (EV) can be the next big window of opportunity for the US to step into the market. Currently, there are a couple of Chinese EV companies (i.e. Xpeng, NIO) that have produced and sold more cars than American EV companies such as Tesla due to significant price reductions which were subsidized by the Chinese government.  With greater subsidies and lower tariffs, EV manufacturers in the US can sell their cars at a lower rate hence able to compete with the local brands. 

Education is another important trade factor that needs to be considered. The US has been well known for attracting talents from across the world, especially students from China. However, due to the current political tension (trade war) and negative perceptions towards Chinese citizens by Americans regarding COVID-19 and human rights issues (Hong Kong, Taiwan and Xin Jiang), many students from China are voicing their concern about getting their degrees in the US. Chinese students are feeling unwelcome and unsafe due potential racism actions that might affect them physically and mentally. The tension and hatred were further amplified by the previous President of the United States which often used racist slurs and comments regarding the origin of COVID-19 which indirectly impacted the Asian community in the US. This could potentially be harmful to the US economy since the international students contributed around $44.7 billion, and Chinese students made up most international students  (Reuters). Having an unwelcoming environment for these students can potentially repel this investment.

There are ways for the US to close the trade gap with China through innovations, education, and fostering domestic firms. Instead of halting China’s growth to retain the worlds’ superpower status, the US needs to work together with China to solve greater global issues such as climate change, economic growth, and political stability.

Policy Recommendations: 

1. US government needs to allocate more financial sources to foster technology industry such as creating technology hub outside of California (i.e., New York and Texas).
2. Subsidizing goods from local firms such as Tesla and Boeing in order to be more competitive in the Chinese market. Establishing a new trade deal to gain access to a greater Chinese market for the local firms.
3. Increasing the quota for international students in US colleges and providing better service and assistance to  international students in order to encourage higher enrollment hence higher foreign investment .
4. Maintaining a strong US dollar currency by building stable relationships with other countries around the world especially American allies such as Australia, india, Japan and South Korea which are situated in close proximity to China. A strong US dollar to Chinese RMB can ease the trade deficit value with China.
5. Sourcing more high-tech goods from Taiwan instead of China to reduce reliance and trade deficit. In addition this policy can reduce the Chinese influence over Taiwan due to stronger US-Taiwan relations. 
6. Placing high tariffs to imported goods from China that involves the forced employment of Uighur workers in Xinjiang to reduce the incentives for Chinese oppressions on the Uighurs. The tariffs should be placed towards both American companies operating in Xinjiang as well as Chinese companies.
7. Strengthening trade alliance with other major Asian countries and regions such as India, Australia and Southeast Asia to reduce Chinese influence in the region. One of the trade alliances that should be revived is the Trans Pacific Parternethsips with Southeast Asian countries.
8. Removing unnecessary sanctions towards key trade players such as Iran and Turkey (major oil exporters). By placing sanctions toward these nations can potentially create collutions between the sanctioned countries (i.e China Iran oil trade deal) which in the long run can reduce the overall trade amount with the US. Sanctions can also create negative views towards the US which could affect the bilateral relations and agreements with foreign countries. 

Bibliography

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Buchholz, Katharina, and Felix Richter. “Infographic: The U.S.-China Trade Deficit Is Growing.” Statista Infographics. 19 Aug. 2019. Web. 21 Mar. 2021.

Doll, Scooter, and Scooter Doll Scooter Doll Is a Writer. “Tesla Competitors Growing in China: NIO, Xpeng, and More.” Tesla Competitors Growing in China : NIO, Xpeng, and More. Electrek, 16 Feb. 2021. Web. 21 Mar. 2021.

Hass, Ryan, and Abraham Denmark. “More Pain than Gain: How the US-China Trade War Hurt America.” Brookings. Brookings, 25 Aug. 2020. Web. 21 Mar. 2021. 

Liu, T., & Woo, W. T. (2018). Understanding the US-China trade war. China Economic Journal, 11(3), 319-340. Web. 21 Mar. 2021

Reuters. “Explainer: What 1.1 Million Foreign Students Contribute to the U.S. Economy.” Reuters. Thomson Reuters, 08 July 2020. Web. 21 Mar. 2021. https://www.reuters.com/article/us-usa-immigration-students-economy-expl/explainer-what-1-1-million-foreign-students-contribute-to-the-u-s-economy-idUSKBN2492VS.

Steinbock, Dan. “US-China Trade War and Its Global Impacts.” China Quarterly of International Strategic Studies. Vol. 4. 515-42. Print. Ser. 4.

US Trade Representative. “The People’s Republic of China.” United States Trade Representative. 19 Aug. 2019. Web. 21 Mar. 2021.Zhen, Liu. “Biden Promises to Tackle China’s ‘unfair Trade Practices’.” South China Morning Post. 12 Dec. 2020. Web. 21 Mar. 2021.