The first shot of the U.S.-China trade war was fired on June 15, 2018, when the United States Trade Representative announced that the U.S. would impose 25 percent tariffs on $50 billion of Chinese imports. Despite drawn-out negotiations to settle their trade disputes in the next eleven months, the two countries failed to reach an agreement. As a result, the trade war quickly escalated.
By the end of 2019, the U.S. had imposed tariffs of varying levels on more than $300 billion of Chinese goods (nearly two-thirds of total China’s exports to the U.S.) and China retaliated with its own tariffs. Fortunately, the two governments reached a temporary truce in January 2020 with the signing of the so-called Phase One agreement. The U.S. reduced tariffs modestly on some goods, pledged not to further escalate the trade war, but otherwise kept most of the tariffs in place. In return, China committed to protecting American intellectual property rights more effectively and purchasing an additional $200 billion of American goods and services during 2020-2021.
Now that the worst trade war since WWII has entered its fourth year, it may be a good time to take stock and speculate about its end game.
Since trade wars inevitably reduce two-way commerce, there are no real winners. The most objective way to evaluate the outcome of the U.S.-China trade war is to judge whether Washington, the initiator of the trade war, has achieved its objectives despite the observed costs (such as reduced exports to China and high consumer prices due to the tariffs).
Unfortunately, even such a simplified exercise is difficult in this particular case because first, American policy-makers had competing objectives, and second, the COVID pandemic so disrupted international trade that it is impossible to know how China’s export machine would have performed without the crisis.
If we want to evaluate the trade war on the basis of perceived or declared objectives of American policy-makers, there are three yardsticks. President Donald Trump wanted to use the trade war to reduce or eliminate America’s bilateral trade deficit with China. In his mind, a country with a trade deficit is a loser in international trade, an idea that may resonate with his political base but is rejected as ludicrous by mainstream economists. Based on changes in bilateral trade deficits since the trade war began, Trump clearly has failed to reach his objective. In 2017, the year before the trade war, America’s trade deficit with China was $375 billion. It fell to $310 billion in 2020, the end of his presidency. But the 17 percent drop was caused not by an increase of American exports to China. In fact, American exports to China fell slightly from about $130 billion in 2017 to $124 in 2020. The decrease of bilateral deficit was attributed solely to a reduction of U.S. import of Chinese goods. In 2017, China sold $505 billion worth of goods to the U.S. The effects of tariffs cut Chinese exports to the U.S. to $435 billion in 2020, a 14 percent drop.
Another objective, championed mainly by U.S. trade representative Robert Lighthizer, , was to force China to remove trade barriers and subsidies so that American firms would not face unfair competition. Lighthizer’s demand was not unreasonable because meeting it would have both benefited American companies and made the Chinese economy more efficient in the long run. Obviously, this object has not been achieved, either, because China rejected it as an infringement on its sovereignty.
The third objective, never officially articulated but nevertheless fully appreciated by the belligerents of the trade war, was to decouple the two economies. Its proponents, rightwing populists as well as national security hawks, saw decoupling as the most effective way of slowing down the growth of Chinese power.
It is also difficult to evaluate whether the third objective of the trade war has been fully achieved.
On one hand, if the China hawks hoped that the trade war would produce a quick and significant reduction in Chinese exports and hurt its growth, then they must have been disappointed. Despite the trade war, China’s global export performance has held up. Chinese exports, totaling $2.26 trillion in 2017, rose to $2.6 trillion in 2020. China’s economic growth has maintained the same pace.
On the other hand, the hawks seem to have made some progress in achieving their objective of economic decoupling. Supply chains in some industries did start relocating out of China (both because of rising costs and the trade war). But instead of a mass exodus of firms, the relocation of manufacturing firms out of China has been modest. Of course, the outbreak of the coronavirus pandemic appeared to have played a role in making companies think twice about relocation, which is an expensive and risky proposition in an uncertain economic environment.
The biggest victory the hawks achieved was not in the trade area, but in the technology sector. The U.S.-China tech war, which broke out almost concurrently with the trade war, has produced consequences perhaps even the most optimistic hawks did not anticipate. The tech war has not just crippled China’s homegrown tech champions such as Huawei. But Washington’s aggressive use of the “entity list” (which effectively cuts off Chinese tech firms’ access to American technology) has prompted Beijing to embark on a course of technological self-sufficiency to protect its security.
Even the largely unsuccessful trade war has made the Chinese government rethink globalization and its economic linkages with geopolitical adversaries. In the 14th Five-Year Plan released in March this year, China officially committed to a “dual circulation” strategy that will build an economy more reliant on domestic growth and indigenous technology. While it is unclear whether such ambitious objectives will be achieved, there is no doubt that policy measures to be implemented to accomplish the goals laid out in the plan will most likely accelerate the decoupling of the Chinese and U.S. economies.
Regardless of the long-term impact of the U.S.-China trade, Beijing and Washington still have pressing short-term business to deal with. The truce in the trade war is fragile. The Phase One agreement will need to be renegotiated or extended soon because China is falling behind its commitment to purchase $200 billion worth of American goods and services by the end of this year. Pressure is also apparently growing in Corporate America for removing the tariffs on Chinese imports.
Politically, President Joe Biden is in a quandary. Although he may benefit from lifting the tariffs because this will likely boost the economy and increase his political support, doing so before the midterm Congressional elections in November 2022 could give the Republicans an issue to attack the Democrats and hurt his party. In addition, his administration has also adopted most elements of Trump’s China policy. As a result, the tensions between the two countries are simply too high to end the trade war.
Under these circumstances, we can only hope Beijing and Washington will be pragmatic enough to address unavoidable issues such as adjusting or extending the terms of the Phase One agreement to avoid a further escalation of the trade war. They can wait for a more opportune moment to restart negotiations to seek a long-term solution to stabilize their trade relations.