Joe Biden, the new occupant of the White House, has taken office as the 46th President of the United States of America. But open wounds left by the Trump administration have yet to heal, not the least of which being the trade war against China started by the U.S. three years ago. Since the first phase trade deal meant to normalize trade relations was signed, small concessions have been made with select tariffs, but the average rate of taxation remains mostly unchanged at 19%. It’s safe to say the trade war is still in full swing. The primary motivation for Trump to start the trade war was to balance the trade deficit and curb China’s economic ascendancy. In the first two years of the trade war, bilateral trade volume between the two countries drastically declined, thus shrinking the trade deficit. Nonetheless, losses in trade with China had to be offset by increases elsewhere and the U.S. continues to run a trade deficit overall. Even while Trump’s measures were in place, China registered a $317 billion trade deficit against the U.S. in 2020, marking the second highest in history.
Meanwhile, China has adopted an active strategy to diversify trade relations. China’s positioning in international trade has increased, remaining the biggest merchandise trader in the world. Since the outbreak of the COVID-19 pandemic, China has been able to overcome and keep the situation under control, which enabled it to resume work and production, ensuring the stability of the supply chain and industrial chain. China has become the production and supply powerhouse for anti-pandemic supplies, providing strong logistical support to the stay-at-home economy.
The other desired outcome for the Trump administration from the trade war was to lift up the U.S. economy. But with every round of tariff hikes, two-way trade dropped further on both the import and export fronts. The antagonistic trade relations took its toll on the U.S. economy, which affected household income and business competitiveness in turn.
The agriculture sector is arguably the hardest hit in the trade war. U.S. agriculture exports were cut by almost 50%. Considering factors like weather and price fluctuation, the decline could reach as much as 70%. The U.S. government had to hand out agricultural subsidies in the hundreds of millions to make up for the loss of Chinese buyers. The U.S. manufacturing industry also bore the brunt of the trade war, and the output of auto, mechanical and electrical industries have also been marked down due to retaliatory tariff hikes. In 2019, China’s import of oil and gas from the US was down by 47% and 90% respectively.
The trade war also weighed on household savings for the average American consumer, as increased tariffs led to elevated prices of intermediate goods and consumer goods. The U.S. consumers have to pick up the bill, which inevitably erodes their disposable income. Some statistics suggest that the tariffs alone are costing Americans $675 on a yearly basis.
Business competition also suffered. Tariff hikes created an atmosphere of trade policy uncertainty and forced some companies to push back or cancel investment plans outright. As intermediate goods are mainly imported from China, the trade war disrupted the supply chain, boosted input costs, eating at profitability and competitiveness.
The third outcome was to create job opportunities. Former U.S. trade Representative Lighthizer claimed that U.S. manufacturing jobs registered a gain of 400,000 from November 2016 and March 2020. However, U.S. media reported that if mid-2018 was taken as a watershed, 80% of the net 400K job increase took place before mid-2018, but began to stagnate since then and even began to decline. Closer reading of statistics suggests that the U.S. lost 245,000 jobs at the height of the trade war.
To put it simply, the trade war didn’t meet its policy objectives, as it failed to contain China’s development momentum, instead costing the U.S. economic growth and jobs. The trade war started by the Trump administration was a losing mistake, and a blemish on the administration’s legacy.
Though Biden doesn’t subscribe to Trump’s approach, he indicated his government would not remove the tariffs against China immediately. Trade policy under the Biden government is yet to be determined. That said, time is not on his side. President Biden needs to take a proactive stance end the trade war against China sooner rather than later, and bring China-U.S. relations back on the right track to shore up domestic trade, increase household income, and spur world economic recovery.
First, lifting the tariffs will serve U.S. economic growth. According to a forecast in the report on “US China Economic Relations” released by the USCBC in Washington DC, if both countries gradually scale back tariff rates to around 12%, the U.S. projects to gain an additional $160 billion in real GDP, and employs an additional 145,000 people. U.S. household income will be $460 higher per capita. Conversely, if the trade war continues to escalate, all the potential benefits are off the table. It will continue the short term shock, and long term effects will permanently lower economic activity.
Second, lifting the tariffs will help improve the well-being of the American people. Trump’s claim that tariffs on China adds to U.S. government revenues could not be further from the truth. Tariff is but a tax on U.S. consumers in disguise. Tens of billions of dollars from the tariffs are paid by U.S. consumers.
Lastly, globalization is the prevailing trend of the global economy. Regional economic integration has been surging as a rebuttal to unilateralism and protectionism. The RCEP, the CAI and the protocol on upgrading the free trade agreement between China and New Zealand all underline that economic cooperation and integration is a trend that cannot be reversed. What is noteworthy is that apart from a handful of exceptions, the majority of U.S. allies are parties to the above-mentioned three trade agreements, and China is their top trading partner. Some American voices have called for the Biden administration to lobby U.S. allies to take sides with the U.S. on trade to contain China. Such an approach is an outright divorce from reality and is therefore untenable.
The Biden administration must shake off the vestige of the protectionist policy under the Trump administration and remove the tariffs as soon as possible and end the trade war against China. That is the only right option.