Ending The Stagnant Affair of US-China Trade Relations

EXECUTIVE SUMMARY

Four years after the Trump administration initiated a trade war with China in an attempt to reform the US-China trade relationship and strengthen the US economy by decreasing its reliance on China, its negative effects continue to hurt the American economy and thus by extension the global economy during a time when a recession is already looming. The US-China trade war has been largely removed from headlines for an extended period of time due to the tumultuous events of the last few years such as Covid 19 and the Ukraine-Russia war, and it may take time for the Biden administration to tackle this issue as a priority. Not wanting to appear “soft on China,” but not having the commitment to directly solve the issue, has led to a rise in economic nationalism — where nationalist ideals trump economic realities. In the meantime, if the United States were to start focusing on softening the anti-China rhetoric and focusing on improving economic and political conditions domestically, as well as extending relations with other allies, this situation would look vastly different.

Introduction

In 2018, imbued with the goal of reforming the US-China trade relationship, massively decreasing the US-China trade deficit, and “confronting China on intellectual property and forced technology transfer” (Hass, 2022) violations, the Trump administration began imposing its first round of tariffs on Chinese goods, kickstarting the US-China trade war. Aiming to support American businesses, the Trump administration “imposed tariffs on more than $550 billion of Chinese products.” This promptly led to “China retaliating with tariffs on more than $185 billion of U.S. goods” (Hass, 2022), and locking both countries into a brutal trade war still ongoing today, locked in place by stagnant policy. As we approach the end of an economic cycle — and as we deal with global political tensions with the war, skyrocketing energy price disruptions, and vivid inflation, continuing the trade war does nothing for the US than to appease the general masses with a false narrative of economic nationalism.

Both Countries Have SideStepped Around The Problem

Although the initial goal of the trade war with China was to bring back jobs to American companies and directly restructure the US-China trade relationship, the trade war has done virtually nothing. Instead of leading the two nations to meaningfully engage and come up with agreeable solutions to their stalemate, the trade war has simply led both countries to zigzag around the problem, and begun a decoupling of trade between the US and China, shifting the competition landscape to less efficient suppliers and receivers of their imports and exports. The United States has shifted many supply chains out of China, “moving to other nations [such as] Vietnam and Taiwan” in an effort to become “less reliant on China for daily goods” (Long, 2020). While this has helped decrease the US trade deficit with China, it has increased the US trade deficit with all other partners, including “Europe, Mexico, Japan, South Korea, and Taiwan” (Hass, 2020). The overall US trade deficit has also increased since the trade war began, going from around $450 billion in 2018 to $650 billion in 2022. This increased trade with other partners due to tariffs on China has made countries like Vietnam and Taiwan much more relatively competitive, but the overall “efficiency loss for the U.S. as imports [are being] sourced from less efficient nations” (Bharadwaj, 2019) has still led to a net economic loss for the American manufacturers and producers that the trade war was supposed to help in the first place.

On the other hand, China has set its eyes on other regions such as resource rich Latin America, surpassing the United States in overall trade with all nations located there except Mexico. China is “a major buyer of grains and metals” and reached total trade flows with Latin America of “nearly $247 billion in 2021 … well above the $174 billion” (Jourdan, 2022) between the United States and Latin America. While Latin American trade with China may decrease again in the future if trade relations return back to normal with the United States and China, the increased influence China is gaining with these new partners can have long lasting effects on its competitiveness with the United States. Peru’s former ambassador to China, Juan Carlos Capunay, stated that “the most important commercial, economic and technological ties for Latin America are definitely with China,” but that “politically the region was still more aligned with the United States” (Jourdan, 2022). All in all, both the United States and China have neglected directly finding a common ground and have shifted their attention to competing for external trade relations with other nations.

Both the US & China Lose Economically

In the face of rigid inflation, increasingly hawkish central banks, continued supply chain issues and high energy prices, a recession is looming on the United States economy, and subsequently the global economy. Not only has the US — China trade war added to inflationary pressures as tariffs have resulted in higher prices for U.S. consumers and businesses, but it has also “hurt American firms and workers, with certain geographies and industries bearing the brunt of the impact” (Durante, 2022), adding to the chances of a widespread, prolonged recession. A study by Moody’s Analytics found that by the end of 2019, the U.S. economy had already lost nearly 300,000 jobs and an estimated 0.3% of real GDP (equating to nearly $70 billion) due to the trade war (Hass, 2020). More research from the Journal of Economic Perspectives found that in 2019, American consumers and importing businesses were paying $3.2 billion in monthly added taxes and losing $1.4 billion monthly due to efficiency losses (Swanson, 2020). On the other side, China faced “$35 billion in export losses in the US market in 2019” (Mishra, 2022) and has “growth slowing to unprecedented levels, to about 3 percent” (Hirsch, 2022). China is also facing its share of economic hardships given the aftermath of Covid 19 and their harsh “Zero-Covid” Strategy lockdowns, having “youth unemployment at 20% and a housing market bubble in danger of crashing” (Hirsch, 2022). Both major participants in this trade war are not in an economic position where they can happily prolong it before they sustain irreparable damage.

Economic Nationalism is Dictating the United State’s Foreign Trade Policy

The US China trade war has led to a new era of economic nationalism — the term describing the recent tendency for policy makers, business leaders, and even economists alike to ignore the economic implications of the trade war and to push for a hard stance on China in the name of American protectionism. Even though economists and business leaders understand that the United States and China are reliant on one another for long term growth and prosperity and that tariffs and decoupling are significantly more harmful than helpful to both sides, they are powerless in the face of hawkish Chinese sentiment in Washington. “New nationalism has settled in deeply in both political parties” (Hirsch, 2022) and the Biden administration is firm on being seen as tough on China, “continuing the Trump administration’s tariffs and other sanctions” in order to fuel the narrative that “China has used trade to get rich at the expense of American workers” (Davis, 2022). The American public has been largely convinced that China is the root cause for much economic turmoil in the United States and that being hard on China is the key to American success. According to a Gallup survey from 2021, “45% of Americans view China as America’s “greatest enemy” — four times as many as in 2018”(Davis, 2022). While there is a general consensus from economists that this is not the case, economists and business leaders cannot influence policy if politicians are bound by the beliefs of their constituents. Attempts from the business community to speak out against anti-China sentiment in regards to trade relations have largely been to no avail. When Evan Greenberg, chief executive of American insurance company Chubb and “a former chair of the U.S.-China Business Council called the idea of “decoupling” between the United States and China an “economic impossibility” … [he] found himself all but alone, with few business leaders endorsing his view” (Hirsch, 2022). With midterm elections coming and no prominent political or business figures willing to speak up alone on this matter to push policy change in any direction, trade war policy continues to stagnantly damage the American economy and the public’s perception of economic matters.

How The Biden Administration Deals With China

The Biden administration has had a tumultuous two years, dealing with the Covid 19 pandemic, the Ukraine-Russia war, sky high inflation and attempting to pass long awaited legislation such as the Build Back Better Act — reformed as the $737 billion Inflation Reduction Act. While they have done fairly well dealing with these headline marking issues, it has kept the Biden administration predominantly occupied and distracted from dealing with US global trade policy, especially when it comes to progressing with the US-China trade war. There is no end and no meaningful policy changes in sight as President Biden “continues to temporize … [being] fearful of the political consequences of appearing soft on China” (Hirsch, 2022), yet not prioritizing the situation enough to take decisive action. While Trump’s administration’s agenda had China as the most direct concern when trying to “Make America Great Again,” Biden’s administration has mandated “the three pillars [of] “Invest, Align and Compete” for their China strategy” (Mishra, 2022). What this means is that while Trump viewed starting the trade war with China as an absolute necessity for American success, Biden seems to care more about keeping a close watchful eye on China, while expanding connections with other allies in the EU or in Asia. In an effort to reverse many of Trump’s politically damaging policies to deal with American reliance on China, “a priority for the Biden administration is to restore the trust of its allies in the Indo-Pacific, Europe, and West Asia” (Mishra, 2022). Unfortunately, what this means for the US-China trade war — is that it will likely remain locked in place until China becomes an economic priority to focus on once again.

A Prolonged Escalated Trade War Would Be An Economic Disaster

Contrary to mainstream political beliefs and media pushed public opinion, an acceleration of the US-China trade war and an increased effort of economic decoupling between the two nations would have profound negative effects on everyone involved. A report by the US-China Business Council found that a trade war escalation and decoupling scenario based on their models would “see the US economy produce $1.6 trillion less in real GDP terms over the next five years and 732,000 fewer jobs in 2022 and 320,000 fewer jobs in 2025” (The US-China Economic Relationship, 2021). It also estimated that “by the end of 2025, US households will have lost an estimated $6,400 in real income” if this scenario were to fully play out. American corporations’ success in recent years can largely be attributed to the profits that they can achieve through cheap, efficient labor and manufacturing in China. If they were to have to relocate and end ties with China, diverting trade to other less efficient nations, the economic losses during this transition would be monumental. Were the United States to continue to decouple from China economically, especially in regards to American technology exports to China, the United States would continue to lose its main bargaining chip when it comes to influencing China politically. The entire situation is a bit ironic as the United States began a trade war with China in order to become less reliant on China and to push Beijing into changing their relationship, yet if in the future the United States and China were to truly be more independent from one another, both sides would have lost their influence over one another.

Recommendation One: Combating Economic Nationalism With Economic Realities

Sooner or later, the US-China trade war will catch up to mainstreet and begin to more drastically affect the day to day life of the American consumer. While the American public may not be as worried about U.S. foreign trade policy as they are with food and energy price changes in their day to day, given our current economic environment, if the U.S. were to enter a recession, the media would quickly find reasons to blame it on. One of those reasons would be the US-China trade war. This would be the time for economists, business leaders, and policy makers to push an economic reality agenda and inform the American public of the true effects of the US-China trade war on the American and global economy. While this would be a more difficult narrative to push during times of economic prosperity, if this were to happen during a recessionary period, people would be prone to follow any solution to their current negative situation. Multiple reports, including one from the US-China Business Council, suggest that “scaling back tariffs would likely benefit the US economy and create jobs … producing an additional $160 billion in real GDP over the next five years and creating an additional 145,000 jobs by 2025” (The US-China Economic Relationship, 2021). When faced with economic truth in a time of recession, the average consumer is more likely to look for change, but this campaign would depend heavily on the media working in conjunction with economic and political leaders.

Recommendation Two: Improving American Economic and Political Strength In Order to Maintain Technological and Moral Authority Over China

The United States must move away from seeing China as the direct economic threat of the West and focus on strengthening conditions domestically first, rather than trying to do so by limiting China’s growth internationally. It is relevant to note that the economies of the United States and China have different comparative advantages and focuses. The United States focuses on agricultural products, high-tech components, and services; and China in basic manufactured consumer goods and inputs (Huang, 2021). Nonetheless, it is largely irrelevant to the current administration as “U.S.-China tensions … are being driven less by economic realities and more by great power rivalry and nationalism” (Huang, 2021). The bipartisan American government, although currently steadfast in its united approach with China, must negotiate a trade agreement with China that would allow both sides to take advantage of their comparative strengths and prosper together. The United States should also continue to strengthen itself by fostering stronger relations with its European and Asian allies, not allowing itself to become complacent in regards to expanding its global economic stewardship.

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