Trump’s Trade War With China Is Starting To Get Out Of Hand ((BETTER))
President Trump launched the trade war to pressure Beijing to implement significant changes to aspects of its economic system that facilitate unfair Chinese trade practices, including forced technology transfer, limited market access, intellectual property theft, and subsidies to state-owned enterprises. Trump argued that unilateral tariffs would shrink the U.S. trade deficit with China and cause companies to bring manufacturing jobs back to the United States. Between July 2018 and August 2019, the United States announced plans to impose tariffs on more than $550 billion of Chinese products, and China retaliated with tariffs on more than $185 billion of U.S. goods.
Trump’s trade war with China is starting to get out of hand
Ultimately, the phase one agreement disappointed because it, along with the trade war, severely damaged the U.S. economy while failing to make significant progress in fundamentally resolving the structural imbalances of the U.S.-China trade relationship.
This post, originally published on April 19, 2018, will be updated as trade disputes with China and other countries evolve. Special thanks to Oliver Ward and Susann Luetjen for assisting with production.
In 2018, former President Donald Trump started a trade war with the world involving multiple battles with China as well as American allies. Each battle has used a particular US legal rationale, such as calling foreign imports a national security threat, followed by Trump imposing tariffs and/or quotas on imports. Subsequent retaliation by trading partners and the prospect of further escalation risked significantly hampering trade and investment, and possibly the global economy. President Joseph R. Biden Jr. must now determine whether to keep US tariffs and other trade barriers in place or adjust policies in the wake of changing conditions, as well as the COVID-19 pandemic.
But the logic underpinning the U.S. trade war was flawed, and the more recent, politically driven restrictions are counterproductive given the damaging long-term economic consequences for both sides. Nonetheless, there have been few signs to date that Biden is likely to change course. In the meantime, then, Europeans may be in a better position for productive give-and-take discussions with China on economic policymaking.
Europe and the United States may have similar objectives in dealing with China, but Europe is more economically integrated with China in terms of investment and trade flows. Because of this, the competitive aspect of their relationship offers more potential for mutual benefit. Moreover, Europe is neither as preoccupied with great power politics nor as dependent on technological advantages as the United States, making the bloc more open to compromise.
President Joe Biden (left) and China's President Xi Jinping meet during a virtual summit on Nov. 16, 2021, in Beijing, China. Despite efforts to crack down on high-tech trade with China, the total amount of trade between the nations has boomed.Kevin Frayer/Getty Images
What was supposed to happen: The trade war was billed as a plan to bring China to its knees by choking off the all-important American market with 25% tariffs on many imports that would rein in the U.S. trade deficit, boost American exports and slow China's rise as a global superpower.
What really happened: "The trade war with China hurt the US economy and failed to achieve major policy goals," a recent study commissioned by the U.S.-China Business Council argues, finding that the trade war reduced economic growth and cost the U.S. 245,000 jobs.
Most economists agree that trade deficits don't actually hurt an economy. And while the U.S. trade deficit with China did decrease somewhat during Trump's time in office, the deficit increased with other countries and overall.
Because the courts and Congress have ceded authority over trade to presidents, Donald Trump had a free hand to conduct trade policy during his presidency. With that free hand, the evidence shows he inflicted significant damage.
That's already been seen in the form of cuts to reserve requirement ratios for banks, which set the amount of funds they must keep on hand. The recent moves mean banks have more money to lend out, stimulating the economy with more debt.
The mutual detentions and release have dominated international headlines with the underpinnings of hostage diplomacy. It remains to be seen how the sudden turn of events will affect US-China and China-Canada relations. Canadian Prime Minister Justin Trudeau was just re-elected in September after calling for early elections and his government appears keen to maintain strong economic and trade ties with Beijing. Meanwhile, Washington DC is likely to view the situation less favorably, for strategic reasons.
Since the 1980s, Trump had advocated tariffs to eliminate the U.S. trade deficit and promote domestic manufacturing, saying the country was being "ripped off" by its trading partners; imposing tariffs became a major plank of his presidential campaign. Most economists do not believe trade deficits pose a significant problem for the American economy. Nearly all economists who responded to surveys conducted by the Associated Press and Reuters said Trump's tariffs would do more harm than good to the American economy, and some economists advocated alternate means to address trade deficits with China.
The volume of trade in goods between the US and China has grown rapidly since the beginning of China's economic reforms in the late 1970s. The growth of trade accelerated after China's entry into the World Trade Organization (WTO) in 2001, with the US and China becoming one another's most important trading partners. The US has consistently imported more from China than it has exported to China, with the bilateral US trade deficit in goods with China rising to $375.6 billion in 2017.
During his 2016 presidential campaign, Donald Trump promised to reduce the US trade deficit with China, which he attributed to unfair trade practices, such as intellectual property theft and lack of access by US companies to the Chinese market. American proponents of tariffs on China have argued that tariffs will bring manufacturing jobs to the US; that bilateral tariffs should be reciprocal; that the US should eliminate its trade deficit with China; and that China should change various policies governing intellectual property and investment. Most economists are skeptical of the ability of tariffs to achieve the first three of these goals. A study estimates that U.S. exports to China provide support to 1.2 million American jobs and that Chinese multinational companies directly employ 197,000 Americans, while U.S. companies invested $105 billion in China in 2019. Economists have studied the impact of trade with China and increasing labor productivity on employment in the American manufacturing sector, with mixed results. Most economists believe that American trade deficit is the result of macroeconomic factors, rather than trade policy. While increased tariffs on Chinese goods are expected to decrease US imports from China, they are expected to lead to increased imports from other countries, leaving the United States' overall trade deficit largely unchanged - a phenomenon known as trade diversion.
Donald Trump's first noted advocacy for tariffs was prompted by Japanese economic success in the 1980s, arguing that the U.S. trade deficit was a burden and that tariffs would promote domestic manufacturing that would keep the United States from being "ripped off" by its trading partners. Imposing tariffs was subsequently a major plank of his successful 2016 presidential campaign. In early 2011, he stated that because China has manipulated their currency, "it is almost impossible for our companies to compete with Chinese companies."
Technology is considered the most important part of the U.S. economy. According to U.S. Trade Representative Robert E. Lighthizer, China maintains a policy of "forced technology transfer," along with practicing "state capitalism," including buying U.S. technology companies and using cybertheft to gain technology. As a result, officials in the Trump administration were, by early 2018, taking steps to prevent Chinese state-controlled companies from buying American technology companies and were trying to stop American companies from handing over their key technologies to China as a cost of entering their market. According to political analyst Josh Rogin: "There was a belief that China would develop a private economy that would prove compatible with the WTO system. Chinese leadership has made a political decision to do the opposite. So now we have to respond."
Peter Navarro, White House Office of Trade and Manufacturing Policy Director, explained that the tariffs are "purely defensive measures" to reduce the trade deficit. He says that the cumulative trillions of dollars that Americans transfer overseas as a result of yearly deficits are then used by those countries to buy America's assets, as opposed to investing that money in the U.S. "If we do as we're doing . . . those trillions of dollars are in the hands of foreigners that they can then use to buy up America."
The Chinese government argues that the US government's real goal is to stifle China's growth, and that the trade war has had a negative effect on the world. The Chinese government has blamed the American government for starting the conflict and said that US actions were making negotiations difficult. Zhang Xiangchen, China's ambassador to the World Trade Organization, said the U.S. Trade Representative was operating with a "presumption of guilt", making claims without evidence and based on speculation.
The trade war contributed to a rise in Chinese nationalism; the South China Morning Post reported that the conflict helped the Communist Party "shore up much-needed domestic support". The external pressure of the trade war allowed Chinese leader Xi Jinping to point to the United States' actions as a reason for China's economic slowdown. The Chinese public responded. Academic Suisheng Zhao summarizes, "Proud of their accomplishments through hard work, tremendous sacrifices, dogged determination, and well-crafted policies, Many Chinese are fed up with US criticisms that China's rise is because it did not play by rules, violated international commitments, and tilted the playing field to advantage Chinese firms."