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The Politics and Economics of the U.S.-China Trade War

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The Politics and Economics of the U.S.-China Trade War The Politics and Economics of the U.S.-China Trade War Deborah L. Swenson University of California, Davis Department of Economics 1122 SSH Davis, CA 95616 [email protected] Wing Thye Woo University of California, Davis Chinese Academy of Social Sciences, Beijing Sunway University, Kuala Lumpur Fudan University, Shanghai [email protected] Abstract The United States declared trade war after substantial defections from the internationalist (in geo- strategy and economics) lobby in U.S. politics to a new coalition between conflict-is-inevitable activists and anti-globalization proponents. Many internationalist businesses changed sides after experiencing disappointments on economic fronts including China’s non-compliance with some of its World Trade Organization (WTO) obligations, China’s acquisition of foreign technology at lower-than-expected prices, and the serious inadequacies in the WTO’s governance of global trade. Many of the disillusioned internationalists have given too much weight to the contribution of globalization to negative develop- ments in the U.S. labor market, and too little weight to the role of powerful capital-biased technological changes and to the inadequacies of state-provided programs for social insurance and human capital formation. Resolution of the trade war and prevention of its frequent occurrence will become more likely when (a) China adopts much greater reciprocity in its economic engagement with the advanced countries despite its status as a developing country under WTO rules; and (b) the United States stops equating geo-strategic competition with economic competition, recognizes that economic dynamism and economic resilience comes from strengthening indigenous innovation capability rather than from holding China back technologically,and institutes social programs to significantly reduce the trauma that is created by frequent job changes. Deep reform of the WTO is urgently needed but is unlikely to hap- pen in the medium run. For the medium run, the United States should mobilize country cooperation in regional settings (like the Trans-Pacific Partnership [TPP]) to introduce policy innovations to serve as templates for a re-designed WTO architecture, and to harness collective market power to be used in future negotiations on WTO reform. Asian Economic Papers 18:3 © 2019 by the Asian Economic Panel and the Massachusetts Institute of Technology https://doi.org/10.1162/asep_a_00710 Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/asep_a_00710 by guest on 28 September 2021 The Politics and Economics of the U.S.-China Trade War 1. Introduction After over 16 months of intense negotiations, marked by occasional drama but always lightened by late night tweets from Donald Trump,1 the United States and China agreed to a limited trade deal on 11 October 2019 that amounted to a truce in their trade war. The Americans put off a scheduled tariff increase on US$ 250 billion of Chinese imports, and the Chinese agreed to buy US$ 40 to 50 billion worth of U.S. agricultural products, be more transparent in foreign market interventions, ease U.S. entry into the financial services sec- tor, and enhance enforcement of intellectual property rights. Trump called this truce “a substantial phase one deal” even though specific details were not released, and nothing was signed.2 The U.S.–China trade war is only one part of Trump’s stated ambition to radically alter U.S. foreign economic relations. Just days after his inauguration in February 2017, Trump with- drew the United States from the TPP. Other early moves included the imposition of tariffs on steel and aluminum imports, and demands that Mexico, Canada, and Korea renegotiate the North American Free Trade Agreement and the Korea–U.S. Free Trade Agreement. On 22 March 2018, the United States Trade Representative (USTR 2018) released a report on China’s practices related to technology transfer, intellectual property, and innovation that accused China of unfair trade practices, and Trump announced that he would be imposing tariffs on Chinese imports. A series of China-specific tariffs were imposed be- ginning on 6 July 2018, and China retaliated in tit-for-tat fashion. By the time of the truce in October 2019, the United States had active tariffs on about US$ 375 billion of Chinese goods, and China had active tariffs on US$ 110 billion of U.S. merchandise exports.3 1 Noteworthy acts by the United States’ side included embarrassing Vice-Premier Liu He “on five different occasions by discarding understandings he thought had been reached or announcing measures on the eve of trade negotiations” (Mitchell, Tom. 2019. China makes few concessions in trade truce with U.S. Financial Times. Available at: https://www.ft.com/content/6a30ed00 -ecd1-11e9-ad1e-4367d8281195); the reduction in academic exchange; and Trump’s tweets that China badly needed the trade war to stop soon. Key acts from China’s side included the “unex- pected” rejection in May 2019 of a draft agreement that, according to the Americans, had been reached smoothly (Lo, Kinling. 2019. What killed U.S.-China trade talks: A tale of two texts. South China Morning Post. Available at: https://www.scmp.com/news/china/diplomacy/article /3010456/what-killed-us-china-trade-talks-tale-two-texts); depreciation of the RMB–US$ rate to beyond 7; an announced total ban on U.S. agricultural products; and the abrupt departure of Chinese negotiators from Washington, DC, in September 2019. 2 Apparently, the details would be worked out by 15 November 2019 when Donald Trump meets with Xi Jinping at the Asia-Pacific Economic Cooperation meeting in Chile. 3 These two numbers are from Timmons and Lawder (2019), which differ from US$ 550 billion and US$ 185 billion (respectively) in Wong and Koty (2019). The Wong and Koty numbers include scheduled tariffs that were announced but not implemented by 11 October 2019. For reference, in 2017, U.S. imports of goods from China were roughly US$ 505 bn, and U.S. exports of goods to China were about US$ 130 bn. 2 Asian Economic Papers Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/asep_a_00710 by guest on 28 September 2021 The Politics and Economics of the U.S.-China Trade War Our analysis of the U.S.–China trade war is organized as follows. Section 2 identifies the different U.S. interest groups on China trade, and Section 3 explains why U.S. trade policy has pivoted away from its traditional emphasis on trade liberalization and global inte- gration. The next four sections, Sections 4 through 7, focus on four economic factors that generated immense political pressure for U.S. protectionism: negative outcomes in the U.S. labor market, China’s violations of WTO norms, U.S. worries about China’s technology acquisition practices, and serious defects of the WTO system. Section 8 analyzes the eco- nomic consequences of the trade conflict on the United States and the world, and Section 9 proposes policy adjustments for the United States and China to resolve their trade war and forestall its frequent reoccurrence. 2. U.S.perspectives on economic engagement with China Policy choices are nearly always the end-products of two contests: the contest of ideas and the contest of interest groups. These two contests are often linked because each interest group naturally pushes for the set of worldviews and solutions from which they will bene- fit. For most important economic issues that affect many U.S. groups (e.g., U.S.–China eco- nomic relations and U.S.–Saudi economic relations), no single U.S. interest group is likely to be strong enough on its own to determine the U.S. policy position. As a result, when a coalition of interest groups brokers compromises among themselves, their formation of a majority coalition on their issue of interest generally enables them to steer the setting of the national policy position on that issue. Our point is that significant change in policy regarding important economic matters, in most cases, is the outcome of the emergence of a new majority coalition on that issue. The reason why the U.S.–China trade war started in 2018 when the U.S. merchandise trade deficit was under 4 percent of GDP—rather than in 2006 when U.S. merchandise trade deficit was over 6 percent—is that the majority coalition on China trade in 2006 was no longer the majority coalition in 2018. Clearly, other factors aside from the trade imbalance have played a larger role in the transformation of the majority coalition. To identify these factors of influence, we looked at the range of U.S. opinions on China trade, which can be classified into four lobby groups. Lobby Group 1 consists of geo-strategists who advocate preserving the primacy of the United States in the global system.4 They are strident supporters of protectionism against China because they believe that the logic of geo-strategic competition makes the U.S.– China conflict inevitable (e.g., Mearscheimer 2001). Members of this group believe that 4 Blackwill and Campbell (2016, 29–36) want “to avoid a U.S.-China confrontation” but they want to “maintain U.S. primacy in Asia. [Hence an] energized American pivot to Asia is the indispens- able ingredient in a successful U.S. policy to participate and project strength more consequentially in the region and to deal with Chinese power and influence under Xi Jinping.” 3 Asian Economic Papers Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/asep_a_00710 by guest on 28 September 2021 The Politics and Economics of the U.S.-China Trade War postponement of the conflict will make the final conflict costlier and the final outcome less certain for the United States because the extra time will allow China to reduce the techno- logical gap, and to strengthen the coalition of authoritarian regimes opposed to the United States.
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