- The political popularity of the punitive actions targeting China has risen even when they do not provide any analytical basis.
- Exports from the USA to China, which decreased from 8.4 per cent in 2017 to 7% in 2022, have not expanded much as a result of the trade war.
- There is no conclusive proof that China’s economy has been weakened if that was the goal of the U.S. sanctions against it.
- A study quoted above estimates taxpayers will pay about $250,000 for every job that they save as part of traditional Buy America programs.
President Donald Trump initiated the trade war with China five years back aimed at reducing that country’s Bilateral Trade Deficit. Then, by limiting high-tech exports and reducing the links between professions and finance, his successor, President Joe Biden, has placed a greater emphasis on Decoupling. Both countries were looking to reduce imports of finished products and create more jobs.
What indicators of a policy’s efficacy should one look for?
The logic behind Trump’s fixation on trade deficits has not made much sense back then and is even more so today. However, the reasons for reducing US trade relations with China and undercutting China’s growth potential are now security concerns. In comparison with those parameters, in view of the costs resulting from price pressures and limited export growth as well as a projected decrease in world output, results are Mixed but on balance unconvincing. But such restrictive measures are strongly supported by US politicians of both parties because their constituents do not know how much it costs, while the benefits from seeming to be tough on China have been appreciated by voters.
Soaring Trade Deficits
According to recent data from the U.S. Census Bureau, the politically sensitive U.S. merchandise trade deficit with China was larger in 2022 than it was in President Donald Trump’s first year in office, while America’s overall trade deficit reached an all-time high of $1.18 trillion. This confirms that tariffs are not likely to reduce US trade deficits and costs will largely be borne by the United States, according to almost all economists who participated in a survey conducted before the launch of Donald Trump’s trade war.
The first stage purchase agreement with China, which called for an additional $200 billion in Chinese imports from the U.S., was a wild card for Donald Trump’s administration. Nevertheless, when world trade is dominated by market decisions of firms and consumers subject to unforeseeable events like the coronavirus pandemic, there is no logical basis for state purchasing agreements. The principles of economics tell us that a country’s trade balance depends on how much it saves and spends. The combination of Biden’s massive spending plans and Trump’s sizable tax cuts has resulted in historic trade deficits as well as ballooning budget deficits.
Trade diversification yet rising reliance on imports from other nations
But China’s falling share of trade with the U.S. is overlooked by this focus on bilateral trade numbers. Compared with China, which accounted for 47% of the U.S.’s trade deficit in 2017, its share declined to 32% last year as a majority of this decline was offset by an increase in total shares held by other Eastern Asia economies. In addition, the European share of America’s overall trade deficit has also fallen from 21% to 1%.
In examining the components of trade, we can learn a lot more. In spite of the fact that imports from China were essentially unchanged in 2022 compared to 2017, import volumes into the United States have grown by approximately $900 billion over this period. As a result, China’s share of the total has fallen from 22% to 17%, composed mainly of production goods. Nevertheless, the United States imports steadily increased from 23% in 1992 to 34% in 2022. Dependence on imports of manufactured goods was not reduced by this decline. As a percentage of total expenditures on manufactured goods.
Imports from other countries, especially Mexico and Vietnam, more than compensated for the reduction in China’s share of manufactured goods imported into the U.S. Thanks to their locational advantages and free trade agreements, these two developing countries were able to import much more from the US than from any other country. The border is shared between Vietnam and China, which is linked to the ASEAN China Trade Agreement, while Mexico and the United States share the border and are linked to the USMCA trade agreement.
However, little attention is paid to the behind-the-scenes role played by China in supplying the components and materials for these other countries exports to the US. As a result of the decline in US imports from China, most of Vietnam’s increased exports were to product sectors that included computer accessories and telecommunications equipment. Since 2017, China’s exports to Vietnam have nearly tripled, with a trade surplus almost doubling by 2022. In addition to a 50% increase in 2021, China shipped nearly 30% more goods to Mexico last year. China may be reducing its direct exports to the United States, but now it’s indirectly exporting more. It is therefore why China has continued to increase its share of global manufacturing output, from 26% in 2017 to 31% in 2021.
In terms of exports, between 2017 and 2020, the US exported a total of about $1.5 trillion but then grew to nearly $1.9 trillion in 2022. But this increase, triggered by the crisis in Ukraine, does not concern manufactured goods but exports of energy products and chemicals to Europe. Exports from the USA to China, which decreased from 8.4 per cent in 2017 to 7% in 2022, have not expanded much as a result of the trade war.
Decoupling Fees and Results
The US firms have faced a tariff-related increase in the costs of their imported inputs that has made exports to China 23% less than they would be if there had been no trade war, combined with Chinese retaliatory tariffs. This has meant that despite the political priority given to these policies by both the Trump and Biden administrations, American trade war policies have not produced a significant increase in exports of manufactured products.
There is no conclusive proof that China’s economy has been weakened if that was the goal of the U.S. sanctions against it. China has recently increased its export share to record levels by creating new export markets and capitalizing on pandemic-driven Western demand for manufactured goods. It could be argued that the world has become more dependent on China for trade, while China has become less dependent on the world.
The costs imposed on US consumers and manufacturers, as well as damage done to American firms’ competitiveness in international trade, should be taken into account when assessing the benefits of decoupling. The Biden administration supports domestic production with subsidies under the Act on inflation reduction in order to counter these tendencies. Such measures may be justified on strategic grounds, but their rationale is undermined by protectionist Buy America conditions. The U.S. policymakers often counter that China has used subsidies in support of strategic industries, but Chinese firms have been interested in importing essential technology and components to ensure their products are globally competitive on cost and performance grounds. Because these products are “dual use,” with a much larger commercial market than military applications, the recent semiconductor and other U.S. restrictions on China’s access to high-tech products are also problematic. Such limitations harm the numerous American businesses that profit greatly from exports to China and may go against WTO regulations.
A significant cost of trade policy distortions can be incurred. A study quoted above estimates taxpayers will pay about $250,000 for every job that they save as part of traditional Buy America programs. In addition, a recent International Monetary Fund study suggests that the combination of US measures for trade and technology decoupling could reduce world GDP by as much as 7 to 12 per cent. (Note: The U.S. Census Bureau’s data was used to calculate all figures in this article)
However, the lack of clarity on United States policy objectives continues to be a problem. How will the United States know if it’s succeeded, and what does it mean to undercut China? The political popularity of the punitive actions targeting China has risen even when they do not provide any analytical basis, given that relations between the US and China are at an all-time low. The truth is that the United States and China have no choice but to continue to trade with one another.
(The author is a Post Graduate student in International Relations at Amity University, Raipur. She writes articles and research papers regularly on international affairs and geopolitics)