Post Pandemic Economic Outlook: Is it in the United States’ interest to continue their trade war with China?

By Michael Ma

Trade wars become less popular topics when a pandemic drags the world into a global recession. Within days, employees were laid off, companies ran into bankruptcy, and certain industries became paralyzed. Facing the global economic shortfall as well as the incoming presidential election, the United States should reflect on whether it is still their interest to continue their trade war with China. 

In 2018, the Trump Administration blamed China for possessing a large trade surplus against the US, failure to comply with the world trade organization (WTO) commitments, intellectual property theft, and forced transfer of US technology to China.

In March 2018, the US imposed a 25% tariff on steel imports and a 10% tariff on aluminum imports to most countries, later specifically targeting China. Trade policies from these two large economic powers swing back and forth, creating a pervasive economic impact, and it seems that the three major claims made toward China to justify these actions are controversial. It is essential to learn the real purpose of initiating the trade war.

While some economists illustrate that a trade war will reduce the US trade deficit and will increase domestic production by high import tariffs, many disagree with this claim. Former Federal Reserve chairman Ben Bernanke, for example, believes that the essential cause of the large trade deficit is America’s saving deficiency. Other economists such as Hufbauer and Lu claim that the US trade deficit with almost the rest of the world inevitably makes a global US trade deficit. China is also notably a final assembler and manufacturer in international value chains and almost half of the trade surplus against the US can be attributed to other countries that export parts and components. Economist Paul Krugman affirms that the trade leverage over China is being exaggerated and the case shouldn’t be of priority especially during the current situation. 

Into the bargain, some researchers do not regard the trade deficit as a sign of crisis. Yongding Yu, a senior fellow of the institute of world economics and politics, Chinese Academy of Social Sciences, argues that running a trade deficit and current account deficit all the time reflects the strength of the US financial system and the hegemony of the US dollar. 

In terms of complying to the UN World Trade Organization commitments, China hasn’t accomplished all that has been outlined. It intentionally restricts foreign access to industries like telecommunication and films, and poses opportunities to domestic companies, which, argued by some, “erode global trading systems, both economic growth and the health of innovative industries”. Yu declares that China has “significant room for improvement”, especially for the financial service sector; but also refutes that some regulations imposed by the United States Trade Representative go beyond the scope of the WTO and justifies China has the right to procure certain technology since it is still a developing country, and reciprocity isn’t required for the developing members.

Moreover, many American officials and economists have blamed China for forcing foreign companies to share technology in exchange for local market share. But similarly to all allegations above, this case is disputable. China denies the so-called “forced transfer exchange”, asserting such accusations to have no concrete evidence. Economist Larry Summers asserts that China has no need to steal these intellectual properties from the US and attributes the Chinese technological development to huge government investment and an effective education system focusing on science and technology.

However, some economists believe the economic allegations above aren’t the real driver of the Sino-US trade conflict. According to the hegemonic stability theory, the declining hegemon inclines to subdue rising challengers in order to maintain its stable hegemony. Although China denies the attempt to set up a rule favoured by itself, many economists and politicians firmly believe the series of activities such as the Belt and Road Initiative, the founding of Asian Infrastructure Investment Bank (AIIB), and the “Made in China 2025” plan aim to shape Chinese global economic governance. 

Before the pandemic, the US levied a heavy tariff on Chinese imports and put companies on the “entity list”, China, in response, retaliated against the US by similar means. Economically speaking, the trade conflict between the US and China is a no-win situation, indicating the existence of an underlying significant political purpose which keeps the conflict ongoing. 

The phase one trade deal reached early this year partially cushioned the tension, but, nowadays, when American household incomes sink, millions of people lose their jobs, and many employers cut wages due to COVID-19, the effects of the trade war are put under a more complex, macroeconomic context and demands further examination. Chad Bown, a senior fellow at the Peterson Institute for International Economics, argues that along with the unreasonable purchase targets that China cannot meet, the pandemic could also be an excuse for The Trump administration to keep the trade deal. However, in light of COVID-19 and the trade war, two aspects—consumer spending and employment—should be reviewed before considering to press on with the trade war.

China is indeed paying for at least part of the tariff, its economy continues to cool off, but it is also the only big economy that has realized a positive GDP increase in the second quarter. In response to COVID-19, Americans curtailed expenditure drastically and the declining consumer spending contributes a -5.3% to the economic contraction in the first quarter. This is unlike China, which went through the pandemic-induced recession in the early half of the year as the US consumer spending fell another $1300 billion in the second quarter, hampering the GDP growth as the consumer spending accounts for roughly 68% of the US GDP. Furthermore, there are great possibilities that the tariff will pass on the costs to consumers, especially when there are no close substitute goods. Investors like Ray Dalio and Jeffrey Gundlach publicly pointed out the potential rise of inflation under the flood of government spending with concerns that consumer purchasing power might crumble as a result.

In consideration of employment, job opportunities taken back from foreigners might be offset by the unexpected job loss caused by protectionism. When ingredient or manufacturing costs from China rise due to US-imposed tariffs, workers in certain industries face layoff, in turn, backfiring on domestic job opportunities.  Employment rates undergo a sharper decline in industries getting hit twice. Correct Craft, for instance, a Florida-based boat-maker, has been bombarded twice, first when aluminum prices rose, second when countries like Mexico, Canada imposed the retaliatory tariff on the boat-making industry. Firms alike suffer not merely having higher costs but also losing orders from dealers in those countries.

In the week ending August 22, 2020, seasonally adjusted unemployment claims reached 1 million, unemployment rates surged above 10% and posed a threat to economic resurgence as state governments paid out an exorbitant amount of money to fill out unemployment and health costs while tax revenues plummeted. 

The government itself has not performed better, about 1.2 million local government jobs vanished since February, and Moody’s Analytics researchers predict a further loss of 2.8 million jobs without federal assistance. 

Low consumer spending contracts tax revenues and hinders transfer payments, which leaves the unemployment issue unresolved and provides space for social and economic instability, which in turn will erode consumption expenditure. Even so, for long-term political and economic hegemony, it may be necessary for the United States to stick to its protectionist trade policies, and, in practice, the US should quickly regain its bargain power over the trade war with China.

Under the current circumstance, strict restrictions on COVID-19 are indispensable, and a series of emergency reactions should be well-prepared to cut off the spread of infection. Additionally, the US should consider uplifting certain tariffs for a reciprocal tariff abandonment, especially targeting most cost-sensitive industries or those that would create the largest social benefit.

President Trump may also be worried about his upcoming election, Thiemo Fetzer and Carlo Schwarz of the University of Warwicks points out that most Chinese retaliatory policies are politically-oriented, aiming to corrode the chance for Trump’s next presidency by destructing the benefits of Trump supporters. Regardless of votes or an economic resurgence, Trump has placed himself in a passive position, and only through negotiations that the release of economic pressures for certain American industries may true prosperity be possible.

The Sino-US trade war is a story of two nations mutually undergoing a period of fasting, with the US having the intention to starve its competitor to death, or, at least, losing the potency to pose a threat again. The end is yet to come, but it is possible that after a joint compromise, both nations will proclaim victory and their people will believe them.