By Chen Dingding Source: The Diplomat Published: 2019-8-23
Capturing the world’s attention, the U.S.-China trade war has been going on for more than a year now, and yet we still cannot see an end to it. Recently, China allowed its currency to depreciate to the lowest level in a decade, simultaneously announcing that its companies will stop purchasing American agricultural products. In response, the Trump administration further escalated the situation by officially calling China a currency manipulator.
Another once-promising negotiation between the two countries seemed to have failed. After these series of escalations of tension, many began to ponder: Why has the trade war persisted so long? And, more broadly, has the Trump administration achieved its initial goals?
In fact, this trade war that has dominated a huge part of the so-called Trump era started in during the last American presidential campaign. Addressing the trade deficit in U.S.-China trade at a rally in Fort Wayne in May 2016, Trump commented that Beijing couldn’t be allowed to continue to “rape our country.” Later on, in March of 2018, Trump, as president, commented on Twitter: “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win… It’s easy!”
Unfortunately, unlike what Trump had in mind, the trade war with China is not an easy win. Two years after the Trump administration’s first punishing acts towards China, the United States still faces a forever escalating trade war without clear strategies, goals, and endgames. “We have a trade situation that is going off the rails,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. According White House economic advisor Larry Kudlow, Trump “has said numerous times his ultimate goal with respect to the world trading system is zero tariffs, zero non-tariff trading barriers and zero subsidies.” Nevertheless, though the trade war did harm the Chinese economy, we are still far from achieving what President Trump described as his objective.
Overall, the trade war has definitely hit China with damages. China’s economic growth of 6.2 percent between April and June saw growth drop to the lowest level since 1992 while U.S. tariffs’ direct impact on China’s GDP is estimated at negative 0.6 percent (not to mention the indirect influences).
Rising costs and the unpredictability caused by the unstable tariffs and retaliations has also caused more than 50 companies, including Apple and Nintendo, to move their supply chains away from China to Southeast Asian countries. Kiyofumi Kakudo, the CEO of Dynabook, said that his firm did not know when the fourth round of U.S. tariffs might hit, and thus will need “permanent measures to avoid the risk of tariffs and be eligible for U.S. government procurement.” Apple, on the other hand, has also asked its major suppliers to consider moving 15 to 30 percent of iPhone production out of China and has attempted to produce AirPods in Vietnam as well.
On the U.S. side, experts predicted a good 2 to 2.5 percent growth in the U.S economy this year. However, if the trade war continues to escalate, which seems inevitable, it might inflict a powerful shock to the American economy. For the first time in nearly 11 years, the Federal Reserve cut interest rates in an attempt to lower the odds of a recession. A day later, Trump again raised the odds for a recession by announcing tariffs on $300 billion worth of U.S. imports from China, targeting consumer goods. Kristina Hooper, chief global market strategist at Invesco said: “It could be incredibly damaging to the global economy. The risk of a recession has gone up because of the ratcheting up of the trade war.” In other words, although the U.S. economy still did not face consequences as severe as the ones China did, a global industrial slowdown might be coming if escalations continue.
Nevertheless, despite the mess the trade war has put the world through, the Trump administration has not yet accomplished its two main objectives: addressing trade deficit and restraining China’s technological enhancement and influence. First of all, the current U.S.-China trade deficit increased to $488.5 billion (preliminary) in 2018 from the $449.1 billion in 2017. Although the current account deficit in the first quarter of 2019 decreased to $130.4 billion from the $143.9 billion in the fourth quarter of 2018, instead of drastically decreasing, large amounts of trade deficit still remains.
Furthermore, key data seems to contradict Trump’s description of how the trade war attracted has “massive amounts of money” into the United States. Between July 2018 to the end of June in 2019, U.S. exports to China decreased by $33 billion, or 21 percent. In contrast, Chinese exports to the United states grew by $4 billion, 1 percent. In fact, U.S. consumers are still attracted to Chinese-made products, especially those made-in-China yet manufactured by U.S. companies such as Apple. As a result, in the first 7 months of 2019, the surplus stood $168 billion in China’s favor.
In addition, China’s offer also seems competitive when compared to its U.S. competitors. Although Beijing has continuously raised its tariffs on U.S. goods, the average tariff it applies to Europe, Japan, and elsewhere has decreased, according to research of the Peterson Institute. This think tank commented: “While Trump shows other countries nothing but his tariff stick, China has been offering carrots. Beijing has repeatedly cut its duties on imports from America’s commercial rivals, including Canada, Japan and Germany.” In other words, while the Trump administration has piled on tariffs after tariffs to a majority of its trading partners, China came up with a more attractive plan. Thus, Trump’s plan of addressing trade deficit and limiting China’s economic influence in the global community seemed to have failed.
Moreover, Trump’s plan of limiting Chinese technological development by banning Chinese tech giant Huawei has also proven relatively ineffective up to this point. Although Huawei faced severe restrictions from the United States, its global market share for smartphones in the second quarter of this year had an increase of one percentage because it has triggered a patriotic backlash against American sanctions in China. Also, in response to the ban on Huawei, the Chinese government and media have declared a slogan on “Made in China 2025” to encourage investment and innovation in the strategic industries listed in the plan. Instead of forcing the company to wither, Trump’s sanctions on Huawei forced China to accelerate its technological development and inspired the young Chinese generation to support Chinese made products.
All this suggests that Trump may have put pressure on the Chinese economy, but he has failed to establish new terms for following negotiations and future developments. Did the trade war force the world to focus on the trade deficit and intellectual property protection from China? Yes. But did Trump achieve his goal of establishing a platform with zero tariffs, non-tariff trading barriers, and subsidies? No: there is still no sight of any promising negotiation that would produce the platform he had in mind.
Other questions also make this still clearer. For instance, did the trade deficit between U.S.-China trade decrease significantly? Did the Huawei-ban hinder China’s technology enhancement? Sadly, the answers to these are no and no. Instead of solving the issues he pointed out, Trump has pulled both countries and their trading partners into an even deeper hole without knowing the way out.
Chen Dingding is a visiting fellow of Chongyang Institute for Financial Studies at Renmin University of China.