TIT INITIAL The two-year segment of the “phase 1” trade agreement between America and China ends on December 31. Neither country is in the mood to mark the occasion. The mutual antagonism is as fierce as ever; a new US law banning products made with forced labor in Xinjiang is the latest flashpoint. Still, it’s a good time to take stock of the economic performance of the Sino-US trade war. The verdict is consistently negative for both countries, with one exception.
Start with the most egregious failure. As part of the phase one agreement, signed on January 15, 2020, China has pledged to import significantly more from America, purchasing an additional $ 200 billion in goods and services in 2020 and 2021, above levels of 2017. After long complaining about China’s manipulation of its economy, America demanded that it manipulate trade flows. As it turned out, Chinese officials had neither the will nor the capacity to do so. China will barely hit a tenth of its commodity purchase target, according to data compiled by Chad Bown of the Peterson Institute for International Economics, a think tank. Even taking into account the disruption associated with the pandemic, the US strategy of bullying China into buying more of its goods has been disappointing.
More generally, the trade war has hurt the Chinese and American economies, as a growing body of research shows. The superpowers started hitting each other with tariffs in early 2018, giving economists two full years of pre-covid numbers to chew on. During this period, average US tariffs on Chinese imports fell from 3% to 19%, while average Chinese tariffs on US imports rose from 8% to 21%. It’s hard to overstate how much of a shock this has been to the world’s largest bilateral trading relationship. Pablo Fajgelbaum of Princeton University and Amit Khandelwal of Columbia University calculate that tariffs were applied to even more trade in proportion to the GDP than the notorious Smoot-Hawley levies of 1930, which led to a spiral of international retaliation and possibly deepened the Depression. Fortunately, the Sino-US trade war did not precipitate such a disaster. The global economy was in much better shape to begin with. And the price effects have been mitigated by complex supply chains.
At the start of the trade war, a common assumption was that both sides would bear the costs of tariffs: Chinese suppliers would charge a little less for their goods, and US importers would pay a little more. However, a first study carried out by economists including Gita Gopinath, now IMF, found that US importers were in fact bearing over 90% of the cost of US tariffs. The obvious explanation was that they had little choice but to rely on Chinese suppliers, at least in the short term, and could not negotiate lower prices. Additionally, consumer prices barely budged, suggesting that retailers have absorbed the costs through slimmer profits.
It couldn’t last, Ms Gopinath and her colleagues wrote: At some point, US importers would pass higher costs on to customers. Chinese economists might take credit for the current spike in inflation in the United States to say it is happening now. At the margin, they are surely right in saying that tariffs can be inflationary, as even Janet Yellen, the Secretary of the Treasury of the United States has acknowledged. But the dislocations resulting from the pandemic – from microchip shortages to quintuple shipping costs – are much bigger factors in the price hike. The trade war only adds to the puzzle.
One of the reasons America imposed tariffs was to encourage manufacturers to locate there. Yet trade frictions have actually depressed corporate investment in America, suggests research by Mary Amiti of the Federal Reserve Bank of New York and others. Stock prices of trading companies with China have performed particularly badly after the tariff announcements. This reflected lower returns on capital and, by extension, weaker incentives to invest. In total, the annual growth in investment of US publicly traded companies would likely have declined by 1.9 percentage points by the end of 2020. Aaron Flaaen and Justin Pierce of the Federal Reserve Board believe that exposure to higher tariffs high was associated with a decline in the US manufacturing industry. 1.4% employment. The burden of higher import costs and retaliatory levies outweighed the benefits of being shielded from foreign competition.
So far, this may all seem like a victory for China. But more recent articles show that he, too, has taken a few hits. Due to the lack of official Chinese granular data, Davin Chor of the Tuck School of Business and Li Bingjing of the University of Hong Kong studied satellite images of night lights to assess economic activity. Most of the Chinese population, they found, would have been oblivious to the trade war. But for the export-intensive regions of the country directly affected, they estimated that tariffs caused a 2.5% contraction in the GDP per person. Another approach from economists, including Xu Mingzhi of Peking University, was to examine data from 51job.com, a Chinese employment platform. The companies most exposed to U.S. tariffs posted about 3% fewer ads in the six months following the tariff increases and reduced pay offers by 0.5% on average. Chinese officials like to talk about bilateral cooperation as “win-win.” The trade war was a lose-lose.
Eggs in over baskets
The trade war has been constructive in one respect, however. US imports from China are slightly lower than they were before the tariffs were implemented. In contrast, its imports from Vietnam have doubled and those from Mexico have increased by 20%. Seen up close, this may be a sign that trade is being diverted from the most efficient producers in China to slightly less efficient producers.
But in terms of business strategy, that seems reasonable. One of the lessons of the supply chain grumblings of the last year is the danger of relying too much on a single source. American businesses can thank the trade war for throwing them into the messy task of rethinking their supply chains. The trajectory of Sino-US relations suggests that there is every reason to accelerate change. ■
Read more from Free Exchange, our column on the economy:
Has the pandemic shown that inflation is a fiscal phenomenon? (December 18, 2021)
Why the demographic transition is accelerating (December 11, 2021)
The explosion of stablecoins relaunches a debate around “free banking” (December 4, 2021)
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This article appeared in the Finance & economics section of the print edition under the title “Lose-lose ordeal”