Who Won the Trade War Between the US and China?
Between 2018 and 2020, the United States and China engaged in the largest trade war since the 1930s, raising tariffs, upsetting markets, and threatening to drive the world economy into crisis. Since then, the conflict has sparked scores of economic studies and plenty of political posturing in both nations.
Who was victorious? The answer is rather tricky, and it includes crucial lessons for those inclined to use tariffs as weapons.
Economists frequently assert that no one wins in a trade war since costs grow on both sides. If that is the case, the United States, which launched the conflict and finally put hefty tariffs on three-quarters of everything China exported to the United States to force changes in Chinese economic policy, has lost by not winning.
There is lots of evidence pointing to a U.S. defeat. During a journey to Beijing in May 2018, top Trump regime officials laid out their demands:
- A $200 billion reduction in the bilateral trade deficit.
- The elimination of advanced technology subsidies.
- The cessation of pressure on US companies to hand over technology.
- The strengthening of intellectual property protection.
The list was so broad that a Chinese scholar at the Hudson Institute and a Trump supporter, compared it to “the Chinese coming into Washington and instructing us to amend our Constitution.”
To put pressure on Beijing, the administration implemented four rounds of tariff increases, increasing average US taxes on Chinese goods from 3.1 percent to 21 percent. China responded with equivalent tariffs. According to an economist at Princeton University and Columbia University, the tariffs targeted a more significant portion of the global economy than even the 1930s Smoot-Hawley tariffs, which are blamed for aggravating the Great Depression.
In January 2020, the two sides negotiated a Phase One trade deal, which served as a trade ceasefire. However, the agreement kept almost all tariffs in place, so American pressure on China has remained since then.
Nonetheless, little has changed. According to a popular trade analyst, China fell 40% short of its goal under the Phase One agreement to buy an additional $200 billion in US products over two years. The US concerns regarding Chinese pressure, technology theft, and other wrongdoings, US Trade Representative reports on China’s trade policies are unequivocal: There is no progress. Earlier this year, USTR used very identical language to condemn Chinese subsidies (“causing harm to U.S. companies”), excess capacity (“world’s leading offender”), and pressure to hand up technology (“U.S. concerns…remained unaddressed”).
They [the Chinese] haven’t changed, commented a former Trump trade negotiator who now works at a law firm. “We made it more expensive for them, but they’re continuing their old practices,” he says, adding that it’s too early to proclaim a trade-war victory.
President Trump’s trade representative, Robert Lighthizer, who served as the United States’ field commander throughout the trade war, claims that the United States came out ahead in a far more crucial area. The dispute exposed how China utilized trade to enrich itself at the expense of American employees and how Beijing depended on subsidies, thievery, and pressure on American enterprises to move ahead. “My goal was to persuade people that China is a problem—an existential threat to the United States,” Mr. Lighthizer adds. “I believe we persuaded folks.”
Fights between the two nations have only sharpened opinions since the trade war. The Trump administration criticized China for concealing the source of the coronavirus epidemic, while the Biden administration had disagreements with China over Taiwan and Russia. The Chinese leadership has accused the United States of hypocrisy, arrogance, and attempting to obstruct China’s growth.
According to a new Research study, 82 percent of Americans now negatively view China, up from 47 percent in 2018. According to a poll conducted last year, 45 percent of Americans regard China as America’s “biggest adversary,” four times the number who said so in 2018.
In Washington, legislators vie to be perceived as harsh on China.
The Biden administration has maintained the Trump administration’s tariffs and other restrictions while it is contemplating readjusting certain duties and seeking partners in the battle.
Mr. Lighthizer also claims that tariffs have hampered Chinese enterprises by raising their prices, particularly when combined with US curbs on Chinese acquisitions of advanced technology. “We’re starting to undo the unearned edge they had in several sectors, particularly technology,” he argues.
The schism with China and subsequent difficulties obtaining supplies from Chinese industries and ports shuttered due to the epidemic have also pushed US corporations to emigrate from China—another US priority. According to a poll over 80% of manufacturing executives with operations in China have either shifted some of their work to the United States or intend to do so within the next three years.
Tariffs have often had the reverse effect, causing corporations to grow outside of the United States to sell to China. For example, BMW AG boosted SUV manufacturing in China rather than exporting cars from Spartanburg, S.C., when China hiked auto tariffs to 40% from 15% as part of the trade war. “We attempt to match manufacturing capacity of a certain model to where demand for that model is,” a BMW spokesman said.
However, there is an abundance of evidence to suggest that China was the loser in the trade war since it suffered a more significant economic impact than the United States, with much of the information produced by Chinese experts. Moreover, tariffs make China more vulnerable since its economy is more dependent on trade for growth than the United States. According to advisers, President Trump had this in mind when he said the Chinese would “run out of guns first.”
According to economists, and other major Chinese colleges, Chinese enterprises facing American tariffs sold less to the United States, cut employment, spent less on R&D, and were less likely to establish new businesses.
According to an economist at Fudan University who conducted her study at the University of Minnesota, China’s GDP loss was three times that of the United States.
Recognizing the possibility of “manipulation and censorship” in China’s official statistics, an economist at Dartmouth College and an economist at the University of Hong Kong analyzed satellite photographs of China’s nighttime sky. Tariff-affected industrial districts were substantially less bright than tariff-free areas, indicating a decrease in economic activity. They predict that per capita income in tariffed regions fell by 2.5 percent compared to unaffected areas.
“Overall, the trade war appears to be detrimental to Chinese enterprises and job seekers,” writes an expert. Like those in the United States, Electoral leaders in China say that the trade war has earned them significant political rewards. According to officials acquainted with the leadership’s thinking, Chinese President Xi Jinping decided to sign the Phase One agreement despite the fact that the United States only modestly decreased tariffs.
Beijing reasoned that the agreement would offer it leverage: if Washington pushed too hard, Beijing might threaten to cancel the trade agreement. When Washington did little more than issue rhetoric to preserve Hong Kong’s autonomy in the summer of 2020, after Beijing implemented a broad national security law, Chinese authorities deemed their plan a success.
President Clinton’s former trade representative, Charlene Barshefsky, believes Beijing came out winning politically. “They didn’t adjust their economic model one iota, reassuring Xi Jinping that their economic model can endure even US attack,” she argues. For example, Chinese exports to the United States have returned to pre-trade war levels. Still, much of the increase is in mobile phones, laptop computers, and toys that were not subject to tariffs, according to Mr. Bown, the Peterson Institute economist.
Overall, Chinese authorities feel the trade war has harmed the United States more than it has hurt China, citing increased inflationary pressure resulting from American tariffs on Chinese goods. As the November midterm elections approach, inflation poses a danger to the Biden administration. “Taxes are a poisonous legacy of the previous government that this administration should eliminate,” a top Chinese trade official argues.
The trade battle also highlighted Beijing’s desire to lessen its reliance on American technology, which has been a long-standing Chinese ambition. To that purpose, China has reinforced the state-led economic model that the Trump administration sought to overturn.
To dominate high-tech industries, Chinese authorities intensified their use of subsidies, including cash infusions, reduced loans, and inexpensive land. In addition to the state-owned corporations that the government generally assists, Beijing vowed last year to invest at least $1.5 billion over the next five years in more than 1,000 smaller, privately held firms nicknamed “little giant” startups. As part of that drive, China announced rules last year instructing hospitals and other state institutions to reserve between 25% and 100% of their purchases of technological products such as medical equipment and imaging tools for local enterprises.
Calculating whether China or the United States won the trade war is a game of measuring wins and losses. But some nations had nothing but success; they began selling to the United States things that China had previously exported. “Whenever we apply tariffs on a particular nation, countries that can give replacements will ramp up,” Dartmouth economic historian argues.
Who won the trade battle between the United States and China? It’s been Vietnam in many ways.
According to Kearney projections, China will export $50 billion less in manufactured products to the United States in 2021 than in 2018, as tariffs raise the cost of Chinese imports. Vietnam raised its manufacturing product shipments to the United States during the same period by $50 billion, free of those taxes. In a different light, Kearney estimates that exports of manufactured products from 14 low-cost Asian nations, including China, would grow by $90 billion in 2021 compared to 2018. Again, Vietnam accounted for over half of the increase.
Before the trade war, Vietnam had established itself as a manufacturing powerhouse. Following in the footsteps of other export-heavy Asian countries, Vietnam welcomed the international investment, developed its infrastructure and benefitted from its proximity to China while paying lower wages.
Vietnam’s initial export successes were in labor-intensive industries such as textiles and furniture. Still, it has recently become a hub for electronics production, thanks to significant investments by Intel Corp. and Samsung Electronics Co. According to experts, the trade war between the United States and China has expedited this transition.
“Vietnam was ideally positioned to capitalize on the crises,” says a Natixis analyst in Hong Kong. One such catastrophe was the trade war. Alex Shuford, CEO of RHF Investments Inc. in Hickory, N.C., switched orders for leather sofas from China to Vietnam when tariffs rendered Chinese imports too costly. During a recent exploring trip to Asia, he skipped China because costs were still too high, and the country was undergoing another round of Covid lockdowns. “We would have begun in China a few years ago,” he says.
Additional export earnings aided Vietnam’s development of industrial parks, ports, and highways and the attraction of higher-paying industries such as electronics. According to a market data firm, electrical machinery now accounts for 46 percent of Vietnam’s exports to the United States, three times the share before the trade war. Lower-value textile and garment shipments climbed as well, but at a far slower pace.
During this time, America’s trade imbalance with Vietnam nearly tripled to $90 billion. That discrepancy drew the attention of Mr. Lighthizer under the Trump administration, who started two investigations into Vietnamese trade practices that may have resulted in penalties.
However, the Biden administration, which regards Vietnam as a possible partner in its battle with China, terminated those investigations. Instead, it is now seeking Hanoi’s cooperation in a pan-Asian trade initiative that it is launching: a win for the United States and a win for Vietnam.
Nonetheless, reforms have not left China in the cold. Chinese manufacturers hurried to establish businesses in Vietnam as well. According to Patrick Van den Bossche, a partner at Kearney, more than half of Vietnam’s fresh exports to the US with the ongoing trade war were from Chinese-owned enterprises. Chinese investment in Vietnam has quadrupled since 2017, reaching $1.9 billion in 2020.
Luxshare Precision Industry Co., a component supplier to Apple Inc. and other American corporations, was one of several Chinese enterprises that cited tariffs as a motivation for expanding in Vietnam. Luxshare announced plans to develop four facilities in Vietnam in 2019. It has already invested more than $3 billion in Vietnam and intends to ultimately move one-third of its output there.
The trend disturbs officials in Luxshare’s home city of Shenzhen, which relies heavily on high-tech enterprises for tax income in southern China. “Relocating manufacturing capacity is a major concern for us,” a Shenzhen official said.
In another twist in the trade war, Shenzhen is now focusing on local technology development to reduce its reliance on American suppliers. It provides preferential tax, funding, and other policies for entrepreneurs and generous grants to universities and other institutions to encourage them to collaborate with companies and pursue cutting-edge technology—precisely the types of subsidies that the United States had set out to eliminate.
According to an economist who researched satellite photographs of China’s nighttime sky for signs of the trade war’s impact, believes the discussion over who won and who lost will resume. “We’ll be speaking about this in 25 years and 50 years,” he predicts.