Article Review International Business

Article Review #2: USA and China Trade War

Was Trump’s China trade war worth it?

By Heather Long

January 15, 2020

As President Trump and China’s Vice Premier Liu He signed the “Phase One” trade agreement,

everyone was asking: Was Trump’s trade war worth it?

Trump’s trade war against China has gone on for nearly two years, causing deep damage in parts

of the U.S. economy. The deal that Trump signed Wednesday does score some wins. China has

agreed to buy about $200 billion more of U.S. goods over the next two years, and U.S. companies

will get more access to the Chinese market and a bit more intellectual property protection. But a

lot of skepticism remains about whether massive tariffs were needed to get here.

From a short-term perspective, the deal doesn’t seem so great. China’s additional purchases make

amends for only a fraction of the trade war’s hit to the economy, analysts say. And the bulk of the

purchasing in the deal could have happened in the summer of 2018 without Trump ramping up

tariffs, many critics say. Back then, China was reportedly offering to buy more agricultural goods,

energy and manufactured products, similar to what is in this deal.

Where this agreement has the potential to be game-changing is in reshaping trade relations with

China. Trump has shifted the dialogue about China. There is now a wide consensus in the United

States to challenge China on its worst actions. After this agreement, U.S. firms in China are no

longer supposed to be forced to hand their technology over to Chinese companies, a long-standing

problem.

The tariffs have also caused what some are dubbing a “partial divorce” between the United States

and China, with supply chains once rooted in China now moving to other nations, especially

Vietnam and Taiwan, making the United States slightly less reliant on China for daily goods.

“Today, we take a momentous step, one that has never been taken before with China,” Trump said

before signing the deal in a lengthy ceremony. “We mark a sea change in international trade.”

Pretty much everyone agrees the trade war inflicted a lot of pain to the economy. As Trump hiked

tariffs on China, U.S. economic growth slowed, business investment froze, and companies didn’t

hire as many people. Across the nation, a lot of farmers went bankrupt, and the manufacturing and

freight transportation sectors have hit lows not seen since the last recession. Trump’s actions

amounted to one of the largest tax increases in years.

Oxford Economics and Moody’s Analytics calculate that the U.S.-China trade war shaved 0.3

percent off growth — the equivalent of $65 billion — last year. And that is likely to grow to $85

billion in 2020, according to Gregory Daco of Oxford Economics, since this deal does not end the

trade war. Tariffs will remain on nearly two-thirds of Chinese imports.

Given all of this, economists say this trade conflict has been a net loss to the economy, albeit a

modest one, in the short term.

“Trump could have had this deal with China six months after coming into office. He didn’t need

to impose hundreds of millions of dollars in tariffs,” said Jeff Moon, a former assistant U.S. Trade

Representative under Obama.

Even Trump and his team ultimately acknowledged that the United States suffered from the trade

war. But they said that the benefits from a deal would outweigh the costs and that the tariffs were

hurting China more.

Even as the U.S. and China agree to trade truce, they are edging toward partial economic divorce

Trump points out that Presidents George W. Bush and Barack Obama didn’t get this far with the

Chinese. He says he managed to put real teeth into the deal, including more tariffs if China does

not do what it promised.

On Wall Street, investors applauded the deal, with stocks ending the day with new records.

Investors are relieved about the trade truce, and they liked when Trump hinted tariffs might come

down if China keeps its commitments.

“I am much more positive and optimistic than you might think,” Blackstone chief executive

Stephen Schwarzman said on Fox Business. “I think the Chinese will honor this deal.”

Critics of the deal point out that it is far more modest than what Trump promise and that China has

a history of not following through. Little in the deal alters President Xi Jinping’s ambitious “Made

in China 2025” plans. For example, the deal doesn’t address how the Chinese government

subsidizes certain industries.

At the White House, China’s vice premier said that Chinese firms will buy more “based on market

conditions,” which already suggests some hesitancy to do exactly what is written.

Also, this $200 billion promise of Chinese purchases doesn’t necessarily mean new sales that never

would have happened otherwise. Many experts say that U.S. farmers and manufacturers will

simply sell to China what they would have sold to other nations.

“Let’s not forget that the $200 billion is a promise that will likely come from trade diversion rather

than trade creation,” Daco said in an email.

Still, some industries make out well in the agreement. Banks, credit card and insurance companies

have long wanted to get access to China’s market without having to partner with a local bank.

JPMorgan Chase is already making moves to enter China.

Natural gas is also poised to benefit as China ramps up purchases. As the Chinese economy grows,

energy consumption is expected to rise quickly, driving demand for natural gas from the United

States. This could also be an area where China develops some dependency on America.

China has also agreed to lift restrictions on American dairy, infant formula and beef, enabling U.S.

farmers to sell more.

On paper, China says it will increase its punishments for intellectual property theft, including

larger fines and even imprisonment to deter stealing. China also agreed to “market-based”

exchange rates.

Whether this deal ultimately pays off depends on whether U.S. firms and farmers really do get

more access to China. That remains to be seen.

Reference

Long, H. (2020). Was Trump’s China trade war worth it? The Washington Post.

https://www.washingtonpost.com/business/2020/01/15/was-trumps-china-trade-war-

worth-it/.

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Assignment

Briefly research the USA-China trade war that took place during the Trump Administration. Be

sure to properly reference the resources you use to answer the following questions.

1. Identify two specific examples of trade restrictions that the USA placed on imports from

China during this trade war. Clearly identify which types of trade restrictions these two

examples are (such as an ad valorem tariff, a quota, etc.).

2. Identify two specific examples of trade restrictions that China placed on imports from the

USA during this trade war. Clearly identify which types of trade restrictions these two

examples are (such as an ad valorem tariff, a quota, etc.).

3. Identify at least one political motive the Trump Administration was pursuing in setting

tariffs on Chinese imports into the USA. Discuss whether you believe the trade war

effectively addressed this motive.

4. Identify at least one economic motive the Trump Administration was pursuing in setting

tariffs on Chinese imports into the USA. Discuss whether you believe the trade war

effectively addressed this motive.