Author: Yan Liang, Willamette University
The US–China trade war originated from US President Donald Trump’s ‘America First’ agenda. It is the centrepiece of his administration’s challenge to multilateralism and reflects the country’s failure in global leadership. Alas, Trump’s trade war is destined to fail.
The trade war is based on an overestimation of the damages it will inflict on China. China’s economy is no longer heavily dependent on trade, as it was just 10 years ago. In 2008, China’s net trade surplus accounted for 8.3 per cent of GDP. By 2018, that figure was only about 1.3 per cent.
China’s household consumption share of GDP has grown rapidly, though it is still quite low at around 40 per cent (compared to 68 per cent in the United States). The average growth rate of private consumption was 8 per cent between 2000 and 2018, compared to just 2.2 per cent for the United States.
Since 2015, consumption has contributed to over 60 per cent of China’s GDP growth, while net exports have contributed to less than 10 per cent. Given China’s demographic changes, urbanisation and the growth of the digital economy, it is likely that, as Martin Wolf argues, ‘over the next decade a mass consumer society will emerge in China’.
Declining exports to the United States will at most shed half a percentage point of growth from China’s GDP. More importantly, the Chinese government has enough policy space to bolster domestic demand and offset the negative impacts of trade, given its relatively low debt-to-GDP ratio of 50 per cent.
The Trump administration also overestimates the impacts of the trade war on foreign investment in China. Despite outcries over companies moving away from China, such claims are simply not borne out in data. In a US–China Business Council survey, 97 per cent of US businesses in China stated that they are profitable. 87 per cent had not relocated or had no plan to relocate their activities. Some companies which moved from China to countries like Vietnam soon found themselves facing skilled labour shortages or limited infrastructure and had to move back to China.
Export-oriented investors may consider leaving China due to heightened export costs as a result of the US tariff hike. But market-oriented investors produce and sell in China to avoid tariffs. Around 35 per cent of US companies are adopting the ‘in China, for China’ strategy, including Tesla and Microsoft. There is simply no evidence that companies are leaving China in droves.
Meanwhile the Trump administration’s departure from multilateral globalism has involved attacking several trading partners. It has distanced itself from strategic allies, even calling Germany and Canada national threats for sending their steel to the United States. The United States also backed out from the Trans-Pacific Partnership, giving China more room to ally with important trading partners. Even though China’s exports to the United States dropped by 8 per cent in the first half of 2019, its overall exports inched up by 0.1 per cent.
The trade war even undermines Trump’s own economic and political bases of domestic support as tariffs on imports are a tax paid by US importers and consumers. It is estimated that Trump’s tariffs on Chinese imports will cost US households on average US$1000 annually.
One may argue that jobs will be saved or created if the tariffs reduce imports and lure US companies back home. Unfortunately, this is still wishful thinking. The United States has transitioned out of a manufacturing economy since the 1980s. Between 1980 and 2000 the manufacturing sector shed 2 million jobs, while from 2000 to 2016 it lost another 5 million jobs. The US economy has transitioned into a service-based economy and it is this structural transformation that accounts for the great majority of manufacturing job losses.
While tariffs imposed on Chinese imports may cause US companies to shift some production locations away from China, they are not returning to the United States but moving to Vietnam, Cambodia and other low-cost countries. Moreover, US companies rely heavily on Chinese suppliers for their global supply chain. The added tariff costs will force them either to relocate the global supply chain — a costly move — or cut back on investment and expansion. By some estimates, Trump’s tariffs would shed half a percentage point from US growth.
By Trump’s calculations, taking on China is a politically gainful act. But as the ‘easy and quick to win’ trade war drags on, more doubts have been raised about…