The world's eyes have been glued to an epic competition that has been unfolding in Beijing between the globe's leading contenders. The contest is fierce, and it's anyone's guess who will emerge the victor. No, we're not talking about the Winter Olympics. We're talking about the ongoing trade war between the United States and China.
The trade war is now almost four years old. In 2018, President Trump fired the first shots by imposing tariffs on various Chinese products. China retaliated, imposing tariffs on American products. The war kept escalating — with each side making their tariffs higher and more expansive.
Then, in January 2020, President Trump met with Chinese Vice Premier Liu He at the White House, and they both signed the "Phase One'' trade deal. Think of it basically as a trade armistice. It prevented the war from escalating further, and it offered a roadmap for the two global powers to potentially become trade buddies again.
Chad Bown has been following the trade war closely. He's a senior fellow at the Peterson Institute for International Economics and co-host of the Trade Talks podcast. He says that, from the beginning, the Phase One trade deal was pretty weird.
"The strangest part," Bown says, was a provision that instructed China to buy an extra $200 billion of American-made stuff. That is, not only did China have to return to buying the amount of stuff it had bought before the trade war, it had to go above and beyond that. $200 billion above and beyond that. And it had to do so in two years; by the end of 2021. "We had never seen a trade agreement like that before," Bown says.
Now that it's 2022 — and China's deadline to buy boatloads of American-made stuff has passed — Bown recently crunched the numbers to see how much China ended up actually buying. "In the end," Bown says, "China actually bought none of the additional $200 billion of exports that it promised in the agreement."
Zilch. Nada.
But it's actually worse than that. While China did ramp up its purchases of U.S. agricultural products, when it comes to buying U.S. products and services overall, it still hasn't even returned to buying the amount of stuff it had bought from America before the trade war began.
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From the beginning, Bown says, it was pretty clear that Trump's Phase One trade deal was unrealistic. By the time it was signed, the trade war had already been waged for almost two years. It had already done tons of damage to business relationships between the two nations. Plus, the often punishingly high tariffs on each side remained (and still remain) in effect. Phase One didn't end them. It just prevented them from going even higher. The average tariff on goods affected is still about 20% on each side. "The fact that the Chinese tariffs were still in place discouraged the Chinese private sector from being the ones to buy American stuff," Bown says. Add to this, a slowing Chinese economy and slowing US exports. "All signs pointed to this being a really, really big ask."
The Biden Administration Wants China To Pony Up
Last week, the Biden Administration made clear it was not happy with Beijing failing to buy the boatloads of American-made stuff they promised they'd buy in the Phase One deal.
As an anonymous U.S. official told Reuters: "Because we inherited this deal, we engaged the (People's Republic of China) on its purchase commitment shortfalls, both to fight for U.S. farmers, ranchers and manufacturers, and give China the opportunity to follow through on its commitments. But our patience is wearing thin," the official said. This official urged China to take "concrete actions" to fulfill its promise.
President Biden has, for the most part, continued Trump's trade policy towards China. That's despite growing evidence that the policy has harmed the U.S. economy, while also not doing a whole lot to damage China's economy or change China's behavior.
In 2021, China announced a record-breaking trade surplus. That is, it sold a heck of a lot more to the world than it bought from the world. Of course, there's a lot more than the trade war affecting China and the broader global economy. Worldwide, the pandemic shifted spending on in-person services to hard goods. And manufacturing hard goods is China's speciality.
But, that said, Bown believes the trade war has proven less effective than the Trump administration originally believed it would be. While the U.S. has leverage, that leverage is limited. "Ultimately, China might sell less things to the United States, but, you know, we're only 330 something million people and the world is 7 billion."
Some supporters of Trump's tariffs hoped the higher costs of Chinese products would help revive American manufacturing. But, the tariffs targeted what economists call intermediate products, or inputs, which are parts, components, and materials that American businesses use to build stuff here. Those tariffs have made it more expensive to do manufacturing in America.
"We now have a huge body of economic evidence that basically makes the case that tariffs have made the American manufacturing sector less competitive," Bown says. "It's harder for American companies to compete with companies in Europe or Japan or anywhere else in the world that can continue to get those Chinese products at lower prices — so it actually harms the competitiveness of the American manufacturing sector."
While you can find stories of American manufacturers reshoring because of either the trade war or the pandemic, or both, Bown says, there's not really any evidence that it's happening "at any sort of measurable level." Research also finds that American consumers are being hurt because businesses are passing on the costs of high tariffs to them. Add to this the effects of China's high tariffs on American exporters, and there's a strong case to be made that the biggest loser from America's trade war with China is America.
There is clear evidence that the trade war has been beneficial to at least one group: other countries. A recent study by Pablo Fajgelbaum, Pinelopi K. Goldberg, Patrick Kennedy, Amit Khandelwal, and Daria Taglioni finds that, basically, the trade war resulted in mini export booms for many bystander countries.
Bown points to some vivid examples of nations on the sidelines of the trade war directly benefiting from it. When China levied large tariffs on American soybean growers, for example, Brazil, Argentina, and other soybean exporters filled in the gap. When China levied large tariffs on imports of lobster from Maine, he says, Chinese consumers began purchasing more lobster from Canada. Some manufacturing commerce also likely left China and headed for neighboring countries, like Vietnam, Thailand, or Malaysia.
But the trade war with China is about a lot more than economics. It's primarily about politics, both domestically and internationally. Polls of Americans show that China is very unpopular. Most Americans want the United States to be tough on the nation — and it seems they may be willing to have a slightly weaker economy to do that.
The tariffs may be bad economics. And they may be failing to change China's behavior. But, Bown says, "Politically, it's very difficult to reverse course with these tariffs on China."
When we asked him about his concerns and hopes about US-China relations, Bown talked about worrisome trends in China. Over the last ten years, it's been sliding toward even greater authoritarianism, statism, suppression of human rights and oppression of minorities. As a result, Bown says, his big concern is that relations are only going to get worse.
Interestingly, for a trade economist at least, Bown's answer had nothing to do with economics. "I can give you an economic answer," he says. "But unfortunately that falls on deaf ears at the moment."
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