please can you please help me with this case in order for me to get prepared for my midterm. this is not a homework, its
please can you please help me with this case in order for me to get prepared for my midterm. this is not a homework, its a case given by the professor for us to get ready for the upcoming exam please. its been more than 6 hours im posting the same exercice but nobody is willing to help me.
QUESTION:
1) Are Trump's accusations true or false? Analyze the arguments for and against each accusation made by him.
The U.S. - China Trade War
When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don't trade anymore - we win big. It's easy!1
? Donald Trump @realDonaldTrump, 5:50 am - March 2, 2018.
On December 1, 2018, U.S. President Donald Trump and China's Leader Xi Jinping faced each other across a dinner table during a G20 meeting in Buenos Aires, Argentina (see Exhibit 1). After what Trump called an "amazing and productive meeting," the two leaders announced a truce in the ongoing trade war between their countries. The U.S. agreed to postpone for 90 days an increase from 10% to 25% in tariffs applied to a large number of Chinese goods, which had been initially scheduled for January 1, 2019. In exchange, the White House announced that China would purchase a "very substantial" amount of agricultural and other products from the United States, adding that it expected the two nations "to immediately begin negotiations on structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services, and agriculture."2The Chinese government simply stated that it was "willing to expand imports according to the needs of the domestic market" and that it hoped to "reach a concrete agreement on mutual benefit and win-win as soon as possible."3
The meeting had come after months of contentious accusations, tariff increases, and mounting retaliations. Despite Trump's assurances that China was sending "very strong signals" after the meeting,4the outcome of the negotiations was highly uncertain. Would China provide enough concessions to satisfy the demands of the U.S.? Would the U.S. back down? Or would the trade war escalate, causing unprecedented disruptions - and opportunities - in global trade patterns?
An Overview of Modern U.S. - China Trade (1978-2016)
It doesn't matter whether the cat is black or white, as long as it catches mice.5
? Deng Xiaoping - Chinese Leader, 1962.
A pivotal moment in the history of U.S. - China relations came in February 1972, when China's Premier Zhou Enlai and Chairman Mao Zedong met with U.S. President Richard Nixon in Beijing. The trip, which Nixon called "a journey of peace," was a surprising attempt to rebuild the ties between the two nations after over twenty years of severed diplomatic and economic relations.6A few months earlier, the U.S. government had ended the long-standing trade embargo, enabling U.S. firms to export a small number of goods to China - including farming, manufacturing, and office machinery, as well as primary products, fertilizers, coal, and some chemicals.7Yet, for most of the 1970s, trade between the countries remained severely limited. Things started to change after Mao's death in 1976 and Deng Xiaoping's rise to power in 1978, when China embarked on a path of economic liberalization and unprecedented economic growth (see Exhibit 3). Formal diplomatic relations between the U.S. and China were restored in 1978, and trade volumes between the two countries grew from $1.1 billion U.S. dollars in 1978 to $4.8 billion in 1980."8
In the early 1980s, China accelerated its trade reforms to emulate the successful export-led growth experiences of other Asian economies such as Singapore, Japan, Hong Kong, and Taiwan. In particular, China created Special Economic Zones (SEZs) in coastal areas, which were exempt from central planning and some labor regulations and taxes. These SEZs quickly became profitable export hubs.9By the mid-1980s, more Chinese companies were allowed to export and import directly, taking advantage of relaxed regulations and tax benefits. China also allowed U.S. companies to invest in joint ventures with Chinese firms, as Deng publicly declared that China "needs to give up portions of the domestic market in exchange for advanced technologies we need."10At the same time, a bilateral trade agreement signed in 1980 granted China "Most Favored Nation" treatment, effectively reducing tariffs on Chinese imports into the U.S. (although this statuswas conditional on a congressional report on human rights abuses, which in practice introduced some uncertainty). At first, Chinese exports focused on textiles and garments, but over time exports became more complex, particularly after the U.S. relaxed controls on American exports of advanced technology, such as jet engines and computers for both commercial and military use (see Exhibit 4).11China's exports were also aided during this time by a dramatic depreciation of the Chinese currency, which went from 1.5 yuans per dollar in 1980 to 8.4 yuans per dollar in 1995 (see Exhibit 5).
U.S. imports from China exceeded exports for the first time in 1985, and the U.S. trade deficit with China continued to grow consistently over the years (see Exhibit 6). In 1986, China applied to join the General Agreement on Tariffs and Trade (GATT), the World Trade Organization's (WTO) predecessor, but its membership was rejected.12 The U.S. and other trading partners were skeptical of China's willingness to reduce its import tariffs and licensing requirements, as well as its reluctance to allow foreign banks and investors to hold controlling stakes in Chinese companies.aU.S. - China relations were further strained after the Tiananmen Square protests in 1989, when the U.S. temporarily suspended weapon exports as well as military leaders' visits from both countries.13
During the 1990s, China increased its efforts to modernize its economy with more policy changes, including new regulatory and administrative frameworks for its banking industry, taxes, and corporate governance systems. China's leaders also renewed their efforts to join the WTO.14A major hurdle was China's request to be granted "developing country status" in some sectors - so that they would have more time to meet WTO standards - which some large WTO members, including the European Union, Japan, and the United States, initially refused to accept.15Finally, in December 2001, China managed to join the WTO after signing an agreement with the U.S. that reduced Chinese tariffs on farming commodities, eliminated tariffs on IT products, and promised to remove foreign equity restrictions in banking, insurance, distribution, telecom, securities, professional, audiovisual, and travel services."16
China's WTO membership led to a boom of its exports all over the world, including those to the U.S. (see Exhibit 7). As one observer remarked, "American imports from China rose by 92% in the three years following China's WTO entry, having risen by just 46% in the three previous years."17By the time President Barack Obama was elected in 2008, the U.S. current account deficit with China had reached $296 billion, about half of its total current account deficit with all countries (see Exhibits 7and 8). The Global Financial Crisis in 2008-09 resulted in a temporary reduction of the current account deficit of the U.S. with China, but the Chinese economy recovered quickly, and exports to the U.S. continued to grow. Over time, economists increasingly fretted about the problem of "Global Imbalances," with the U.S. experiencing a persistent current account deficit financed by Asian countries with unusually high savings rates and large currency account surpluses."18China, in particular, had accumulated a massive amount of U.S. Treasury securities (see Exhibit 9), and many observers worried about the potential instability that sudden changes could have on the value of the dollar and the U.S. economy."19
In the early 2010s, the Obama Administration pursued dozens of trade cases against China at the WTO, with little success. By 2016, the Chinese share of global exports reached 13.8%, the highest level experienced by any country since the U.S. in 1968.20Accordingly, in 2016, the U.S. tried to prevent China from setting trade rules in the Asia-Pacific region by signing a multilateral trade agreement called the Trans-Pacific Partnership (TPP), which included 11 other countries and accounted for nearly 40% of global economic production. China had its own trade agreement for the region - called the Regional Comprehensive Economic Partnership (RCEP) - which included Indonesia, Malaysia, the Philippines, Singapore, Thailand, Japan, Korea, Australia, New Zealand, and India, and represented almost 27% of the world's GDP. Like the TPP, the RCEP focused on trade in goods and services, investments, and dispute settlement mechanisms but excluded regulations on labor, food safety, and environmental standards."21
By the end of Obama's presidency, the level of U.S. skepticism toward China's policies and their impact on the U.S. economy was on the rise. As a result, during the 2016 presidential election, Donald Trump's complaints about China fell on sympathetic ears."22
The U.S. - China Trade War
We can't continue to allow China to rape our country, and that's what they're doing. It's the greatest theft in the history of the world.
? Donald Trump, campaign rally, May 2, 2016."23
Trump's Accusations
As early as 2011, Donald Trump shared his unforgiving views on China via his Twitter account: "China is neither an ally nor a friend - they want to beat us and own our country."24Over time, his language and tone became increasingly hostile, often placing the blame on prior U.S. administrations for being too soft on China. In 2012, he tweeted, "China is robbing us blind in trade deficits and stealing our jobs, yet our leaders are claiming 'progress' SAD!"25
Some of the accusations seemed outrageous, such as when he tweeted in 2012 that "The concept of global warming was created by and for the Chinese in order to make U.S. manufacturing non- competitive."26But the bulk of Trumps' arguments were echoing complaints that appeared to resonate with a large share of the U.S. population.
Currency ManipulationOne of the earliest accusations leveled by Trump on China was that it devalued its currency to gain an "unfair" trade advantage. The claim was not new, dating back to at least the early 2000s. In 2009, Obama's Treasury Secretary had openly accused China of resorting to "currency manipulation" by fixing the exchange rate. After a G20 summit, Obama stated that China's currency was purposefully "undervalued" to foster exports, a practice that, he claimed, annoyed other Chinese trade partners as well as the United States. However, the Treasury Department chose to maintain the formal assertion that China was not a "currency manipulator," a charge that would have forced the U.S. Congress to take trade measures against China."27
As a candidate, Trump fully embraced the currency-manipulator accusation. During a campaign rally in June 2016, he stated, "The single biggest weapon used against us and to destroy our companies is devaluation of currencies, and the greatest ever at that is China. Very smart, they are like grand chess masters. And we are like checkers players. But bad ones."28Trump later promised that, if elected, he would formally label China as a "currency manipulator."29Once elected, he broke this promise. In the first few months of his presidency, Trump prioritized China's support in negotiating a deal with North Korea on their nuclear weapon development program. In April 2017, he tweeted, "Why would I call China a currency manipulator when they are working with us on the North Korean problem? We will see what happens!"30
China repeatedly argued that the currency manipulation accusation was groundless. Those supporting this view could point out the fact that the Renminbi was allowed to appreciate approximately 25% between 2005 and 2015 (see Exhibit 5)."31But critics argued that the Chinese currency was still "undervalued" relative to its worth in a free-floating market. Indeed, the Chinese government intervened extensively in the foreign exchange market during this time, buying foreign exchange reserves and implementing strict capital controls."32Under increasing international pressure, in 2015, China attempted to liberalize its foreign exchange market - and contrary to what many in the U.S. expected - the currency's value immediately plummeted. To some observers, this was an indication that the Renminbi was not really undervalued; otherwise, "it would have risen instead."33Consistent with this view, in subsequent years, the IMF often concluded that China's currency was "broadly in line with fundamentals."34In 2018, Premier Li Keqiang publicly stated: "Persistent depreciation of the RMB will do more harm than good to China. Therefore, we will not engage in competitive devaluation,"35 echoing similar statements made by other Chinese leaders in the past.
Transfer of wealthTrump often argued that "China has been taking out massive amounts of money & wealth from the U.S. in totally one-sided trade..."36As its exports to the U.S. grew, China accumulated a massive amount of U.S. Treasury securities. In 2000, it held only 6% of all U.S. Treasury securities outstanding. By 2018, China was effectively the largest foreign creditor to the U.S. government, with 18% of all foreign holdings of U.S. Treasury securities. Trump's supporters often argued that the same money theU.S. was paying to the Chinese was lent back to the U.S. to purchase even more Chinese goods and perpetuate the debt cycle. Others feared China's potential sale of its huge Treasury holdings, which would quickly depress U.S. bonds, raise U.S. interest rates, and severely affect U.S. monetary and fiscal policies.
The "one-sided trade" argument seemed to rely on a mercantilist view that exports are "good" and imports are "bad,"37exposed by one of Trump's main trade advisors, Peter Navarro, in a campaign document in 2016:
The growth in any nation's gross domestic product (GDP) - and therefore its ability to create jobs and generate additional income and tax revenues - is driven by four factors: consumption growth, the growth in government spending, investment growth, and net exports. When net exports are negative, that is, when a country runs a trade deficit by importing more than it exports, this subtracts from growth."38
Chinese leaders proclaimed that they wanted to ensure "mutually-beneficial and win-win cooperation between China and the U.S. in trade and economy," as "China benefits remarkably from the strong synergy, while the U.S. also reaps extensive economic benefits from the opportunities and results generated by China's growth."39 China supporters argued that U.S. consumers were enjoying lower prices, an unprecedented amount of variety in consumer goods, and that the real cause of the U.S. trade deficit was the fact that China was able to produce the goods that the U.S. wanted to consume at a much lower cost.
Stealing JobsDuring his campaign, Trump often claimed that "disastrous trade deals" had led to the loss of millions of manufacturing jobs in the U.S. As a president, he continued to accuse China of causing the demise of the U.S. manufacturing sector. The logic was simple: facing competition from inexpensive Chinese products, many American manufacturing firms had shut down or outsourced jobs to China. In January 2018, Trump stated: "We've lost, over a fairly short period of time, 60,000 factories in our country - closed, shuttered, gone. Six million jobs, at least, gone." While the numbers were not precise, there was truth in his statement. U.S. manufacturing jobs dropped 34% in the 1998-2010 period,"40and academics had documented the connection to China's rise in manufacturing. David Autor, an MIT economist, had argued that "It's certainly not the case that all of U.S. manufacturing job loss after 2001 is due to China's WTO accession [. . .] but conservatively, 40 percent of the decline between 2001 and 2007 can be attributed to that source."41
However, some analysts argued that Trump's view of China's labor market and its impact on U.S. jobs was outdated. Wages had risen significantly in China over the years, and according to a Boston Consulting Group report in 2015, "the costs of manufacturing in China's major export-producing zone were [then] almost the same as the United States."42Others believed that there was nothing the U.S. could do to reverse the trend. The editor of The Economist, for example, argued that "the goal of rolling back decades of American deindustrialization is a pipe-dream" and that "should America succeed in forcing supply chains back onshore, it will find that many fewer jobs are attached, because of rapid automation."43
Lack of ReciprocityTrump's remarks for more fair trade were often linked to the need for symmetry and reciprocity in the bilateral trade relationship. For example, in August 2018, he tweeted: "When a car is sent to the United States from China, there is a Tariff to be paid of 2 1?2%. When a car is sent to China from the United States, there is a Tariff to be paid of 25%. Does that sound like free or fair trade. No, it sounds like STUPID TRADE - going on for years!"44The average tariff in China (weighted by sectoral trade volumes) was indeed much higher than in the U.S., but it had consistently fallen over time - particularly after China joined the WTO (see Exhibits 2and 3). In fact, using this metric, China could claim that it was now less protectionist than other large developing countries such as India and Brazil (see Exhibit 10).
IP Theft and Forced Technology TransfersTrump strongly accused China of copyright infringements, cyberespionage, and forced technology transfers,"45amplifying similar claims raised by previous administrations. Copyright infringements and pirated goods were an old complaint about China, which some estimated to cost over $255 billion to the U.S. each year."46Chinese officials acknowledged that there was "a lot of room for improvement" and frequently promised more crackdowns on pirated goods and exports."47
Cyber espionage had already raised tensions between the two countries in 2015 when the FBI accused China's government of "playing a significant role" in a 53% surge in economic espionage cases. The U.S.threatened China with sanctions, but after a short negotiation, Obama and Xi signed an agreement to stop government-sponsored cyberattacks "that steal corporate records for economic benefit."48Hackers were not the only issue. Often the Chinese government was accused of supporting firms blamed for stealing intellectual property, such as in the case of technology giant Huawei. For years, the U.S. labeled the company a national security threat, accusing it of selling equipment to tap or disable U.S. communication networks."49The company repeatedly denied the accusations, as well as any connections to the Chinese government."50
Trump was particularly adamant on denouncing China's "forced technology transfers": the implicit requirement that U.S. companies share technology with Chinese firms in order to secure market access. The practice was old, and many firms took it as a normal cost of operating in China, but complaints increased as China became a strong rival in sectors such as chemicals, computer chips, and electric vehicles. The Chinese government argued that the partnerships are voluntary and "American companies in China have received huge returns [. . .] and are the biggest [beneficiaries] of technological cooperation."51But critics pointed to the Chinese government's attempts to pressure "U.S. partners in joint ventures to relinquish technology, using local courts to invalidate American firms' patents and licensing agreements, dispatching antitrust and other investigators [as a form of retaliation], and filling regulatory panels with experts who may pass trade secrets to Chinese competitors."52
VP Mike Pence summarized the administration's position on these issues in November 2018:
To win the commanding heights of the 21st-century economy, Beijing has directed its bureaucrats and businesses to obtain American intellectual property - the foundation of our economic leadership - by any means necessary. Beijing now requires many American businesses to hand over their trade secrets as the cost of doing business in China. It also coordinates and sponsors the acquisition of American firms to gain ownership of their creations. Worst of all, Chinese security agencies have masterminded the wholesale theft of American technology - including cutting-edge military blueprints. And using that stolen technology, the Chinese Communist Party is turning plowshares into swords on a massive scale."53
A particularly contentious program was the "Made in China 2025" initiative, launched in 2015 by Xi Jinping. According to Trump, this was at the center of China's recent push to "take over, economically, the world."54The official goal was to modernize Chinese manufacturers by providing state support and funding, pushing them to become global technology leaders in areas such as electric vehicles, aerospace, and robotics. According to the WSJ, by late 2017, "the Import-Export Bank of China had supported China 2025-related lending of nearly 700 billion yuan ($102 billion) according to state media. Funding from other government sources adds up to hundreds of billions more."55As trade tensions escalated, Chinese leaders stopped mentioning the plan, and Trump publicly declared, "China got rid of the China '25 because I found it very insulting."56
Threat to National SecurityDespite their different approaches to diplomacy, both Obama and Trump faced Xi Jinping's ambition for his country's growing prominence on the global stage. As the world's second-largest economy, China cultivated its international economic influence by spearheading projects such as the Belt and Road Initiative and overtaking the rest of the world in overseas lending to developing countries."57The possibility that China could soon become the largest economy in the world raised many concerns in Washington. Indeed, in a controversial speech in November 2018, Vice President Pence labeled China as "the foremost threat to U.S. security" and even accused Beijing of interfering in America's democratic process."58Pence said the U.S. had hoped economic liberalization would bring it into an international partnership. One observer noted, "The American establishment believed that a more liberal China would be less likely to challenge the U.S. on the international stage. [. . .] But political developments in Xi's China have refuted the expectations of the liberal internationalist worldview that shaped successive American presidencies. China has not become more democratic. Nor is it any longer willing to live quietly within a U.S.-designed and dominated world order."59
The Trade War Escalates
As the Chinese saying goes, it is only polite to reciprocate.
? Statement of the Chinese Embassy in the United States."60
Just a few days after taking office in January 2017, Trump announced that the U.S. was pulling out of the TPP and that he was considering the imposition of tariffs on imported aluminum and steel."61Tensions subsided in the following months, when according to some observers, "the more moderate views of his chief economic adviser Gary Cohn and senior adviser Jared Kushner, Trump's son-in-law, have balanced the harder-line nationalist views of senior adviser Stephen K. Bannon and Peter Navarro, director of the National Trade Council."62
An auspicious moment came in April 2017, when President Xi visited the U.S. and met with Trump at his resort in Mar-a-Largo. The two leaders announced a framework for a 100-day plan that could ease economic concerns on both sides. Commerce Secretary Wilbur Ross and Vice-Premier Wang Yang were chosen to lead the talks between the two countries. Central to the discussions was the inexpensive Chinese steel that the U.S. negotiators believed was flooding global markets and putting U.S. steelworkers out of jobs. According to the WSJ, the motto of Mr. Ross' negotiation team was "no steel, no deal."63
After several months of negotiations, the Chinese eventually agreed to reduce production at a higher pace than they had previously promised. But in Washington, the proposal was labeled as "little more than a repackaging of past unfulfilled promises." The negotiations ended, and Robert Lighthizer, a former steel-industry lawyer who, according to media reports, "resented how Chinese imports had battered his industrial clients," became the new U.S. Trade Representative."64
Trump publicly appeared to be getting impatient. In August, his administration launched investigations under "Section 301 of the Trade Act of 1974," which "gives the U.S. Trade Representative broad authority to respond to a foreign country's unfair trade practices."65Shortly after, the U.S. International Trade Commission announced that imports of solar panels and washing machines had caused "serious injury" to the U.S. and recommended that President Trump impose "safeguard" restrictions."66
In November, Trump visited China. The trip had raised expectations that the two countries could find ways to settle some of the trade tensions, but no significant deal was made."67According to the Wall Street Journal, Lighthizer told Trump, "They're playing you," and spoke so bluntly in the meetings that some of his Chinese counterparts claimed to be offended."68
On January 22, 2018, President Trump introduced safeguard tariffs on $8.5 billion of solar panel imports and $1.8 billion in washing machines imports. These tariffs affected imports from all foreign countries, but the bulk of these came from China and South Korea."69Both countries immediately filed complaints with the WTO"70(see Exhibit 11).
In February, the Commerce Department released a report concluding that imports of steel and aluminum threatened U.S. national security by "weakening our internal economy" and "shrinking [our] ability to meet national security production requirement in a national emergency."71
On March 8, President Trump announced a 25% tariff on steel imports ($10.2 billion in 2017) and a 10% tariff on aluminum imports ($7.7 billion in 2017). These tariffs were imposed on imports from all countries, with a temporary exception granted to Mexico and Canada."72The decision raised alarms in many countries, as only 2% of U.S. steel imports came from China at the time."73Additional temporary exceptions were granted to the EU, and permanent exemptions were eventually granted to South Korea, Brazil, Argentina, and Australia. On June 1, when the new tariffs took effect, Canada retaliated with tariffs on $12.8 billion of U.S. imports,"74while the EU and Mexico each retaliated with tariffs on $3 billion of imported U.S. goods. In all cases, the retaliation tariffs affected a wide variety of goods, ranging from Bourbon to Harley-Davidson motorcycles."75
In early April, Trump publicly threatened to impose the first round of major tariffs specifically targeting Chinese goods. Treasury Secretary Steven Mnuchin, often described by the press as "a moderate looking for a deal," convinced the president to approve a new trade mission to Beijing. The negotiating team included Lighthizer and White House trade advisor Peter Navarro, who, in his 2011 book "Death by China," claimed that China's "perverse form of capitalism combines illegal mercantilist and protectionist weapons to pick off American industries, job by job." According to a media report, "On the first day of talks, Lighthizer presented U.S. demands that called China to reduce its $375 billion trade surplus with the U.S. by $200billion within two years, to scrap policies and subsidies that supported favored industries, and to pledge not to retaliate." The negotiations quickly fell apart, with Trump allegedly telling his advisors, "Bring me tariffs."76
On June 15, the U.S. formally announced the imposition of 25% tariffs on $50 billion of Chinese imports. On the same day, China announced a retaliation with almost identical trade volumes and implementation schedules. In both countries, the tariffs were introduced in two stages, with the first $34 billion imposed on July 16, 2018, and an additional $16 billion on August 23. The U.S. initially focused on intermediate goods in an attempt to limit the impact on consumer prices. The Chinese targeted U.S. soybeans and vehicles but excluded aircraft."77The soybean tariffs were particularly worrisome for the U.S., given that over 57% of all U.S. soybean exports ($30 billion) were going to China at the time."78
On September 17, the U.S. announced plans to impose a third round of tariffs affecting an estimated $200 billion of U.S. imports from China. The tariffs would be introduced at 10% on September 24 but were scheduled to increase to 25% on January 1, 2019."79China immediately promised to retaliate, but this time it could not match the volume of trade impacted, given that it only imported a total of $130 billion from the U.S. in 2017 (see Exhibit 4)."80By the time this new round of tariffs was implemented, approximately 55% of the total value of U.S. imports from China and 85% of China's imports from the U.S. were affected.
Chinese officials complained that "In its Section 301 report and other ways, the current U.S. administration stigmatizes China by accusing it of economic aggression, unfair trade, IPR theft, and national capitalism. This is a gross distortion of the facts in China-U.S. trade and economic cooperation. This is disrespectful to the Chinese government and people as well as incompatible with the real interests of the American people."81They also claimed that the investment and trade restrictions imposed by the U.S. "distort market competition, hamper fair trade, and lead to breakdowns in global industrial chains [that] are detrimental to the rules-based multilateral trading system and severely affect the normal development of China-U.S. economic and trade relations."82China's leaders claimed that Chinese-American relations were not only key to "the well-being of the peoples of the two countries, but also world peace, prosperity, and stability. Cooperation is the only correct option for China and the U.S., and only a win-win approach will lead to a better future. China's position is clear, consistent and firm."83
Impact on the U.S. Economy
China is targeting our farmers, who they know I love & respect, as a way of getting me to continue allowing them to take advantage of the U.S. They are being vicious in what will be their failed attempt. We were being nice - until now! China made $517 Billion on us last year."84
? Donald Trump @realDonaldTrump, July 25, 2018.
The higher tariffs did not lower the country's trade deficit with China, which rose to $106 billion in the third quarter of 2018, compared to $92.9 in the same quarter of 2017 (see Exhibit 6). This increase resulted from a remarkable rise in U.S. imports from China. Some analysts argued that importers were increasing orders and inventories to avoid the anticipated escalation in tariffs in the following quarter. Others believed that Chinese firms could find replacements for U.S. agricultural products but that American importers were having a harder time replacing Chinese goods."85
The tariffs provided some additional revenue for the U.S. government. In particular, the steel tariffs collected $1.4 billion in revenues in four months,"86as Trump tweeted, "I am a Tariff Man...MAKE AMERICA RICH AGAIN."87However, as with any tax, there were questions about how the incidence of the tariffs would play out, with different views on who would ultimately bear the burden. The Trump administration believed the burden would eventually fall on the Chinese exporters, who would be forced to reduce their export prices. But the prices that U.S. importers paid for Chinese goods (excluding tariffs) did not fall between 2017 and 2018 (see Exhibit 12a). Initially, the bulk of the tariffs was being paid by U.S. importers, although a standard prediction among economists was that the extra cost would be quickly "passed-on" into consumer prices. Indeed, when tariffs on washing machines were imposed in January 2018, the price index for "Laundry Equipment" produced by the U.S. Bureau of Labor Statistics increased by 17% in three months, the biggest gain in more than 40 years. Appliances were only 0.01% of the total consumer price index, but many arguedthat it was a worrying sign of what would happen if the tariffs were extended."88However, when the third round of China tariffs was implemented in September - affecting a much larger share of consumer goods imports - aggregate prices remained relatively stable, and there were no reports of significant increases in the prices of Chinese goods impacted by the new tariffs."89
The Trade War had a major impact on the U.S. stock market, which suffered a 20% drop between October and December 2018 (Exhibit 13). Uncertainty about a potential deal increased the volatility of the market, and many investors feared that this would undermine business and consumer confidence in 2019. Some economists were also concerned about a potential economic slowdown due to the trade war. The U.S. Congressional Budget Office (CBO) reported that the "tariffs imposed by the Trump administration may dent the economy and hit business confidence."90In contrast, Secretary Mnuchin announced in January 2019 that "We see no indication whatsoever of a recession on the horizon," adding that the trade dispute with China is not hurting the U.S. and that "there is still a very good case for 3 percent growth this year."91Indeed, the jobs data released in January seemed to support Mnuchin's claim. The WSJnoted, "the U.S. labor market notched its 100th straight month of increased employment in January 2019 while sustaining robust wage growth, passing the tests posed by a federal government shutdown, market volatility, and uncertainty about global economies."92
The U.S. sector that seemed most directly impacted by the trade war was agriculture. After China retaliated with a 25% increase in tariffs for soybeans, the price of this crop in Chicago fell by roughly that same amount, creating a wedge of 25% with the price obtained by farmers in other soybean- producing countries like Argentina and Brazil (see Exhibit 12b). Exports of soybeans to China collapsed, falling 62% in the first ten months."93China's retaliation affected mainly the Farm Belt states, where much of Trump's electoral power came from (see Exhibit 13). In July 2018, the U.S. government pledged subsidies of up to $12 billion to farmers affected by the trade war."94In spite of these efforts, by January 2019, the number of farm bankruptcies appeared to be reaching levels not seen in more than ten years."95
Impact on China's Economy
China just announced that their economy is growing much slower than anticipated because of our Trade War with them. They have just suspended U.S. Tariff Hikes. U.S. is doing very well. China wants to make a big and very comprehensive deal. It could happen, and rather soon!!"96
? Donald Trump @realDonaldTrump, July 25, 2018.
In 2018, China's economy slowed its growth pace to its lowest level since 1990, at 6.6% per year. The economic slowdown - more severe than Beijing had anticipated - was compounded by the trade war with the U.S. and falling international demand. Some Chinese exporters, amidst the uncertainty, appeared to have postponed investments and even started laying off employees. China's unemployment rate rose to 4.9% in December, up from 4.8% in November. Xi Jinping's efforts to restrain debt and avoid financial risks also added to China's slowdown, as local governments were forced to reduce their spending on infrastructure."97
China's exporting regions in the south seemed to have suffered the most."98On January 4, 2019, the head of the Chinese National Bureau of Statistics recognized that "The economy faces downward pressure" but sought to lower the anxiety about the trade war by noting that "the economy overall is driven by domestic demand."99Several other indicators pointed to a mild slowdown, including property sales, industrial output, and domestic retail sales. Unfortunately, there are always lingering doubts about the quality and reliability of China's official statistics."100
Many viewed China's slowdown as the main reason why Xi might be willing to make concessions to the United States. The idea that "Beijing might blink first in talks because the Chinese have much to lose"101was becoming popular in the U.S. media, particularly after President Xi Jinping eliminated an additional tariff on auto imports in December 2018, just a few days before the G20 truce meeting. At the same time, Chinese leaders could potentially stifle dissent and re-direct resources more quickly to "outlast Mr. Trump in a trade standoff."102
Impact on Other Countries
China's economic slowdown shook its commercial partners around the world. "The falloff in factory production and consumption is taking a toll on how much China buys from companies elsewhere in Asia, the U.S. and Europe."103China had become a major player in global trade: throughout the 2010s,"it accounted for a fifth of the total growth in global exports and imports, and played a key role in supporting demand during periods of weakness in other countries, such as during the Eurozone's financial crisis."104However, China's troubles were also an opportunity for other Asian countries to compete for a larger share of global manufacturing exports.
The agricultural tariffs introduced by China on U.S. soybeans were seen as an opportunity in countries such as Brazil and Argentina. For example, Brazil "experienced a record in soybean exports in April 2018, and by August, its exports to China has grown to 66% of Chinese imports, as compared to 48% the year before."105The trade war provided not only a short-term opportunity to sell more soybeans to China, but it could also potentially cause long-lasting changes in international trade patterns by forcing China to speed up its desire to diversify its trading partners.
"America First": Renegotiating NAFTA
President Trump's trade policy actions extended beyond China to include attacks on U.S. allies and other countries. The most important renegotiation was NAFTA. Trump's 2016 campaign speeches had condemned it as "one of the worst trade deals in history."106Focusing on Mexico, Trump's supporters often argued that NAFTA had not raised labor standards sufficiently to level the playing field for American workers."107The claim was consistent with Trump's other complaints about illegal immigration and the need for a wall along the U.S. border with Mexico.
During the G20 meeting in Buenos Aires, the U.S. signed a new deal with Mexico and Canada - rebranded as the U.S.-Mexico-Canada Agreement, or USMCA - approximately eighteen months after Trump had first threatened to pull out of NAFTA. The negotiations had been unusually quick for this type of trade deal. The Trump administration believed that the new deal provided more favorable terms for the U.S., but critics argued that the changes were "a backward step for free trade" and that the president was simply "taking a victory lap" for "a crisis of his own making."108The USMCA required Canada to lower dairy restrictions for U.S. milk and raised to 75% the portion of a car that had to be produced in the U.S., Mexico, or Canada for the car to be exempt from tariffs (up from 62.5% under NAFTA) (see Exhibit 15). It established that 40% to 45% of the content of a car had to be made by workers earning at least $16 per hour. The Trump administration hoped this would shift some production to the United States, but his critics argued that it would mainly increase prices for consumers."109In 2017 Americans spent $498 billion on cars and parts while Canadians spent $11 billion on dairy."110The USMCA also introduced a "sunset" clause that made the agreement expire after sixteen years (the U.S. team originally wanted it to be five years), with a renegotiation every six years."111Trump refused to remove the steel and aluminum tariffs, which supporters believed showed that "tough tactics have won him concessions."112 Justin Trudeau, Canada's Prime Minister, emphasized "stability" as the greatest achievement of the new deal."113
As the USMCA was being signed, Trump referred to the presidents of Mexico and Canada as his friends, claiming, "This has been a battle, and battles sometimes make great friendships."114 But his critics argued that his "America First" strategy had antagonized the same countries that could have been powerful allies against China. Indeed, before 2018, Canada, Europe, and other U.S. allies seemed to share some of Trump's objections to Chinese trade and business policies. In particular, the Financial Times noted that "Mr. Xi's signature Belt and Road Initiative is viewed increasingly as an effort to translate economic weight into geopolitical hegemony."115Trump's unilateral stance, often portraying multilateralism as contrary to American interest, made it less likely that other countries would support the U.S. trade tactics against China.
Hoping for a Deal
We are either going to have a REAL DEAL with China, or no deal at all - at which point we will be charging major Tariffs against Chinese product being shipped into the United States. Ultimately, I believe, we will be making a deal - either now or into the future."116
? Donald Trump @realDonaldTrump, December 5, 2018.
For the previous 40 years, China and the U.S. had both embraced globalization and trade, based on an apparent understanding of how the other would behave. As some observers noted, "the Chinese assumed that the U.S. would continue to support free trade, while the Americans believed that economic liberalization in China would eventually lead to political liberalization."117The year 2018 proved both of them wrong: President Trump imposed a large number of tariffs while China introduced a constitutional change that eliminated presidential term limits."118As the Trade War escalated, it became clear that both leaders were determined to take a strong stance in defense of their own interests.
The G20 truce, reached on December 1, 2018, offered some hope that a deal would be reached, but speculation was rampant as the deadline to come to a long-term trade agreement by March 1, 2019, was approaching. On January 31, President Trump announced that "No final deal will be made until my friend President Xi, and I, meet in the near future to discuss and agree on some of the long-standing and more difficult points," and emphasized that trade representatives were working to "make a complete deal, leaving nothing unresolved on the table. All of the many problems are being discussed and will be hopefully resolved," effectively setting a high bar for what could be accomplished before the deadline, when tariffs on $200 billion in Chinese imports were set to more than double."119
Trump's hope clashed with the opinion shared by analysts and business leaders who believed that it would take time to get China to make significant concessions. Indeed, as China hawks in Trump's own administration had been saying all along, "extracting real reforms from China that fundamentally alter its economic model - and making sure they stick - would entail a long grind."120
Step by Step Solution
There are 3 Steps involved in it
Step: 1
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started
Authors: Robert J Gordon
12th edition
138014914, 978-0138014919
