By: Priyam Nayak
September 9 2020
President Trump's stance on China triggered a trade war between the two nations which caused significant damages to the U.S. economy.
President Trump's stance on China triggered a trade war between the two nations which caused significant damages to the U.S. economy.During his acceptance speech at the Republican National Convention, President Trump asserted that the U.S. economy had been strengthened due to his approach towards China whom he accused of stealing jobs and ‘robbing the country.’ He has frequently claimed during his election campaign that the tariff hikes imposed by his administration benefitted the U.S. economy. Even before Trump joined the U.S. presidential campaign, he had been a vocal critic of China's trade practices and advocated tariffs to reduce the U.S. trade deficit. During his 2016 presidential campaign, Trump frequently emphasized that the U.S. trade with China, and the agreements that enabled it, were the primary reasons for the loss of U.S. manufacturing jobs and intellectual property. He said China was responsible for 'the greatest theft in the history of the world' and lashed at the U.S. trade deficit with China, which in 2016 stood at around $346 billion. His campaign released a strategy to reform the U.S.-China trade relationship, in which it pledged to 'cut a better deal with China that helps American businesses and workers compete. On January 22, 2018, Trump announced tariffs on solar panels and washing machines, thus commencing a trade war with China. On March 3, Trump asked the United States trade representative (USTR) to investigate imposing tariffs on US$50–60 billion worth of Chinese goods. He relied on Section 301 of the Trade Act of 1974, reasoning that the proposed tariffs were 'a response to China's unfair trade practices over the years,' including theft of U.S. intellectual property. Over 1,300 categories of Chinese imports were listed for tariffs, including aircraft parts, batteries, flat-panel televisions, medical devices, satellites, and various weapons. Trump's administration implemented several rounds of tariff hikes on Chinese goods subsequently, with several rounds of talks between Chinese and American officials ending in a stalemate. In July 2018, China imposed retaliatory tariffs on U.S. goods of similar value before filing a complaint with the World Trade Organization against the U.S. Initially, the trade war elicited mixed responses from economists and trade experts. A report published by the Council on Foreign Relations states that many economists and trade experts do not believe that trade deficits hurt the economy, and warn against trying to win the trade relationship with particular countries. Others, however, believe that sustained trade deficits are often a problem. There is substantial debate over how much of the trade deficit is caused by foreign governments and what policies, if any, should be pursued to reduce it. Reuters conducted a poll in March 2018 reported that nearly 80 percent of 60 economists who answered a question on the tariffs said they would do more harm than good. The rest said it would do nothing or very little. Not one respondent said they would benefit the world's largest economy. 'The tariffs are likely to be met with retaliation from U.S. business partners and completely miss the point as China is mostly kept out of range. They have the potential to become highly inflammatory and to undermine the global economic expansion,' the report quoted Stefan Koopman, a market economist at Rabobank. The Budget and Economic Outlook 2020 to 2030 by the Congressional Budget Office touted that the tariff hikes reduced U.S. economic activity. It stated that increases in tariffs reduce U.S. economic activity in three ways. First, they make consumer goods and capital goods more expensive, thereby reducing U.S. consumers' and businesses' purchasing power. Second, they increase businesses' uncertainty about future barriers to trade. Such uncertainty leads some U.S. businesses to delay or forgo new investments or make costly adjustments to their supply chains. Third, they prompt retaliatory tariffs by U.S. trading partners, which reduce U.S. exports by making them more expensive for foreign purchasers. All of those effects lower U.S. output. U.S. consumers and businesses replace certain imported goods with goods produced in the United States, which offsets some of that decline. Also, by reducing the deficit, tariff revenues increase the resources available for private investment in later years. As the trade war escalated, it became evident that large sections of the economy had largely been negatively impacted by it. A report published by the United Nations in November 2019 stated that the U.S.-China trade war was hurting both the economies. The ongoing US-China trade war has resulted in a sharp decline in bilateral trade, higher prices for consumers, and trade diversion effects (increased imports from countries not directly involved in the trade war), it reported. Economists at the Federal Reserve Bank of New York, Princeton University, and Columbia University concluded that the trade war had slashed U.S. real income by $1.4 billion per month by the end of 2018. The American Farm Bureau reported in July 2019 that farm bankruptcy filings in the year through June were up 13 percent from 2018 and loan delinquency rates for commercial agricultural loans reached a six-year high triggered by the trade war as Chinese buyers looked to other nations for procuring agricultural products. A September 2019 study by Moody's Analytics found that the trade war had already cost the U.S. economy nearly 300,000 jobs and an estimated 0.3% of real GDP. Consumer sentiment and economic confidence among small farms also hit record-lows in 2019 owing to the economic turbulence caused by the two nations. Studies also showed that U.S. companies primarily paid for U.S. tariffs and were forced to accept lower profit margins, cut wages and jobs for U.S. workers, defer potential wage hikes or expansions, and raise prices for American consumers or companies. A Reuters report citing Commerce Department data pegged the cost borne by American companies due to Trump's tariffs at $46 billion. The manufacturing sector also clocked the deepest slump in more than a decade in December 2019 as the trade war had wielded a heavy blow to factory output, orders, and employment. Despite Trump's tariffs, the U.S. goods trade deficit with China continued to grow, reaching a record $419.2 billion in 2018. By 2019, the trade deficit had shrunk to $345 billion, at somewhat similar levels as 2016. Foreign policy experts Abraham Denmark and Ryan Hass wrote in Brookings that while the U.S. deficit with China decreased, its overall trade deficit did not. Trump's unilateral tariffs on China diverted trade flows from China, causing the U.S. trade deficit with Europe, Mexico, Japan, South Korea, and Taiwan to increase. Although economic rivalry between the United States and China is not new, Trump's supporters saw his administration's aggression towards China's business practices, as a sign of him taking on China and securing a major win. But contrary to Trump's claims, data suggests that the trade war did little to alleviate the problem that Trump intended to solve by imposing tariffs on Chinese goods. On January 15, 2020, the United States and China signed a new trade agreement. The administration announced that tariffs on certain imports from China that were imposed at a rate of 15 percent on September 1, 2019, will be reduced to 7.5 percent on February 14, 2020. The pact is intended to open Chinese markets to more American companies, increase farm and energy exports, and provide greater protection for American technology and trade secrets. China has committed to buying an additional $200 billion worth of American goods and services by 2021 and is expected to ease some of its tariffs on American products, the New York Times reported.