Is the trade war with China beneficial to the US economy?

Editor: Akshat Daga

Illustration by Sonja Lam

Abstract The ongoing US-China trade war seems to reinforce a realist position within the sphere of international relations, wherein nations - in pursuit of their own interests - inevitably struggle for power in the global arena. This paper aims to first elucidate the reasons for such conflict(s); illuminate the implications of the ongoing trade war on the US economy and the affected industries; and lastly assess whether the trade war is in fact, ‘good’ for the US economy. 1. Overview of the Conflict Before diving into the depths of this paper, it would first be appropriate to briefly summarize the timeline of the ongoing trade war.

Source: China Briefing

2. On What Grounds? There exists a myriad of reasons which include: President Trump’s campaign rhetoric, a BOP deficit, intellectual property concerns, unfair subsidies, and the depreciation of the RMB. For the purpose of this paper, we shall dive deeper into the BOP deficit. Though not entirely mutually exclusive, President Trump has used US’s BOP deficit, as part of his campaign rhetoric, directed against the Chinese government (Swanson, 2019). For example, the U.S. census Bureau and the U.S. Bureau of Economic Analysis announced that the goods and services deficit was $46.2 billion as of April 2018 (USCB, 2018).

Source: US Census Bureau Notwithstanding President Trump’s office, the budget deficit has in fact, been on a steady rise, owing to the China Shock (Autor, 2016), where the deficit with China expanded dramatically beginning in the early 2000s from an average of $34 billion in the 1990s. 3. Impacts of Trade War on the US Economy Many economists believe that the negative effects of the tariffs ultimately outweigh the positive ones (Swanson & Smialek, 2020). For instance, raw materials or intermediate goods imported by the US manufacturers became more expensive, increasing the costs of US products and reducing their competitiveness. As a result, some of the key sectors had experienced a long period of contraction, affecting the overall US economy. 3.1 Manufacturing Sector The US saw its contraction in the manufacturing activity in the fourth quarter of 2019, for the first time since 2016. This was mainly caused by the escalation of the trade war, global economic weakness, trade uncertainties and collapsing business and consumer confidence (Lockett, 2019). Based on the Institute for Supply Management’s Manufacturing Purchasing Managers’ Index (PMI) - a widely monitored indicator of the sector’s health - has dropped to below the 50-point benchmark level. This is indicative of the slump and mild recession in the manufacturing industry; it also serves as a warning that trade uncertainty can weigh on manufacturing activities. Furthermore, according to the Federal Reserve economists, the trade war has reduced US manufacturing employment and increased the costs of procuring materialsand components for American manufacturers (Verbrugge, 2019). The US manufacturing employment was climbing steadily in 2017 and 2018, but hampered afterwards, when the full effect of the tariffs set in (Verbruggen, 2019). As seen from the graph below, the employment rate began to drop in September 2019, immediately following the contraction in the manufacturing sector in August 2019.

Manufacturing Purchasing Managers’ Indices Source: Financial Times

United States - Manufacturing Employment Source: Moody’s Analytics 3.2. Food and Agribusiness As a form of retaliation, China has cut off imports of key US agricultural products including soybeans, dairy and corn, and has imposed retaliatory tariffs of 15% or 25% on almost 100 different US food and agricultural produce such as pork, fruit and tree nuts. In July 2018, China expanded the 25% tariffs to 697 tariff lines and eventually to 1084 by the end of 2019 (Congressional Research Service, 2019). According to the American Farm Bureau, US agricultural exports to China totalled to US$9.1 billion in 2018, down from US$19.5 billion in 2017 (The Straits Times, 2019).

China’s imports of Agricultural Products, 2014-2018 Source: Congressional Research Service Meanwhile, China has also intensified its quarantine and safety inspection checks on US products. For instance, the Chinese customs have ramped up inspections of all US pork imports, which only 30% of them were checked on in the past (Mitchell, Feng, Liu & Campbell, 2018); the shipment of calf skins was also left idling at a port in South-eastern China for more than a month before it was ultimately sent back to the US, leading to a US$50,000 loss for the company (Cassella& Bray, 2018). 3.3. Tech Companies The US has banned its domestic companies from continuing their businesses with Huawei, one of the leading smartphone and high tech companies in China. This has led to a zero-sum game in the sense that Huawei has lost its access to critical products and services from US companies such as Google which provided its Android operating system, as well as Intel and Qualcomm which provided the smartphone chips. According to the Consumer Tech Association, the tariffs have cost the tech industry $10 billion since 2018. Amongst all, tech giant Apple has been hit particularly hard by the tariffs, with its major products such as AirPods and Apple Watch subjecting to punitive tax, the company also found it hard to sell phones to the Chinese market. Therefore, it is evident that ordinary consumers, and many US companies, especially those that have business relationships with China, will have to absorb the after- effects of the tariffs imposed by the US government, which is clearly not at a much advantageous position in this trade war. 4. Is the US Winning the Trade War? As a whole, it is evident that the imposition of tariffs- though not at the consideration of Phase one of the trade deal- will dampen the US’s economy, with a 0.26% drop in long-run GDP and a 0.16% in wages (Tax Foundation Taxes and Growth Model, 2018). Therefore, it follows that such tit-for-tat strategy is one that will not produce any fruitful results, be it in the case of the US or China. -Chia Hao Guang, Dong Naige, Ong Guan Da, Akshat Daga

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