Future U.S. trade policy towards China

K. C. Fung,
Professor of Economics,
University of California,
Santa Cruz, USA

In this paper, I would like to examine critically the future beyond-Trump era trade relationship between the United States and China.  Any forecast beyond the horizon is difficult, regardless of whether we consider a future Democratic or Republican Administration. However, three elements seem to have emerged.  One, there is a bi-partisan consensus both in the executive branch and in Congress that Great Power competition between the United States and China will continue for the next few decades.  Of course, as highlighted by the current Coronavirus outbreak, there should still be significant areas of potential co-operation (such as global pandemics, climate change, disaster and humanitarian relief, etc.). Two, there should be clearer distinctions between U.S. trade policies towards allies versus potential competitors.  Third, there should be a return in future Administrations to policies in this area based more on competence and expert inputs instead of Trumpian gut instincts and transactional motives.

At present, average overall U.S. tariffs on imports from China remain above 19%, despite the January 2020 “Phase One” agreement.  Most mainstream researchers seem to view the Trump Administration approach to trade with China to be too inconsistent and too unfocused to be effective.  While there can be overlaps, in this paper, I would like to highlight four distinct types of future U.S. trade policies and trade relationships between the United States and China.

First, an increasingly important area for the future U.S.-China trade relationship is digital trade. This broadly involves e-commerce, big data, social media and messaging apps, search engine, online advertising, content sharing and streaming, etc.  Such types of digital trade often exhibit networked effects, with the value of the platforms dependent on how many other users may be using them as well.  Other standard properties of these digital services include: winner-takes-all, success breeding more success and first-mover advantages.  Given these typical characteristics, and with the Great Digital Firewall in place in China, future U.S. policymakers may view American companies such as Google, Facebook, Twitter, YouTube, Amazon being essentially shut out of China with increasing alarm.  One emerging policy response seems to be market segmentation, leading to the Chinese digital, online market being dominated by Chinese companies, while the U.S. market will be increasingly reserved for American firms.  In addition, since digital company profits and future algorithmic learning are driven more by the number of users and increased acquisition of big data, the U.S. future digital trade policy will likely be to enable and empower American digital firms to compete better outside of China: in Europe, Japan, and even in Belt and Road economies (including Southeast Asia and Africa).

Second, future U.S. value-added trade policies may more clearly create a distinction between “essential” and “non-essential” supply chains.  “Essential” supply chains may involve technology-intensive components and equipment (e.g. semiconductor, future 6-G telecom equipment, smart robots, drone production, laser-guided machine tools, microprocessors, optical devises, 3-D printers, etc.), but as reminded by the Coronavirus, “essential” parts can also include medical supplies and equipment.  “Non-essential” components trade may involve textile and garment, furniture, basic transportation vehicles, etc.  For “essential” supply chains, there may be U.S. future policies encouraging such components and equipment be produced in the United States, or at least much closer to the U.S. markets, instead of being produced in China.  In other words, there will likely be a shortening of the U.S. “essential” supply chains.

Third, focusing on finished technology products that embody design, branding and scale economies such as iPhone and Boeing aircrafts, the future U.S. government will further amplify the need to vigorously enforce intellectual property rights, protection of designs, enhanced product differentiation and raising global market shares.  U.S. Special 301 tariffs will likely to be continued to be utilized against China.  Future U.S. policymakers will also be increasingly aware of the potential complementarities of Brand America with all its cultural and institutional soft power and the branding of American products and services.

Fourth, when future U.S. administrations consider basic agricultural, metal and manufacturing industries such as garment, textile, shoes, food and fishery products, simple household appliances, basic consumer electronics goods, steel and cement, the conventional comparative advantage-driven gains from trade will likely dominate their thinking.  Except for occasional anti-dumping duties, countervailing duties and safeguards, these types of trade may still be driven by conventional free trade arguments.

To sum up, looking beyond the Trump era, for digital trade, “essential” supply chains and technology-intensive and design-intensive products and services, future U.S. Administrations and U.S. Congress will likely pay much closer attention to the country’s increasingly comprehensive, more intense but also more nuanced trade competition with China.

Email: kcfung@ucsc.edu; kcuofcaliforniaprofessor@gmail.com

Expert article 2720

> Back to Baltic Rim Economies 2/2020