Making sense of the U.S.-China trade war

Ka Zeng
Distinguished Professor
Department of Political Science, University of Arkansas
USA

kzeng@uark.edu

The recent trade war between the United States (U.S.) represents the largest economic warfare in modern history, with far-reaching implications for both the regional and global political and economic landscapes. While the trade war has captured growing scholarly interests, what have remained relatively little understood so far are the origins of the trade war, in particular the role of U.S. businesses in the trade war and the impact of the trade conflict on bilateral economic relations.

U.S.–China economic relations have been fraught with tensions since the beginning of China’s economic reform and opening to the outside world in the early 1980s. While the United States has sought to address its trade concerns with China through a combination of unilateral, bilateral, and multinational approaches through the end of the Obama administration, profound changes in the strategic and economic contexts of U.S.–China relations have significantly altered the calculations of the leadership in Washington. Importantly, China’s rise to the center of global manufacturing and trade activities increasingly challenged the U.S. leadership role in the global economy, raising questions about whether the two powers can avoid the so-called Thucydides’ trap often associated with a wrenching hegemonic transition. China’s embracement of stronger authoritarian control, an increasingly nationalistic and assertive foreign policy, and mercantilist economic policy under President Xi Jinping further contributed to the disillusionment among many U.S. policymakers about the effectiveness of engagement as a policy tool to manage the challenges posed by China’s economic ascent. These developments further coincided with the coming to power of President Donald Trump, a unique policy entrepreneur who saw an extraordinary opportunity in scapegoating China as a means of dealing with the domestic backlash against trade and globalization, setting the stage for the large-scale tariff retaliations that started in Spring 2018.

While changes in the broader geopolitical and economic contexts distinguish the recent trade war from earlier trade spats between the two countries, one puzzle that remains is why the U.S. business community, long a stanch supporter of U.S.–China economic integration, has failed to constrain the use of retaliatory trade policies by the Trump administration. During the early years of China’s economic reform, the U.S. and China have engaged in the exchange of products in which each had a comparative advantage, leading to a highly complementary trade structure whereby U.S. producers are highly dependent on the production of labor-intensive products from China. High levels of import dependence have attenuated the protectionist impulse of American producers, limiting domestic pressure for trade restrictions and hence a tit-for-tat trade war. To what extent has such dynamics changed in more recent years? On the one hand, there is evidence that China has gradually climbed the ladder of technological development to pose growing competitive challenges to U.S. dominance in critical sectors such as artificial intelligence, quantum computing, and 5G wireless networks. This may have potentially titled the balance of political power in the United States in favor of protectionist interests. On the other hand, however, recent research has shown that as a result of China’s deepening participation in global production networks, firms heavily dependent on input sourcing from China or engage in production in China have fiercely resisted the imposition of retaliatory tariffs against Chinese products and that corporate opposition has far outweighed the support for the trade war stemming from an anti-trade coalition composed of import-competing interests and those seeking to challenge China’s unfair trade practices. A closer examination of the preferences and stance of corporate actors is therefore merited for us to better understand the domestic politics behind the trade war in the United States.

How has the trade war impacted U.S.–China economic relations? An examination of monthly bilateral trade data between the beginning of the trade war in March 2018 and the onset of the COVID-19 pandemic at the end of 2019 suggests that heightened bilateral tensions under trade war conditions have negatively affected U.S. imports from China, in particular in those segments of the two economies that are most closely integrated with each other through global supply chain linkages. Between 2017 and 2019, total U.S. imports from China have declined by 9.5 percent, with the drop being most pronounced for industries most closely integrated into China-centered production networks through input sourcing, downward exports, or vertical foreign direct investment. Furthermore, not only have such industries been subject to steeper tariff hikes, the impact of the tariffs has also been more sustained on such industries. In other words, while the more confrontational and aggressive negotiation approach under President Trump has done relatively little to address China’s malpractices in the global trading system, it has had a chilling effect on U.S.–China trade relations and the strong supply chain relationships that U.S. companies have built with Chinese producer over the years. The continuation of a policy of decoupling may therefore inflict considerable damage on the two largest economies in the world, with far-reaching implications for both regional and global economies and the pattern of geostrategic competition. Future studies could examine the impact of the trade war on not only bilateral but also regional trade and investment relations to more fully unveil its repercussions.

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