America v China: why the trade war won't end soon

Current Status of Trade War

• The United States and China have been engaged in a reciprocal tariff war for 16 months, with the US imposing a potential 25% tariff on all Chinese imports.
• The conflict spans multiple industries and markets, significantly impacting global economic structures.

Historical Context and Origins

• US frustration with China's rapid economic rise dates back to 1978; China's GDP grew from 6% of the US level in 1978 to 66% last year, with purchasing power parity already surpassing the US.
• China's 2001 entry into the World Trade Organization (WTO), facilitated by the US, was intended to promote Western-style capitalism and protect US prosperity, but the US now claims China grew by "not playing fair."
• Specific grievances cited by the US include:
  • Non-level playing fields where Chinese competitors receive free land or significant tax breaks unavailable to Western firms.
  • Allegations of state-sponsored theft of foreign intellectual property and technology, though Chinese officials counter that espionage is a mutual activity.
• The conflict escalated politically following Donald Trump's 2016 election, which brought tough rhetoric and a shift toward using tariffs as a primary negotiation tool.

Escalation and Quantitative Impact

• In July 2018, the US imposed 25% tariffs on $34 billion worth of Chinese products, nearly doubling the average tariff rate on Chinese imports from 3.8% to 6.7%.
• Retaliatory measures caused China to more than double its average tariff rate, while the US average rate tripled.
• The trade war is overtly political, with Chinese tariffs heavily targeting US agricultural exports (specifically soybeans) from the Great Plains, directly affecting counties that supported the Trump administration in 2016.
• According to Chad Bowne of the Peterson Institute for International Economics, the high tariffs on soybeans have severely impacted farmers in Iowa and the Midwest who rely on the Chinese market.

Economic Consequences and Future Outlook

• The International Monetary Fund (IMF) projects significantly lower global economic growth due to trade war tensions.
• Business investment decisions are currently hindered by uncertainty regarding future market access.
• A potential "phase one" deal is anticipated, which could involve:
  • Partial tariff relief.
  • Increased Chinese purchases of US produce.
  • Tighter Chinese adherence to intellectual property rules.
• Sumeya Keynes notes that a phase one deal is unlikely to resolve all underlying issues, particularly given the US demand for fundamental changes to China's economic structure.
• Beyond tariffs, the US has imposed restrictions on Chinese tech firms, specifically targeting Huawei on grounds that the company benefits from Chinese government subsidies and threatens US leadership in future technologies.

Strategic Implications

• The US government maintains that no other country should be allowed to out-compete the US in key future industries.
• Analysts identify uncertainty as the primary driver of the negative economic impact surrounding the Huawei case and the broader trade dispute.
• Long-term resolution remains difficult as the US seeks structural changes in the Chinese economy while China prioritizes its own growth and citizen wealth.