Trade wars: U.S. strike
Since China's accession to the WTO, Washington has viewed Beijing as a major threat to its economy. The PRC's overly rapid growth and its entry into new markets have hit the US industry, making the production of some more expensive goods virtually meaningless. A number of measures taken in this regard, aimed at supporting its own economy and cutting down its rivals, have had the opposite effect for American manufacturers, but have had a steadily positive effect on the dollar exchange rate.
History of the conflict
Since 2001, when China joined the WTO, its trade with the United States has grown in value fourfold over the next two decades, from $100 billion to $400 billion. Chinese goods flooded into the U.S. market, resulting in price reductions of about 2 % with imports rising by 1 percentage point, and as a consequence, the annual purchasing power of the average U.S. household increased by $1500 from 2001 to 2007. The negative effect, however, has been the loss of 550,000 U.S. manufacturing jobs and the forced transfer of technology for access to the Chinese market, which the White House estimates damages U.S. companies by $50 billion annually.
"China shock" U.S. officials have tried to overcome through negotiations, WTO disputes, increased investment controls, tariffs, and the development of their own industrial policy. In March 2002, President George W. Bush Jr. introduced protective measures against steel. Rates ranged from 8 to 30 % on imports of fabricated metal products, machinery, equipment, and parts. As a result, supply shortages developed and metal prices soared, resulting in the loss of nearly 200,000 jobs in the steel consumption sector.
In September 2008, China overtook Japan to become the largest holder of about $600 billion in U.S. debt. The growing interdependence between the U.S. and Chinese economies became apparent, increasing fears of economic imbalance between the countries. Barack Obama, who became president in 2009, has taken a tougher line on Beijing. By his own admission in 2012, his administration has brought trade cases against China almost twice as often as his predecessors.
Since 2009, the United States has filed 20 enforcement complaints with the World Trade Organization and each has been upheld, including China's illegal taxes on more than $5 billion worth of U.S. auto exports and $250 million a year in steel exports.
Obama also imposed duties on imported tires and increased scrutiny of Chinese investment, blocking two deals on the recommendation of the Committee on Foreign Investment in the United States (CFIUS). His administration also lobbied for the Trans-Pacific Partnership (TPP), a mega-regional trade agreement that would have allowed Washington to set the rules of international trade. China in this case was seen as a rival capable of imposing its own will on the APAC countries with its authority and volume. The overwhelming majority of Democrats in both the House of Representatives and the Senate repeatedly voted in favor of blocking the TTP. Protests were staged by eco-activists because the agreement included an expansion of fossil fuel trade. The political powers granted to corporations under a supranational investor-state dispute settlement process were also condemned. Negotiations to create a new U.S. trade bloc became bogged down in controversy and intraparty infighting. In 2017, President-elect Donald Trump officially withdrew the United States from this pointless race, ending an eight-year effort that Barack Obama hoped would transform American influence on four continents. A new chapter has begun in the White House's China policy - an even fiercer one than under Obama.
During 2018, the Trump administration launched a series of trade measures aimed at reducing imports, first targeting specific products (steel, aluminum, solar panels, and washing machines) and then specifically targeting imports from China.
The first phase of the trade confrontation between Washington and Beijing occurred in the early summer of 2018, when the two sides raised tariffs by about $50 billion. In September 2018, the White House imposed additional tariffs to cover $200 billion worth of Chinese imports, to which China responded by imposing additional tariffs on $60 billion worth of imports from the United States. Trump attempted to resolve the tariff battles with a trade agreement under which China pledged to purchase about $200 million worth of U.S. goods over two years, including agricultural products In return, the U.S. promised to reduce some tariffs, but the duties on $250 billion worth of Chinese goods were intended to remain in place. China failed to fulfill its part of the agreement, and Washington responded by declaring Beijing a currency manipulator. The U.S. Congress, responding mainly to concerns about China's acquisition of U.S. technology, passed legislation expanding the role of CFIUS and tightening controls on exports of high-tech products.
Joe Biden has taken more aggressive steps: he signed a law banning the Chinese social network TikTok; maintained all of Trump's sanctions on the Chinese, as well as tariffs worth about $360 billion. He also imposed unprecedented export controls that have limited Beijing's ability to obtain advanced technology, and banned U.S. investments in sensitive industries that lawmakers fear could be used to help China's growing military.
The Biden administration's Investing in America program has stimulated more than $860 billion in investments in electric vehicles, clean energy and semiconductors. On May 14, 2024, the president directed his trade representative to raise tariffs under Section 301 of the Trade Act of 1974 on $18 billion of imports from China. The tariff rate on certain steel and aluminum products increased from 0-7.5% to 25%, semiconductors will increase from 25% to 50% by 2025, and electric vehicles will increase to 100%. The tariff rate increases also affected lithium-ion batteries, natural graphite and permanent magnets, solar cells, harbor cranes, and medical products. In all cases, the increase from 0-7.5% reached 25-50%.
An implicit threat
Tariffs can be thought of as duties imposed on all goods imported into the United States. The high prices of imported intermediate products, raw materials, and components place an additional burden on production costs, resulting in lower profitability for firms. The second is the rising cost of U.S. products, which becomes higher than international competitors. This reduces the competitiveness of U.S. goods and affects export-oriented industries.
For example, the tariffs imposed by the U.S. on China in 2018 were fully linked to domestic prices of imported goods in the U.S., while Chinese exporters did not reduce commodity prices. As a result, the cost of goods at U.S. ports of entry rose in line with the tariff increases. According to an analysis by Massey University's School of Economics and Finance, each 10% tariff imposed reduced import demand by 43%.
According to UN experts, while the US imported about $255 billion worth of goods from China in the first half of 2018, imports totaled less than $230 billion in the same period of the following year, which corresponds to a decline of about 10%. In the same period, there was a negative impact on the GDP of the US, Mexico, Japan, Russia, the Middle East and North Africa - from 0.02 to 0.07 points in half a year.
The risk of a renewed trade war in 2025 will increase if Donald Trump wins the election, according to Fitch Ratings, a statistical rating agency. The presidential candidate has announced a possible tariff hike for China of up to 60% and an across-the-board 10% tariff on all U.S. imports. In scenarios of aggressive tariff hikes, Washington would face short-term GDP hits of up to 0.8 points. If U.S. trading partners respond by raising tariffs, the impact would be larger, up to 1.1. Higher tariffs would raise inflation by up to 0.4 points, but only in the short term. For U.S. trading partners, the impact would be greater in retaliatory scenarios, with China, Canada, and Mexico suffering the largest losses with GDP hits of 1.8 points in the worst-case scenario.
The Chinese Peak
At the moment, the theory of "China's peak" is gaining popularity among economists, in which Beijing's influence is declining. The Chinese government has reported a GDP growth rate of 5.2% in 2023. However, as Nikkei Asia clarifies, when measured in U.S. dollars, its GDP has actually declined by 0.5% from 2022. The GDP gap between the United States and China has grown significantly from $5 trillion in 2021 to nearly $10 trillion by 2023.
For 10 years, U.S. policy toward China has been based on its rapid growth. However, the theory of "China's peak" suggests a decline in Beijing's power and requires the White House to reconsider its defensive measures in favor of cooperation. On the other hand, the PRC is still a country with a large agrarian population: the urbanization rate is only 65%. If it increases to 80%, another 200-300 million people will move to the cities, which will be a driver of future economic growth. In this dichotomy, the current Biden administration is laying the groundwork for a case of friendship: in late August 2024, U.S. National Security Advisor Jake Sullivan visited Beijing - for the first time since 2016. The visit created an opportunity for a conciliatory dialog between the heads of state. Kamala Harris, who will continue Biden's line if she wins the presidential election, has not yet commented on her future policy toward China, although it is already clear that the Trump-Biden trade duties are unlikely to be canceled. Nevertheless, the presidential candidate has no desire to tighten the screws: she criticized her rival's plans to further increase tariffs. During her trip to Indonesia for the Southeast Asia summit in Jakarta in July 2024, Harris said Washington is not seeking conflict with Beijing. Despite tensions over the situation in the South China Sea, Taiwan, the countries' relationship, in her estimation, is developing in line with healthy market competition. It is fundamentally important for the US, as Harris put it, to win the technological race with China, while Donald Trump in complicity in supplying chips to China has "sold the US out".
Within American society, China is used as a stressor. The reaction of politicians is determined by the adaptive capacity of the whole system and the elite's readiness for a direct confrontation. But the interpenetration of the two economies, despite tariff pressures and political claims, is too great: China is the third-largest export market for the United States after Canada and Mexico. A 2023 report by the U.S.-China Business Council, an industry group, found that exports to China supported more than a million U.S. jobs. Billions of dollars earned in the Middle Kingdom are then invested in the domestic market. A great deal will depend on the geopolitical environment. Even in the most difficult times, such as during the Bush Jr. administration, the White House, while maintaining a bellicose stance, still made concessions with China as America faced terrorism and prepared to retaliate against Islamists. And even the tariff hikes, whose negative effect on the macroeconomy has already been addressed, are ultimately aimed not at protecting American manufacturers, but at strengthening the dollar. Between 2018 and 2019, as the trade war entered its hot phase, the dollar strengthened not only against the yuan but also against a broad basket of other currencies. This, in turn, reversed the impact of the U.S. protective duties as it lowered the price of imports from China for U.S. buyers. In fact, the additional import duties imposed had only a marginal impact. Trade policy uncertainty only significantly damages economies where exports are a large share of GDP. By comparison, U.S. merchandise exports account for only 11% of GDP by the end of 2022, while China has 20.7%. Even in case the rhetoric of the new White House administration will be more aggressive, it will still be positive for the national currency.