Legacies of the Sino-American Trade War

Introduction

In the wake of the aggressive American policy of containment beginning with the Trump administration, China enacted a salvo of retaliatory measures. In this essay I will provide the reasoning behind these measures coupled with the direct impacts of the trade war and further impacts of China’s subsequent approach to its economy. I will begin my essay by looking into what comprised the ‘harder line’ of the United States, from tariffs to arrests and drawing up entity lists of firms ‘compromising national security’. I will then swiftly move on to exploring Chinas response, deep diving into the logic behind their strategic retaliatory efforts. Lastly, I will explore the primary impacts on the Chinese economy followed by looking at the way the trade war impacted China’s approach to its economy, turning the axis inwards to developing domestic industries particularly the digital and green economies. The importance of this topic cannot be overstated given China’s role as a behemoth in the global economy, the dynamic between China and the US entails ramifications for virtually all other states, therefore analysis of China’s economic intentions is crucial. Ultimately US aggression and the trade war, coupled with Chinese policies in response, have had significant impacts on the Chinese economy.

The Harder Line of the United States

The nature of Trump and Biden’s aggressive policy of containment is emphasised when you consider America’s prior approach. From President Nixon’s visit to China in 1972 and the opening of diplomatic relations 6 years later, what entailed was a general Washington Consensus aiming for engagement (Mearsheimer, 2021; Wang, 2016). The Obama administration openly “welcomed the rise of China” (Li, 2016). The Bilateral Investment Treaty and the willingness of China to purchase US treasury bonds in the wake of the 2008 financial crisis emphasises this relationship of cooperating and integrating, with the US seeing China as a “stabilising” factor (Li, 2016).

This changed under Trump however. The massive growth of the Chinese economy and military, decline of domestic manufacturing, growing trade deficit, perception of China as a “revisionist power” and the polarised democratic and autocratic political systems all culminated in American fear of a Thucydides trap occurring (Li, 2016; Mearsheimer 2021; Wike, 2013). Trump’s campaign ran off a promise to take a harder line, and so in early 2018 tariffs began to be imposed, starting with appliances and solar panels, steel and aluminium soon became subject to tariffs in March 2018 (Itakura, 2020: 77-78; Schlesinger & Ailworth, 2018; Wang, 2021). In July 2018 the US pushed another 25% import tariff on $35 billion of Chinese goods, followed by a further $16 billion in August (Itakura, 2021: 77-78). In September the US put a 10% import tariff on $200 billion of Chinese goods, followed by promise to raise that to 25% in January 2019, however this only came into effect by May (Itakura, 2021: 77-78). On the 1st of December 2018, the daughter of the founder of Chinese tech giant Huawei, was arrested in Canada at the behest of the US government (Horowitz, 2018). What followed was further actions taken against Chinese firms operating on American soil, requiring many to be registered as foreign government entities (Naranjo, 2020). Visas were revoked for Chinese students and officials, and blame was levelled at China for the initial spread of Covid-19 (BBC, 2020; Mangan, 2020). These government actions combined with a media focus on Chinese treatment of Uyghurs and harsh suppression of the Hong Kong Protests led to the American public’s perception of China as a barbarised “caricature” (Zhang, 2021; 1443).

Despite Bidens support of policies to engage China earlier in his career, the line of harsh American policy toward China proved to be bipartisan with the arrival of the new administration (Li, 2021: 7). Beyond the persistence of tariffs, the Biden administration went on to designate the Chinese firms, ZTE, Huawei, Hytera, Hikvision and Duhua as national security threats (DW, 2021).

Chinas Response and its Reasoning

In the face of tariffs and the US push for decoupling, China engaged in several modes of response. Following the first round of American tariffs, China countered with its own import tariffs in April of 2018, by late 2019 it had put in place tariffs on around $100 billion worth of American exports (Fajgelbaum & Khandelwal, 2022; Itakura, 2021: 77-78). In looking at why China felt the need to reciprocate, Zhang (2022: 88) highlights the fact that China’s retaliatory tariffs had a sole purpose, to weaken support for the trade war in America hoping to force Trumps hand in setting aside American tariffs. China sought a return to the status quo of encouraged trade, easy to understand given the US trade deficit of $375.2 billion to China in 2017 (Scott, 2018). Chinese tariffs were extremely targeted, levied on almost all forms of agricultural products as well as Auto-manufacturing, metals, oil extraction, and gas extraction (Zhang, 2022: 88-89). The reason for such targeted tariffs was that these products were predominantly produced in Trump-voting rural areas, and so China was seeking to apply pressure to Trump from within his core base of support (The New York Times, 2018). Zhang (2022: 88) posits that 61% of jobs affected by Chinese retaliatory tariffs were held in Trump-voting counties. Despite the logical nature of this response, scholars such as Pei (2019) saw flaws in China’s initial response, with Xi seemingly not taking into consideration the fact that America in 2017 imported $505 billion in Chinese goods as opposed to China importing only $130 billion of American goods, thus America held vastly higher leverage over the Chinese export market. On this basis Chinas willingness to engage in a tit-for-tat tariff conflict seemed unwise. Perhaps under the consideration of this knowledge, China allowed for some concessions, aligning with what Medeiros saw as Chinas initial insistence on engagement even in the face of US aggression (Hass, 2021). Rather than “isolationism” and “push-back”, China sought a mediated calibration to the new dynamic. First of Chinas concessions regarded the bilateral trade balance, promising to purchase an additional $1.2 trillion in US goods over coming years, furthermore China floated the idea of permitting American access to restricted markets (Hass, 2021). So, whether it was targeted tariffs or concessions the Chinese motivation was to cease American hostility.

So, we see a China initially seeking the swift dismantling of American tariffs, however as the end to US containment policy appeared nowhere on the horizon, Hass (2021) notes several points that Chinese response began to reformulate around. Most significantly Hass (2021) states that China wishes to seek out a non-hostile external environment hoping for “win-win cooperation”, we can argue this is the case given the nature of the Belt and Road Initiative (BRI), an exchange of goods and services to the benefit of both China and the participating country, with the World Bank (2018) expecting the initiative to lift 7.6 million people from extreme poverty. Even the arguments against BRI, such as accusations of debt-trap diplomacy on Chinas part couldn’t be considered actively hostile, just manipulative given the willing participation of the other party. A further prong of Chinas strategy according to Hass (2021) is reducing economic dependence on America and increasing global dependence on itself. Evidence of this approach is again displayed by the ever-growing list of states joining the BRI. Regarding the diminished dependence on the US, although China has indeed put in place tariffs on American exports, as we have already discussed these were intended as a temporary measure to cease the initial American efforts against China. Whether China maintains a stand-alone goal of reducing dependence on the US, this is questionable, given China’s stated agreements to purchase further American goods as well as Chinese exports to the US increasing in some sectors as I will explore later in the essay. What we can see more assuredly was that as American hostility ebbed on, China became increasingly aware that its relationship with the rest of the international system had to be looked after should supply chains need permanently restructuring.

2020 saw renewed Chinese retaliatory efforts in the face of Trump’s scape-goat-ing of China to deflect from American struggles with Covid-19 (Neuman, 2020). China retorted with regulation on export controls, national security investment screening, visa sanctions, such efforts resemble American actions against China in the years prior (Treisman, 2021; Zhang & Pang, 2021). Further to this Hass (2021) argues that China became “less-constrained” in its domestic actions such as in the case of government suppression of groups in Xinjiang and Hong Kong. However, I argue that the Chinese Communist Party’s strict maintenance of stability within its borders is not a new occurrence or one suddenly now ‘permitted’ by American hostility. Strife between the population of Xinjiang and the CCP has existed since its incorporation into the PRC in 1949.

In summary, China’s response involved participation in the trade war through its targeted counter tariffs and verbal concessions with the aim of dissuading further American tariffs. Given the persistence of American tariffs and actions taken against Chinese firms, China then moved toward mimicking American decoupling tactics through regulation on bilateral activities. Conjoined to this was Chinas renewed persistence in multilateralism with the rest of the world stage, displayed through continuation of projects such as the BRI and completing the creation of the Regional Comprehensive Economic Partnership (RCEP) (Ward, 2020).

Primary Impacts of the Harder Line on the Chinese Economy

The tough stance both Trump and Biden took regarding economic interaction with China has had significant primary impacts on the Chinese economy. In looking at general figures, Itakura (2019: 91) used a recursively dynamic CGE model of global trade to estimate that the cumulative impact of the US-China trade war involves a fall in GDP of $317 billion for the US (-1.35%) and fall of $427 billion on Chinese GDP (-1.41%). This model weights and aggregates the impacts of import tariffs in protecting domestic industries but also the impact on foreign investment and productivity. Itakura (2019: 91) concludes that the Trade war led to a decrease in all sectorial outputs in China except agriculture, furthermore Chinese imports of transport equipment and agricultural goods were the products most affected by American Tariffs. Zhang (2022, 90) states that the most export-centred areas of China were subject to a 2.5% reduction in income per capita between 2018 and 2019, furthermore consumer prices skyrocketed for goods such as pork and animal feed.

Yang et al (2022: 1) state the decrease in Chinese exports to the US as being the primary result of the trade war thus entailing a shrinkage in Chinese exporter profits. Looking at the impact of Chinese exports 4 years on from the outset of the trade war, Bown (2022) notes that total imports from China have remained down, with 2020 seeing their worst levels before beginning to rise again. While Chinese exports of semiconductors, some IT products, consumer electronics, clothing, and furniture remain down, other export sectors have increased sales to the US, these products include laptops, monitors, games consoles, toys and phones (Bown, 2022). Looking closely at different categories of exports, the Chinese goods hit by tariffs experienced diminished trade, however imports of products never hit during the trade war are 50% higher than pre-war levels (Bown, 2022). These goods comprised 33% of total US imports however this has grown to 47% in 2022 (Bown, 2022). Thus, the persisting demand for Chinese goods offsets a portion of the expected impacts.

It is worth considering the uncertainty the trade war brought to foreign investors. Given the leverage of the US through its self-styled leading role in multilateral institutions and of the liberal democratic Western nations, the effect of its blacklisting of an economy is of concern for prospective investors. Zhang (2022: 90) notes that multinationals left China at a rate of 11.4% in 2019, compared to an average of 7.1% prior to the tariffs.

How China’s Approach to its economy changed

The impact of the harder line of America on China’s approach to its economy can be summarised as the shifting of heavy focus to its domestic industries, in particular the digital tech industry and the ‘green economy’. However, as I will go on to explore, the development of domestic industries is certainly not a signal of China closing off to the world.

Looking first at China’s development of the digital tech industry, what is interesting to note is American commentary (even by those who believe friendly engagement with China should be pursued) is quite unanimous on the idea that technological competition between the US and China really is a zero-sum competition (Barboza & Bader, 2020). The increasing dependence of virtually every industry on technological innovation means the forerunner in technologies such as AI, 5G or chip manufacturing will hold the capacity to lead those industries on the global stage. Beyond American emphasis on the importance of digital tech development China’s keen involvement is displayed in writing through the 2022 Chinese Central Economic Work Conference readout which succinctly emphasises, “we should vigorously develop the digital economy” (Wang & Bai, 2022). Furthermore the 14th five-year plan stated the intention of digital economy businesses contributing 10% to Chinese GDP (International Trade Administration, 2022). The fallout of American aggression and attempts at decoupling with China have resulted in further motivations to lead the way in the semiconductor industry, and industry expected to be worth $1 trillion by 2030 (King, 2022). China maintains a strong semiconductor manufacturing share at 6% of foundries revenue share worldwide in 2020 that grew to 8% in 2022 (Chiao, 2022). One key incentive for bolstering this industry is the Biden administrations CHIPS act and similar projects in Europe in 2022 seeking to invest heavily into their own respective semiconductor industries (King, 2022). For China this clearly reads as evidence of a wish to decouple from reliance on the Chinese tech industry especially within the context of the Chip 4 alliance announced in March 2022 (King, 2022). Part-state owned investment management giant CICC in China estimates cumulative investment into the digital economy will exceed $11.13 trillion within the next five years, a seven-fold increase (Cheng, 2022). The scale of China’s push in this direction is shown by the direction of its other key industries, whilst the Chinese digital sector saw investments grow by 14% in 2022, investment into real estate -a mainstay sector of the Chinese economy- fell by 22% (Cheng, 2022). A causal link between the trade war and development of the Chinese digital economy is highlighted by Yang et al (2022) who analysed the positive correlation between impact of US tariffs in Chinese cities and land grants for high-tech companies given by local authorities in Chinese cities. Their study concludes that once the Trump administration had drawn up a blacklist of Chinese firms in 2020, China saw shift in the “division of labour” given the overcapacity of low-end industries hit by tariffs, local governments were incentivised to invest into high-tech industries (Yang et al, 2022: 2).

Development of its ‘green economy’ was one of the primary economic focus points for China in the wake of US aggression. Climate considerations are a relatively new issue in China, Bader (Barboza & Bader, 2020), a key player in the Obama administration noted that at the Copenhagen climate conference in 2009, China was “far from accepting its role in greenhouse gas emissions”. In 2007 China became the largest emitter of CO2 and three years later overtook the US in total energy consumption (Barboza & Bader, 2020). Today environmental considerations are key in the CCP agenda with the 14th five-year plan stipulating the need to improve water quality, air pollution, recycling, and development of the EV market (UNDP, 2021). Furthermore, the plan promises net-zero emissions by 2060 (UNDP, 2021: 2).

Whilst Chinas current focus on its domestic green economy is growing in recent years, the direct link to the harder line of the US is dubious given China’s stated climate commitments in the 11th, 12th, and 13th five-year plans prior to the onset of US aggression (CGTN, 2020). However, the argument for its acceleration could be tied to the more general point that China sought a heavy focus on domestic industries and consumption in general in the wake of the trade war. The readout from the Central Economic Work Conference stated, “focus on domestic demand. We must give priority to restoring and expanding consumption.” (Wang & Bai, 2022). The tariffs shocks to Chinese exporters signalled the need for China to maintain healthy domestic markets going forward whilst not closing China off to the world as the readout later states “greater efforts should be made to attract and utilise foreign investment.”. In the face of US decoupling, we see both domestic market development and emphasis on other markets, with exports to ASEAN countries outweighing those to the EU and US in November 2022 (Cheng, 2022). Pei (2019) offers a bleak supposition that the world economy will continue to fragment into split economic blocs, circling around the two powers China and the US, with the US insistence on this division we can certainly see a spread of ways in which China is adapting and positioning its economic direction.

Conclusion

So, to conclude, China’s response to the harder line enacted by both Trump and Biden initially entailed counter tariffs and concessions to push the US into retracting their export tariffs, however upon the lack of progress made, China began to mimic US aggression. The trade war and US aggression entailed impacts on Chinese exporters, GDP and consumer prices. Secondary impacts were significant with China pushing the prioritisation of its domestic industries, most notably its digital and green economies. Furthermore, the Chinese government saw the longevity and bipartisan nature of US aggression as a sign to progress trade and relations with other players in the global system. Ultimately the outcome of the trade war granted neither side particularly high leverage over the other however there were certainly a range of primary and secondary impacts on the Chinese economy that have massively impacted its stated trajectory.

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