Three years into the U.S-China trade war, the Phase One truce signed in January 2020 still holds, but the path forward for the relationship between the world’s two biggest economies remains unclear.
Speaking from New York at a Chamber webinar on 22 July, Oxford Economics’ Lead Economist Alex Mackle shared insights from his firm’s survey on the impact of the trade war on the economy in the United States, and discussed some possible future scenarios for trade ties.
“The subtitle of the report is ‘a crucial partnership at a critical juncture’ and I think this really summarises where we are at the moment,” Mackle said.
With China poised to become the world’s largest economy by 2030, the United States is set to lose the status it has held since the 19th century. As China’s wealth has grown, the U.S. narrative – particularly under former President Donald Trump – has focused on perceived damage to the U.S. economy caused by China’s economic policies. However, as Mackle explained, the numbers paint a different picture.
“China is a significant export destination for the United States. In 2019, the U.S. exported US$106 billion worth of goods and US$57 billion worth of services,” he said, adding that these exports support 1.2 million U.S. jobs.
Imports from China benefit the U.S. by lowering costs for consumers, and many U.S. firms invest directly into China.
“The potential for further investment is also enormous, given the extent to which China will continue to grow,” Mackle said.
Besides these tangible benefits, the key long-term benefit to the U.S. comes from gains in “total factor productivity,” Mackle said, which refers to the efficiency with which capital and labour can produce goods and services.
So, given the benefits of trade with China, what is behind the eruption of tensions?
Mackle explained that one of the key drivers is the “China shock.” Even though American consumers in general have benefited from trade with China, it has had a negative impact on small but highly concentrated regions of the U.S. that had been dependent on manufacturing.
“The import of low-cost goods from China actually accelerated the reduction of employment and manufacturing in these states,” Mackle said. “This led to economic and other hardships in very localized areas.”
Criticism of China accelerated under the Trump administration, developing into the trade war. In mid-2018, before U.S. actions began, the average tariff on imports from China was around 3%. A year later, this had peaked at 21%, with China retaliating in kind. The Phase One agreement has reduced these tariffs to around 19% in both directions.
Although the aim of the tariffs was to help the U.S. economy, they have had the opposite effect, leading to reduced investment by U.S. firms, supply chain disruption and higher costs of goods. Oxford Economics estimates that the cost of the trade war to the U.S. economy has been US$108 billion – around 0.5% of GDP – and the loss of 245,000 jobs.
A second reason for the U.S. deciding to take action is due to China’s economic model, with “unfair” practices such as subsidies for SOEs and technology transfer demands. U.S. critics have also focused on the country’s trade deficit with China. But, as Mackle explained, there is no evidence that China’s unfair trading practices are the cause of the trade deficit, even though the Trump administration tended to lump together the two issues.
Ultimately, while the trade war did negatively affect the Chinese economy, it has not created any benefits for the U.S.
“The trade war failed to achieve its stated policy goals,” Mackle said. “First and foremost, it hurt the U.S. economy and reduced employment. Although the trade deficit with China did narrow slightly, this was offset by an increased trade deficit with the rest of the world.”
So what are the paths forward? Mackle noted that U.S. policymakers across the political spectrum are skeptical about China. So the current Phase One tariffs will likely remain in place, and there may be moderate decoupling in technology.
From this baseline, Oxford Economics has explored two possible scenarios: the first a de-escalation of the trade tensions with tariffs dropping to around 12%.
In an escalation scenario, tariffs could rise to 45% with more extreme decoupling, which would lead to a US$1.6 trillion loss of GDP to the U.S. This situation is unlikely, however, especially with Trump no longer in the White House.
Mackle noted that the Biden administration is focused on ideas like “buy American,” supported by government stimulus packages. “Further tariff increases are unlikely,” he said. “But we could see tariff wars replaced by subsidy wars.”
Bringing manufacturing home has been a policy goal of both the Trump and Biden administrations, but this may not be feasible. Trying to decouple from China in the electronics supply chain is not going to recreate the jobs that have been lost in the American Rust Belt, Mackle explained.
“There is a real shift in technology now,” he said. “If you repatriate jobs from countries where the cost of labour relative to capital is lower, what we have seen is rather than creating jobs, those jobs get replaced by robots. Robots that seemed expensive before, or that didn’t exist before, now seem very cost effective.”