INRL 300 Case Memo: The U.S.-China Trade War
Poojitha Tanjore
Introduction: The Trade War
The tense relationship between the People’s Republic of China and the United States has caused many to turn a blind eye to policy decisions out of frustration. However, as the U.S.-China trade war escalates, we can no longer ignore the ways in which it impacts daily life and global politics. With the announcement of sweeping tariffs under the Trump administration in 2018, relations between the countries have begun to deteriorate. The U.S.-China trade war is a prolonged economic battle with a retaliatory dynamic. In analyzing the interrelation of the historical, economic, and political implications of the U.S.-China Trade War, we can address the trade war and the opportunity for reform that the trade war holds.
Historical Analysis
Although the U.S.-China diplomatic relationship began with the establishment of the People’s Republic of China, the U.S.-China trade war began in 2001 when China entered the World Trade Organization (WTO). China’s entry as a quickly growing economy brought U.S. opinion to the forefront. Despite tensions prior to 2001 between the two countries, the U.S. believed that China’s entry into the WTO would allow the U.S. more access to China, an increased “rule of law” in China, and potentially “no downside” (Lighthizer, 2016). However, historical ignorance of Chinese commitment to mercantilism, financial incentive for U.S. firms to shift abroad, and the strength of the Chinese economy to overcome the initial “triumph of democracy” brought by joining the WTO has led to years of turmoil (Lighthizer, 2016).
China’s use of foreign ownership restrictions, technological regulations, investment in foreign companies to obtain intellectual property, and intrusion into foreign networks are the four core concerning actions taken by China as cited in the Hillman Testimony (Hillman, 2018). The global community made monumental mistakes that have cost the economy today by poorly preparing the scope of WTO rules. Although these mistakes are now history, through expansion of WTO jurisdiction it is possible to deter China from dominating the global community and temper the trade war (Lee, 2018).
Economic Analysis
In 2018, the U.S. imposed three rounds of tariffs on China totaling more than $360bn. In retaliation, China imposed $100bn of tariffs on U.S. products. This trade war, especially through rounds of tariffs, has had immense economic implications such as rises in consumer goods prices, deadweight loss, and obstacles to production (Hufbauer and Jung, 2018) for both countries. More specifically, U.S. manufacturing suffered as the price of intermediate goods from China hiked up supply costs. It became more difficult to sell U.S. goods in the Chinese market, causing a drastic loss of sales (Lardy, 2020). On China’s end, official reports have stated that China’s economic growth has decelerated to its slowest pace since 1992 (Deng, 2019). Additionally, China’s exports declined substantially relative to previous years, as seen by the $5.6 decrease in exports to the U.S. in June 2019 (Ludwikowski, 2019). In 2019, China’s industrial output fell to the lowest in 17 years (Myers, 2019). More than indicative of the economic relationship between the U.S. and China, the trade war foreshadows tense economic relationships that can arise without expanded WTO trade regulation in the dispute settlement process.
Despite the global economic growth catalyzed by the rise of China, the trade war is still concerning due to its negative effects that seep into the global economy. Despite the fact that the economic tariffs in the trade war are legal, the actions are often a retaliation toward other illegal activities. Most of China’s WTO cases fall into three categories: providing illegal state subsidies, discriminating against foreign goods and suppliers, and controlling supply chains (Wu, 2016). The U.S. has grown increasingly frustrated with these actions, along with technological hacking and other illegal actions taken by China. The United States has also made many mistakes as indicated by their outstanding cases at the WTO, some of which the U.S. has chosen to ignore (Wu, 2016). Both countries have contributed to the economic chaos, which is enabled by the lack of comprehensive WTO rules such as increased rules on state-owned enterprises, foreign theft of IP, and other policies that can ensure both the U.S. and China are steered toward a market-oriented direction. The trade warr brings light to many of the WTOs infrastructural flaws, demonstrating the need to expand economic market regulations to prevent this trade war from further impacting the global economy.
Political Analysis
China’s economic growth has caused political conflicts within the WTO and has altered the shape of China’s diplomatic relations (Lighthizer, 2016). The blurred lines between China’s state-owned entities and the links that run through the Communist Party may be economic problems, but they require political analysis as the WTO copes with regulating them. As Wu said in her China Inc. paper, “At its heart, the problem is political rather than economic: do we seek a “one-size-fits-all” set of multilateral trading rules?” (Wu, 2016). The ambiguous nature of China’s political state and its corresponding economic actions beckon new trade rules however, the scope of those rules remains unknown.
The political complexity of China causes problems on a global scale which are worsened when China and the U.S. interact as political entities. In 1979, the two countries saw the development of ties through common initiatives to combat pandemics, WMD proliferation, trade, and climate change (Swaine, 2019). These common goals seem nearly foreign today as both China and the U.S. contribute to negative rhetoric about one another. From the U.S. withdrawal from the Paris Climate Accords in 2017 to China’s use of technology to infiltrate the U.S. networks in 2009 to acquire data through Operation Aurora, diplomatic relations have turned negative. Exacerbating the political conflicts between the two countries is Trump’s assertion that China has grown at the expense of U.S. success. This rhetoric is used to mobilize economic policies, such as the sweeping 2018 tariffs. The complicated political nature of China and its political relationship with the U.S. is cause for concern, and both factors contribute to the trade war.
The Future of the Trade War: Reforming the WTO
The U.S.-China trade war shows that any country can fall victim to poor economic diplomacy when an overarching institution does not regulate trade. Although it is clear that politics and economics play a large role in the trade war, the fact that the WTO has not yet addressed China’s actions through expanding WTO regulation is astounding. This historical blunder enabled the trade war to occur through not limiting China from questionable actions and the U.S. from side-stepping cases. The trade war is a product of weakness exhibited by the WTO allowing both countries to fail the goals of the WTO and global markets. (Lighthizer, 2016). Since the WTO is merely a coalition of countries that must mobilize reform together, the only policy that all countries would back is one that makes the U.S. and China subject to trade regulation.
There is an opportunity at present to broaden WTO trade regulations to be preventative and fair (Huang, 2018). Properly addressing state-owned enterprise and keeping the sanctity of free markets are the two avenues through which to address the trade war (Bacchus et al. 2018). In doing so, the U.S.-China trade war may soften as both countries are subject to new regulations that keep them from taking advantage of the other and mitigate the illegal actions that occur. It should have been obvious that the WTO needed to expand reforms to keep up with its spirit as a global trade facilitator when China entered the WTO as a “nonmarket” economy and with charges of piracy of intellectual property (Hughes, 2018).
The Future of the Trade War: U.S. Leaves the WTO
U.S. reaction to the U.S.-China trade war may result in the U.S. leaving the WTO. The WTO’s goal is to help member countries gain nondiscriminatory access to markets through establishing a framework of rules for the trading system. However, the U.S. frustration with the trade war and the WTO allowing for trade violations on China’s end to occur has caused U.S. leadership to discuss leaving. The U.S. leaving the WTO would alter trade diplomacy drastically, according to trade experts at the Peterson Institute for International Economics. The U.S. could lose its Most Favored Nations (MFN) status, which allows U.S. access to the economies of 20+ countries (Costa & Cimino-Isaacs, 2016). Additionally, nondiscriminatory MFN tariffs would be redacted, meaning that countries could apply tariffs to the U.S. economy as they wish. It has been predicted that the U.S. leaving the WTO would result in a 96% decrease in access to world customers, meaning that U.S. exporters would have an even bigger cost advantage when competing in foreign markets than if they stayed in the WTO (Costa & Cimino-Isaacs, 2016). Leaving would not only result in dangerous outcomes for the U.S. economy, eliminating access to forums through which trade disputes are resolved (Costa & Cimino-Isaacs, 2016).
The Future of the Trade War: Trump’s Strategy
The Trump Administration’s strategy is to escalate the trade war through pressuring China’s economy and reducing China’s presence in the U.S. until China abides by WTO rules (Ward, 2018). Steve Bannon, Trump’s former top strategist and a self-proclaimed China hawk, has called this strategy “economic warfare”. This strategy remains an option for the U.S. in addressing the U.S.-China trade war, but it has shown to increase tensions between the two nations. China’s retaliations as shown through retaliatory tariffs, includes relaxing sanctions against North Korea, and moving closer to Moscow and Tehran (Ward, 2018).
China’s retaliatory tariffs indicate that no matter the economic pressure from the United States, they will continue to assert their dominance. The end of Trump’s economic warfare may come with the end of his Administration. However, public opinion has already been influenced by the two countries’ rhetoric against one another that it is possible for this trade warr to continue longer (Ward, 2018). Trump has rejected the strategies of predecessors like Bush and Obama that include discussing mutually important issues and opening up trade. Trump is keen on tariffs, eliminating Chinese Communist Party funded resources at educational institutions in the U.S., and promoting all that will curtail imports from China (Ward, 2018).
Conclusion
The US-China trade war has brought global economic regulatory issues to the forefront. Although leaving the WTO and Trump’s policies are two ways forward for the U.S, they are not resolutions to the Trade-War. Through expanding the legal terms of the WTO in resolving trade disputes, hopefully both the U.S. and China will have to play fair. The call by the global community for the WTO to expand its jurisdiction is vital to ensuring mutually beneficial outcomes for the U.S. and China, as well as ensuring healthy economic relations between other member countries. The US-China trade war’s impact spans the globe, not merely through direct trade fluctuations, but also through bringing to light complicated economic issues that must be addressed.
Works Cited
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POOJA TANJORE 