Effects of the US-China Trade War on Trade Balances

Effects of the US-China Trade War on Trade Balances
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Effects of the US-China Trade War on Trade Balances
The United States is one of the most developed nations in the world. Since gaining its independence over 200 years ago, the country continues to overcome a myriad of challenges and take advantage of different opportunities to cement its position as a global superpower. Over the years, the U.S., under the tutelage of different leaders, has been very strategic in its trade activities with countries not only within its borders, such as Canada but also those situated on far ends of the globe, such as China. Particularly, the U.S. has since World War II sort to promote and of enhancing its economic growth and competitiveness through reducing barriers to global trade and investment. The U.S., through its trade policy, has also been keen on the promotion of an open and transparent rules-based trading system. Through international trade, the U.S. manages to export products and services in which it possesses a higher and relative comparative advantage in the form of skills or resources and consequently, imports those that are inefficiently produced and unavailable in the region. These consultative efforts have seen the U.S. grow to become the largest economy in the world. Similarly, they have positioned the country as a popular destination for foreign direct investment. Some of the country's top trading partners include Canada, China, Japan, and the U.K. The U.S. Census Bureau ranks all these nations below the U.S. in terms of total trade in goods. Over the recent past, the U.S. has imposed harsh and stringent trade agreements that have adversely impacted the rankings of its trade partners and their balances. Some of these countries that have been greatly affected include China. The research paper examines in-depth the impacts of trade agreements and tariffs imposed by the U.S. since 2018 on China and highlight some of the causative factors behind the shift in the trade balances.
Analysis of U.S. Trade in Goods with China
The United States and China have been engaged in trading activities for many generations. The U.S. has, over the years, export products and services it harbors relative comparative advantage and, on the other hand, imports those that are inadequately and inefficiently produced and available in the country. It is estimated that the complex economic relationship between China and the U.S. started in the late 1970s when the two great nations signed a bilateral agreement to reestablish their diplomatic relations. Trade-in goods between the two nations grew rapidly since that period, from about $4 billion in terms of exports and imports to over $600 billion in 2017 (Ustr.gov, 2020). During that period, China's exports to the U.S. have transitioned from low-value products to adversely capital-intensive commodities. The Asian country is a major supplier of advanced technology to the U.S. and which is a highly demanded resource in the current global dynamics. Nonetheless, the trade deficit between the two countries has grown immensely over the years, with the U.S. importing more from China than it is actually exporting.
According to figure 1 below, the trade deficit between China grew to about $375 billion. This was quite an increase from $346 billion in the previous year (Census.gov, 2020). During that period, the U.S. exports to China amounted to $129 billion, while its imports were $505 billion (Census.gov, 2020). Economists and policymakers have offered various reasons for the growing trade imbalance between China and the U.S. These include unfair trade practices from China and the growing strength of not only the Chinese economy but also its production systems.
Figure 1. /foreign-trade/balance/c5700.html
From figure 2 below, the trade deficit between these two nations grew even more in 2018 to the tune of $418 billion. During this period, while the number of exports to China reduced by about $9 billion, there was a substantial increase in the products and services imported from China. According to figure 2, U.S. imports from China were $539 billion (Census.gov, 2020). This was a major cause for concern as it put the U.S. in a precarious situation in the sense that it was becoming overly reliant and dependent on products and services from China. As such, the U.S. government, under the tutelage of President Donald Trump, moved in swiftly to impose trade tariffs on Chinese imports. Since then, the Trump administration has exhaustively put in place stringent measures inclined at reducing the trade deficit and imbalance.
Figure 2: /foreign-trade/balance/c5700.html
The efforts of the Trump administration paid off as there was a significant decrease in the trade deficit in 2019 and as shown in figure 3 below. In 2019, the U.S. trade deficit with the Asian nation stood at $345 billion and which represented an 18% decrease from the previous year. The total U.S. exports and imports during that period were $106 billion and $451 billion, respectively (Census.gov, 2020). Some of the items the U.S. imported from China in 2019 include computers, cell phones, toys, clothing, and sporting items. This is because China is the biggest manufacturer of technological items. China also has an abundance of raw materials needed for the manufacture of apparel and sporting commodities. China also benefits from the many U.S. companies that send their raw materials to the country to benefit from the low-cost assembly. China has lenient labor and employment laws with a low minimum wage that entices manufacturing companies globally. The items from the U.S. companies once shipped back into the country from China after assembling are deemed to be imports and consequently, increase the trade deficit. The U.S. also imports different agricultural products from China, including processed fruits and vegetables, spices, herbal tea, and snack foods. Reports further indicate that the U.S. imported about $20 billion worth of services from the Asian country in 2019 and which represented a 5.4% increase from the level in 2018 (Census.gov, 2020). Primarily, the U.S. imported services in the research and development sectors and the travel industry.
On the other hand, the U.S. majorly exports soybeans, semi-conductors, and commercial aircraft parts to China. The Asian nation is currently the 3rd largest agricultural market of United States' agricultural products, with the likes of cotton, pork, hides, and skin being top of the list (Green & Zessoules, 2019). It is estimated that the U.S. exported a total of $14 billion in agricultural products to China in 2019. Additionally, the U.S. also exports various services to China. In 2019, it was reported that the U.S. exported about $56 billion worth of services and which was more than a 200% increase from the level in 2009. Some of the leading services exported to China are in intellectual property that covers items such as trademarks and industrial processes in the transport sector.
Figure 3: /foreign-trade/balance/c5700.html
The initiatives employed by the Trump administration, coupled with other factors, have played a huge part in reducing the trade deficit and balance even further in 2020. The total U.S. exports and imports as of October 2020 amounted to $95 billion and $348 billion, respectively (Census.gov, 2020). This represented a trade deficit of $252 billion, a sharp decrease from $345 billion in 2019. One of the other factors that may have caused a sharp decrease is the coronavirus pandemic that continues to affect many parts of the globe. With nations instituting stringent measures to curb the spread of the virus, including lockdowns and restrictions on movements, trade activities between China and the U.S. have gravely affected. The U.S., for one, has had to look into its local market to complement the shortage of goods and services that were previously sourced from China. This, in turn, has helped to reduce its overdependence on the Asian region.
Factors/ Policies behind the shift in Trade Balances between China and the U.S. since 2018
As it has been highlighted in the previous section, U.S. trade with China has grown immensely since the two nations signed a bilateral agreement in the late 1970s. Particularly, the trade had increased drastically from $125 billion in 2001 when China ascended to the World Trade Organization to more than $700 billion by the end of 2017 (Myers et al., 2019). China has been the chief beneficiary of the trade relations. Its economy has not only quadrupled, but it has transitioned from the 4th largest economies in 2001 to one of the global giants today. The Asian nation accounts for about 16% of global activity and is responsible for close to 50% of global marginal growth (Gertz, 2020). During the same period, the U.S. had also grown overly dependent on Chinese products and services, resulting in an ever-increasing and widening trade deficit, as shown in figure 4 below.
Figure 4: /foreign-trade/balance/c5700.html
The progressive evolution of China, coupled with the huge trade imbalance, prompted a shift from the U.S. viewing the country as a partner to a competitor. It was highly important for swift measures to be implemented by the U.S. government to remedy and rectify the position. As such, the Trump administration deployed several measures in that regard.
The Trump administration not only blamed China for unfair trade practices but also for the theft of intellectual property. As such, to force the Asian nation to make changes, the administration started setting tariffs and other trade barriers. According to Myers et al. (2019)," Trump has advocated tariffs to reduce the U.S. trade deficit and promote domestic manufacturing, saying the country was being "ripped off" by its trading partners; imposing tariffs became a major plank of his presidential campaign". Various economists and policymakers who support the tari...