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New Study Counts Cost of Sino-US Trade War

New Study Counts Cost of Sino-US Trade War

tHE INITIAL the two-year part of the “phase one” trade agreement between the Americas and China will expire on December 31. Neither country is in the mood to celebrate the occasion. Mutual antagonism is as fierce as ever; a new US law banning goods made with forced labor in Xinjiang is the latest flashpoint. Still, now is a good time to take stock of the economic results of the Sino-US trade war. The verdict remains negative for both countries, with one important exception.

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Start with the most glaring failure. As part of the phase-one deal signed on January 15, 2020, China pledged to import dramatically more from America by purchasing an additional $200 billion worth of goods and services in 2020 and 2021, compared to 2017 levels. Complaining about China’s manipulation of its economy, America demanded that it manipulate trade flows. It turned out that Chinese officials didn’t have the willingness or ability to pull it off. China will barely meet a tenth of its purchase target for goods, according to data collected by Chad Bown of the Peterson Institute for International Economics, a think tank. Even if we factor in pandemic-related disruptions, America’s strategy of persuading China to buy more of its commodities is disappointing.

More broadly, the trade war has hurt both the Chinese and US economies, as a growing body of research shows. The superpowers began hitting each other with tariffs in early 2018, giving economists two full pre-covid years of numbers to crunch. During that time, average US tariffs on Chinese imports rose from 3% to 19%, while average Chinese tariffs on US imports went from 8% to 21%. It’s hard to overestimate the shock to the world’s largest bilateral trade relationship. Pablo Fajgelbaum of Princeton University and Amit Khandelwal of Columbia University calculate that the tariffs were applied to even more trade as a share of U.S. GDP than the infamous Smoot-Hawley tariffs of 1930, which sparked a spiral of international retaliation and may have exacerbated the Depression. Fortunately, the Sino-US trade war has not resulted in such a disaster. Initially, the global economy was in much better shape. And price effects have been dampened by complex supply chains.

At the start of the trade war, a common assumption was that both sides would bear the cost of the tariffs: Chinese suppliers would charge a little less for their goods and American importers would pay a little more. Yet an early study by economists, including Gita Gopinath, is now of the IMF, found that US importers actually bore more than 90% of the cost of US tariffs. The obvious explanation was that they had little choice but to rely on Chinese suppliers, at least in the short term, and unable to negotiate lower prices. In addition, prices for consumers have barely increased, suggesting that retailers are absorbing costs through lower profits.

This couldn’t last, Ms. Gopinath and her colleagues wrote: At some point, US importers would pass on higher costs to customers. Chinese economists might gleefully point to the current rise in inflation in America to argue that it is happening now. On the margins, they are certainly right that rates can be inflationary, as even Janet Yellen, the US Treasury Secretary, has admitted. But dislocations caused by the pandemic — from microchip shortages to a fivefold increase in shipping costs — are much bigger factors in pushing prices up. The trade war is only adding to the headache.

One of the reasons America raised tariffs was to encourage manufacturers to settle there. Still, trade frictions have actually weighed on business investment in America, research by Mary Amiti of the Federal Reserve Bank of New York and others suggests. Share prices of companies trading with China performed particularly poorly following tariff announcements. This reflected lower returns on capital and, by extension, weaker incentives to invest. All things considered, annual investment growth of publicly traded US companies would likely have contracted by 1.9 percentage points by the end of 2020. The Federal Reserve Board’s Aaron Flaaen and Justin Pierce estimate that exposure to higher rates was associated with a 1.4% decline in US manufacturing employment. The burden of higher import costs and retaliatory duties outweighed the benefits of shelter from foreign competition.

So far, this may all sound like a win for China. But more recent papers show that she too has had setbacks. Due to a lack of detailed official Chinese data, Davin Chor of the Tuck School of Business and Li Bingjing of the University of Hong Kong studied satellite images of nighttime lights to gauge economic activity. Most of the Chinese population, they found, would have been unaware of the trade war. But for the export-intensive parts of the country directly affected, they estimate that tariffs led to a 2.5% contraction in GDP per person. Another approach taken by economists, including Beijing University’s Xu Mingzhi, was to look at data from 51job.com, a Chinese job platform. Companies that were more exposed to U.S. rates posted about 3% fewer ads and cut their salary offers by an average of 0.5% in the six months following rate increases. Chinese officials like to talk about bilateral cooperation as ‘win-win’. The trade war is lose-lose.

Eggs in more baskets

However, the trade war has been constructive in one respect. America’s imports from China are fractionally lower than before it introduced tariffs. By contrast, imports from Vietnam have doubled and those from Mexico have increased by 20%. Narrowly speaking, this could be a sign that trade is being diverted from more efficient producers in China to slightly less efficient producers.

But as a matter of business strategy, this seems sensible. One of the lessons learned from supply chains over the past year has been the danger of over-reliance on a single source. US companies can thank the trade war for starting the messy business of rethinking their supply chains. The course of Sino-US relations suggests they have every reason to accelerate the shift.

Read more from Free Exchange, our column on economics:
Has the pandemic shown that inflation is a fiscal phenomenon? (December 18, 2021)
Why the demographic transition is accelerating (Dec 11, 2021)
The explosion in stablecoins revives a debate around “free banking” (Dec 4, 2021)

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This article appeared in the Finance and Economics section of the print edition under the headline “Lose-lose Ordeal”