The U.S.-China trade war reads like a poorly written political script: leaders spew vigorous polemics at each other, denounce policies made by the other while adopting those same policies, and take flawed actions that actually only hurt their own citizens. What the script reveals at the end, however, is not a scene where the protagonist flies off happily ever after in a grand resolution. Instead, the story continues indefinitely, causes a global downturn, alienates allies, and establishes a dangerous precedent of divorcing sound trade policy from foreign policy.
With the recent round of trade talks aimed at resolving the trade dispute between the United States (U.S.) and the People’s Republic of China (China) coming to an end, both sides have expressed that “new progress” was made and the talks were “constructive.” However, what these conciliatory comments ignore is the fact that the crisis was first brought about as a result of misunderstanding economic concepts and neglecting international dynamics. While the U.S. is home to the largest economy in the world, its growth is marred by superficial and unsustainable policies—such as the recent levying of tariffs—that will likely prove to be long-term detriments to the U.S. economy. This trend is best captured in U.S.-China trade relations, recently stained by hostile trade policies that assumes a U.S.-China trading partnership made decades ago while ignoring sound economic and foreign policy.
A Primer on the U.S. Trade Deficit
On the trade balance, Adam Smith once wrote that “[it’s] unnecessary to lay extraordinary restraints upon the importation of goods from those countries with which the balance of trade is supposed to be disadvantageous. Nothing, however, can be more absurd than this whole doctrine of the balance of trade.” Trade deficits occur when a country imports more than it exports. In macroeconomic terms, a country’s exports minus its imports is equal to savings minus investment. In the wake of the Tax Cuts and Jobs Act of 2017 and tariffs levied against products such as steel, aluminum, and other Chinese goods, the U.S. trade balance has reached unprecedented levels, widening to $891.3 billion. Trade imbalances with China account for almost half of that number, rising to $419.16 billion for 2018. But analyzing these numbers in a vacuum as some are apt to do risks adopting the same flawed reasoning that has led to U.S.-China tensions.
Multiple elements can influence the trade deficit, such as more government spending, the exchange rate of the dollar, and a growing economy. In the U.S. context, the stability and size of its economy encourages increased purchases of American assets, appreciating the dollar. As the dollar strengthens, foreign goods become cheaper to purchase and American consumers buy more and save less. In the shadow of weakening global growth, financial and trade conditions internationally have contracted while the consumer-driven U.S. economy continues to expand, contributing to the deficit. Additionally, increased government spending over the past several years has also widened the deficit.
As economist Martin Feldstein notes, it often becomes politically expedient to blame the trade deficit on unfair practices adopted by foreign governments. While it may be correct to assert that governments such as China do engage in improper economic activities, constraining those countries’ access to U.S. products or markets will not drastically change the trade balance. This may be considered a legitimate negotiating strategy, but a belligerent trade policy that adopts this fallacious attitude damages important country relations and harms domestic consumers, making the costs greater than the benefits.
Trade deficits are not inherently bad nor are they good. It’s important to note that sustained imbalances can harm the economy, such as contributing to slow growth and destabilizing financial bubbles. A larger trade deficit provides a challenge in increasing employment and sustaining economic growth. However, the U.S. has experienced remarkably low unemployment rates and consistent economic growth.
In a two-country scenario, large trade deficits can lead to irreversible damage to the U.S. economy. However, despite what some may believe, no country exists in this bilateral sphere. To identify trade imbalances--such as the one between the U.S. and China--as the greatest economic issue is to incorrectly identify the appropriate factors influencing the economy and country relations.
Historically, due to its size and influence, the U.S. may have operated in a global environment closer to the zero-sum world that the Trump administration has painted a picture of. However, the international terrain has shifted, with China possessing more market power and global impact.
The ‘Rise’ of China: What’s the Alternative?
Over the course of 2018, the Trump administration imposed tariffs on at least $200 billion of U.S. imports, with tariff rates ranging from 10 percent to 25 percent. Targeting strategically significant industries, such as steel and goods important to China’s “Made in China 2025” program, this marks the first U.S. trade war seen since the 1930s. President Trump cited unfair terms of trade, the large trade deficit, and discriminatory trade practices by China as the primary reasons behind the recent trade policies. In response to this, several countries, notably China, have levied retaliatory tariffs on at least $121 billion of U.S. exports.
Written in the shadow of these recent tariffs, several studies assert that U.S. consumers are hit hardest by trade tariffs. Economist David Weinstein found that, in the wake of the trade tariffs recently implemented, the full incidence of those tariffs has been passed through to domestic consumers. In an effort to mitigate this, the Trump administration has encouraged Americans to switch to alternative suppliers, believing that if Americans do this, the burden of $200 billion of tariffs against Chinese goods will be paid only by foreign firms. However, if this was possible, it would have happened already. In the short-term, Americans cannot find viable alternatives to the competitive goods that China producers offer.
This suggests that over the past decade, a shift in the global economy has occurred, affording more market power to Chinese firms. As International Monetary Fund data indicates, China currently makes up 19.18 percent of the world’s GDP (in Purchasing Power Parity) in comparison to the U.S.’s 15.01 percent. Additional Chinese geopolitical strategies through the use of markets, infrastructure, and foreign aid continue to strengthen the country’s position in the global community. These actions are what has led some to comment that China is on the ‘rise.’ To use this fearful expression is a misnomer that ignores the fact that China and its influence has always been present on the global stage. However, similar to what President Trump is espousing now, China has historically looked inwards instead of outwards. The change in China’s current international strategy and their increasing presence has prompted a reactionary and protectionist response from the U.S., perpetuating an already weakening U.S. presence.
Driven by substantial economic growth over the past several decades, Chinese producers have become key contributors in the global supply chain created by globalization, further solidifying their position in the global economy. As the investment bank Morgan Stanley comments, “the integration of supply chains both domestically and globally has meant that any trade measures implemented on a single country or sector will likely ripple outward to other regions and sectors.” Action taken in one corner of the world affects the entire world. This economic and political shift in China’s market power and its trade partner ‘elasticity’—meaning that there is increasing market power for Chinese producers and a growing array of markets able to substitute for the U.S.—allows producers to avoid importation prices and instead push a majority of the burden towards U.S. producers and consumers. The U.S. remains the largest economy in the world but stands a close second in production. Poor trade, economic, and foreign policies have allowed other countries, such as China, to inch closer to surpassing the U.S. in influencing the complex web of global supply chains.
Hostile trade and economic policies implemented by the U.S. risk alienating trading partners significant to the U.S.’s economic and international presence. Economic structures and relations form the body that social and political institutions dress. While the validity of those economic structures is a topic that deserves its own lengthy discussion, the reality is that the emergence of economic substitutes to the U.S. weakens its already lackluster presence in the international community. Similar to what countries in the past have done, China is simply capitalizing on the U.S.’s weakening international presence and is pushing towards a softer expression of power to increase its influence. The trade war instigated by the U.S. against China and other countries risks solidifying this.
Divorcing Trade Policy and Foreign Policy
In the report “Beyond the Water’s Edge” by the Center for Strategic and International Studies, researchers found that many U.S. Congressional members appeared to “view trade issues as distinct from foreign policy.” While it appears to be a concession to the conflict between domestic and international policies, the Trump administration has adopted this perspective, furthering global tensions and diminishing the U.S.’s influence.
Even though the Trump administration asserts that the U.S. economy has been running at a deficit for far too long, the U.S. has underpinned multilateral global policy cooperation efforts since World War II as a result of that deficit. A tightening of trading policy harms not only the global economy but the U.S.’s international status.
The U.S. economy currently provides a majority of liquidity to the world economy while simultaneously driving demand. This has contributed to the large trade deficit as discussed in the previous primer on the trade deficit. Ruchir Sharma, head of emerging markets and chief global strategist at Morgan Stanley Investment Management, argues that by maintaining the deficit and consequently its position as the de facto reserve currency, U.S. international borrowing costs are lowered and its Gross Domestic Product (GDP) growth is heightened. The dollar has served as the most popular global reserve currency and, as Council on Foreign Relations’ James McBride and Andrew Chatzky contend, as the “primary tool for global transactions.” Because it is the de facto reserve currency, other countries use the dollar as the primary currency in their foreign exchange reserves and some even peg their own currencies to the dollar. These reserves are used in the global economy during transactions and investments. Because of these reserves, U.S. influence in the global economy and greater international stage remains profound.
By pretending that trade policy and foreign policy doesn’t exist in conjunction with each other, the U.S. risks placing itself in the economic and political vacuum it’s created. This directly stems from a fundamental misunderstanding of economic dynamics and how it relates to international relations.
Looking Forward
It’s been said before: the ‘rise’ of China is threatening the current global order. In the wake of increasing tensions between previously friendly countries, China is becoming a more legitimate alternative to an often hostile and unpredictable U.S. administration. Instead of lashing out with poor policies that perpetuates this--such as levying harsh tariffs, backing out of the now defunct Trans-Pacific Partnership (TPP), and swelling the budget deficit--the U.S. should focus on reaffirming economic relationships with those they have marginalized. While there are trade-offs inherent in every economic action taken, multilateral trade deals such as the TPP can be used to counter China’s growing influence without estranging countries who have depended on the U.S. in the past. But while these approaches are legitimate in their prescription, such suggestions imply that a rising China is dangerous to the U.S.
Somewhere far back in the annals of history, someone once convinced us that a unipolar world was the only viable goal for countries. However, the U.S. should reject the notion that the international stage is a pragmatic game of chess with antagonists standing at opposite sides of a board. Most—though they may not admit it—are tired of this narrative or, rather, they should be tired of it. The U.S. should engage with China, join its international initiatives, and continue to establish itself as a leader standing among leaders. If the U.S. is attempting to influence China and its policies, working alongside China instead of against it is the best approach the U.S. can take. Hostile trade and diplomatic policies only succeed in alienating those closest to us and entrenching stereotypical narratives about those who are not. Beyond a ‘rising’ China, the most effective foreign policy that the U.S. can adopt is to engage in multilateral endeavors and strengthen its relationship with other countries through positive economic and international agreements.
Separating trade policies and international relations is a fallacy that disrupts the global economy. Trade policies should affirm relationships with other countries, forcing those countries and individuals to work together for mutual goals. Failing to acknowledge this--or ignoring this--isolates the U.S. and strains global dynamics. The U.S. is still the largest economy in the world and wields immense power in the international community. To implement policies that act as if this isn’t true lacks a depth of understanding and causes the U.S. to become smaller on an already crowded global stage.
An administration that clings to the tattered sleeve of a vacuous economic practice devoid of international context runs the risk of further weakening its position in the world. The Trump administration has made reducing the U.S. trade deficit a key policy position, looking at the global economy through two-dimensional lenses. However, hostile policies ignore the multidimensional nature of foreign policy as facilitated through economics. Instead of implementing policies that could better global relations, the administration has established itself among elitist economists and politicians who are either ignorant or feign ignorance in order to achieve ideological goals. And yet, somehow, the U.S. still hasn’t managed to lessen its trade deficit.
Note
Because there are topics mentioned deserving of their own discussion, this article only seeks to understand and explain the misconstruction of economic elements and the failure to incorporate those elements holistically into international relations. It’s important to acknowledge those subjects that have not been elucidated upon in order to continue having conversations about these issues. There have been several subjects that have been offered in the context of the discussion that have not been appropriately expanded upon:
This article does not seek to specifically only comment on the veracity of trade policies such as tariffs, but instead examines the economic dimensions in which these policies exist and the theoretical failures that have followed. For example, the usage of the dollar as a de facto global reserve currency supports U.S. influence in the international community. However, the article did not ask whether or not that influence has been correctly wielded.
The article does not comment on the geopolitical strategies adopted by China. While often accused of using ‘debt-trap diplomacy’ to gain power, some would assert that these policies offer alternatives to monopolistic initiatives that are arguably an extension of neocolonial practices.
Finally, the article does not comprehensively comment on the impact of a large trade deficit and liberal trading policies. These policies and practices create positive benefits for consumers, such as contributing to lower product prices, higher overall standards of living, and so on. However, these same policies have arguably led to the consolidation of capitalism and the crystallization of inequality, environmental degradation, etc.