US-China Relations and what it means for the global economy

Last week, the United States ordered the Chinese consulate in Houston, Texas to close permanently – giving them just three days to do so. The Justice Department claimed that the “outpost” was a refuge for spies, stealing sensitive information from the Texas A&M Medical System as well as the University of Texas Anderson Cancer Center. Almost immediately, China ordered the same fate for the U.S. Consulate in Chengdu. The hostility marks a potentially irreparable turning point in a period of rising tensions between the two countries who together represent forty percent of global output. 

Even after the closures, each still operates four consulates and one embassy in the other’s country.  The souring of the relationship, despite signs of amends as recently as January, leaves little hope for further trade agreements. The result beckons a climax that might not only impact the countries themselves but also the structure of the global economy. 

What Happened? 

The United States and China have forged remarkably close economic ties ever since the former’s President Richard Nixon normalized relations between the two countries in 1972. China exports more to the United States than any other country; at the same time, China is the US’ third-largest export partner. This entwined relationship creates massive opportunities on both sides of the Pacific. In 2018, exports to China supported the employment of over one million people in the US. American companies, from General Motors to Apple, support Chinese jobs through manufacturing, an industry that contributes 29.1% of the country’s GDP. 

However, in 2016, Donald Trump was elected on a platform of foreign-distrust and rebalancing the United States’ heavy trade deficit. In 2018, the Trump Administration began a trade war with China leading to an increase in tariffs and a shrinking of profit margins. 

Education is one of the US’ largest service exports to China; in the 2017/2018 academic year, universities in the United States educated 363,000 Chinese students – a third of the total international student population. However, Chinese students in the US – the number of which has risen 350% from a decade earlier – have also been under close US government scrutiny. 

According to the Economist, the FBI “contacted hundreds, perhaps thousands, of students, researchers and professors with ties to China” under suspicion that they might be committing intellectual property theft and working for the Chinese Communist Party (CCP). 

The Trump Administration’s mistrust, therefore, extends beyond the bounds of the trade deficit and represents a more comprehensive backlash against China and Chinese nationals. The administration has tightened rules on visas for Chinese students, especially those concentrating on subjects related to the CCP’s “Made in China 2025” policy, such as aeronautical engineering and biomedicine. 

Although these claims may seem entirely contrived by an administration who seems to have little in terms of long-term strategy, they are perhaps not completely unfounded. Recently, a Chinese researcher was arrested after trying to smuggle biomedical material back to China from Harvard University. The National Institute of Health (NIH) has also claimed that at least some researchers to whom it awarded grants have “established shadow labs in China mirroring their NIH-funded ones in America.”

Although it seems the Trump Administration’s suspicions are perhaps not entirely unfounded, their response has been appallingly mishandled. Even though education-related exports to China are still growing, it is becoming increasingly difficult for Chinese nationals to gain entry into the country. According to China’s Ministry of Education, “more than 10% of students sponsored by the government […] were unable to travel to the US due to visa problems. Additionally, the U.S.-China Business Council points to trade tensions as the cause of more than one 100,000 job losses in 2018 in the US. 

Despite rising tensions, Trump signed a first phase trade agreement with China in January of 2020. The agreement left tariffs temporarily at higher levels – around 20% – and instead aimed to rectify some longstanding disagreements between the two countries. For instance, China agreed to strengthen intellectual property protection and increase purchases of US manufacturing, energy and agricultural goods by at least $200 billion over two years. 

Since then, however, tensions have further soured as Trump sought to shift blame for his poor handling of Covid-19. China has itself been in the limelight recently as a result of the Hong Kong Democracy Protests, flagrant Human Rights violations in Xinjiang, and its authoritarian presence in the South China Sea. 

As a result, a Phase 2 trade agreement is practically off the table. The President’s “Art of the Deal” skills in negotiation leave tariffs on US exports to China around 12% higher than they were when he took office. 

Impact on the Global Economy 

The trade war between the two countries will likely have an extensive global impact, especially in countries with deep economic ties to China and the United States. Although the largest effects will be felt within these two countries, restructured trade routes will inevitably create winners and losers. 

The Associated Press reported that Brazil and Argentina experienced a sales boost on certain agricultural products as a result of Chinese import tariffs on the US. On the flipside, US tariffs on Chinese manufacturing will harm smaller Asian countries who provide raw materials and components to the Chinese Industry.  

The Peterson Institute for International Economics forecasted in Autumn of 2019 how the global economy would adjust to the US-China trade war. The model, based on a time horizon of three to five years, studied how different scenarios would impact global trade using tariff rates implemented and proposed at the time of writing. 

In the base scenario, American exports to China would decrease by 7.32%, while Chinese exports to the United States would decrease by 5.61%. Global trade routes would adjust to reflect these changes and re-route trade. For instance, China’s exports to Europe would increase by 2.26% while Europe’s exports to the United States would increase by 1.51%. Consequently, most other countries would be better off in terms of absolute welfare as a result of an adjustment in global trade routes, but only by a fraction of a percent.

Mexico and Canada, who join the United States in the North American Free Trade Agreement (NAFTA), would see real exports decline in line with the US. Depending on the extent of tariffs, all three countries would see real exports decline by 0.25% to 1.05% 

All told, The Bank of Finland estimated that tariffs would slow global GDP by 0.7 percent in the base scenario and 2.0 percent in the adverse scenario. Mirroring these findings, the OECD suggests global GDP would slow by 0.6%. 

Conclusion

The Trump Administration’s trade war with China is likely more of a political scheme than an economic strategy. Nonetheless, tensions with China have been rising on both sides of the aisle and mark a rare point of bipartisan consensus. Joe Biden, the Democratic frontrunner in the 2020 presidential election, is also running on a platform of “getting tough with China.”

Tensions are growing as well throughout the world, as countries condemn the treatment of Uyghur minorities in Xinjiang’s forced labor camps, the stifling of democracy in Hong Kong, disputes in the South China Sea and Trump’s handling of the Coronavirus pandemic. As tensions and confrontations rise between the US and China, one thing is certain: the world is watching.  

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