The China–US Trade War

Guoyong Liang, Haoyuan Ding

• Publisher: Routledge
• Year: 2020
• ISBN:
  9781000165067
• Edition: 1
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

An unprecedented trade war broke out between the world's two largest economies in 2018 and escalated subsequently. It is the first major economic conflict to occur in the era of globalization, with its aftermath going far beyond trade. The trade war weighs heavily on China and the United States and threatens the world economy and the global trading system.

This book provides a timely account of the China–US trade war with insights into its causes and consequences. Examining through the lenses of both history and theory, it analyzes the context and causes of the trade war, the intertwined processes of tariff combat and trade negotiations, and the impacts on international trade, foreign direct investment, macroeconomic performance and firm behaviour. It also addresses the long-term strategic and geopolitical implications of the ongoing trade and economic confrontation.

This book will appeal to those interested in international economics and politics, global governance and development.

1
Trade wars

Review of history and theory

Weapons are inauspicious instruments, not used by the gentleman.

– Lao Tzu

Both historical and theoretical perspectives are needed to understand a trade war – its causes, processes and impacts – and to deal with it effectively. After a brief conceptual discussion, this chapter reviews history and theory about trade wars. The historical section of the chapter pays particular attention to the evolution of international trade policies and domestic trade politics of the United States, which have led to several major trade conflicts during the past century or so. The theoretical section of the chapter first provides a review of the existing literature in international economics, which helps us understand why trade wars break out and what their welfare effects are. It then presents the game theoretical approach, explaining how trade wars are fought and where they end.

1.1 The concept

“Trade wars” are international economic conflicts where two states use unusual restrictive measures to affect imports of goods or services from each other in order to achieve certain economic objectives. This definition distinguishes trade wars from trade disputes, where states use normal restrictive measures such as anti-dumping and countervailing within a framework of multilateral rules, and trade sanctions and embargoes, which are often more severe and driven by international political considerations. The restrictive measures used by states in a trade war are normally special, additional and punitive tariffs, which are intended to generate a negative impact on the original imports of goods and services from a certain trading partner. Indeed, a trade war often aims to exert influence over trade flows and therefore improve the balance of trade. However, there might be other objectives beyond trade, such as technology, industry and employment.

“Trade wars” are bilateral in nature, though more than two countries or economies could be involved in one conflict. Using tariffs and other economic means, states fight and retaliate against each other, and bargain and negotiate between themselves. These interactive characteristics demonstrate some similarities between a trade war and a real war. The imposition of tariffs and other unusual restrictive measures by a country are against the will of its trading partner, and these economic “weapons” are part of an arsenal for economic “warfare”. As mentioned earlier, the tariffs are special, additional and punitive, and sometimes refer to the related legislation that provides legitimacy to their introduction.

The emphasis of economic means and objectives in the definition of trade wars does not mean that they are apolitical. On the contrary, trade wars are political both within a country and internationally. Within a country, domestic politics related to trade and trade protection can lead to policy decisions in favour of a trade war and affect policy stances for trade negotiations. Between countries, the initiation, escalation, de-escalation and finalization of trade wars involve a complicated process of international political interactions.

1.2 Trade wars and politics: a brief history

Early trade wars during the 17th–19th centuries

Historically speaking, trade wars often involved the world’s major economic powers and trading nations, related to their rise and fall in the global landscape. Trade wars emerged as early as in the late medieval period, such as those between England and the Hanseatic League. During the 17th, 18th and 19th centuries, a number of major trade wars broke out, involving the world’s major economies and trading nations at that time, such as the United Kingdom and France. These trade wars included, for instance, the Anglo-Dutch trade war and the Anglo-French trade war (see e.g. Conybeare, 1985, 1987). Rising nationalism, mercantilism and protectionism led to serious trade conflicts, as well as escalating warfare and shifting hegemony.

These early trade wars occurred within a broader economic and strategic context, sometimes involving the straightforward banning of imports and exports of certain goods. During 1615–1617, a brief trade war, due to the so-called Cockayne Project, was fought between England and the United Provinces of Holland (the Dutch Republic). The Anglo-Dutch trade war took place against the background of economic rivalry and military conflict between the two countries (Wilson, 1957). England banned the export of unfinished cloth, and the Dutch retaliated by banning the import of finished English cloth. The trade war later escalated to a broader commercial and geographical coverage, before the economic rivalry extended to naval warfare (Hinton, 1959). As a result, the Dutch economy was in a state of decline by the end of the 17th century, and so was its maritime and commercial supremacy.

There had long been economic conflicts between England and France. In 1664, Jean-Baptiste Colbert, the French minister of finance under Louis XIV, started to change the tariff system, which considerably raised tariffs on imported textiles. In 1666, English woolens were prohibited, and one year later, tariffs on textiles doubled. Colbert’s policy efforts drew on the ideas of mercantilism, which sought to ensure that exports exceeded imports and thus to accumulate wealth. Colbertism has become a synonym of mercantilism and protectionism. England retaliated by raising duties on French wine and started to negotiate with the French side (Priestly, 1951). However, trade diplomacy did not work, and the Anglo-French trade war rapidly escalated. Despite efforts to end the trade war in the Treaty of Utrecht in 1713, bilateral tariffs remained high during most of the 18th century. After the 1820s, the trade relationship between the two countries started to improve. In 1836, particularly, the French side abolished some imports prohibitions and reduced tariffs on major British imports, such as cotton yarn, iron products and coal (Ratcliffe, 1978). Finally, the Cobden-Chevalier Treaty in 1860 led to, on the French side, the removal of all prohibitions and a general reduction of tariffs, and, on the British side, the admission of duty free goods except for French wine and spirits. In 1881, the treaty was replaced by a most-favoured nation (MFN) convention.

Evolving US trade policies since the beginning of the 20th century

The United States became the world’s largest economy at the end of the 19th century, and then turned into the world’s number one power after the two world wars. From the long-term historical perspective, the US trade policy has been constantly evolving, reflecting not only economic interest considerations and domestic politics, but also its global leadership and diplomatic influences.

During the first half of the 20th century, the US trade policy went through a fundamental transformation from protectionism to reciprocity, and then to the establishment of multilateral trading system. The 1922 Fordney-McCumber Tariff Act and the 1930 Hawley-Smoot Tariff Act raised the average tariffs by 20 and six percentage points, respectively. In particular, the introduction of the latter exacerbated the consequences of the Great Depression and put global trade into unprecedented difficulties. In the context of the New Deal, the 1934 Reciprocal Trade Agreements Act delegated powers over trade policy to the executive branch. By signing bilateral agreements, the US government started to guide tariffs towards a downward trend. Right before the end of World War II, the State Department began to plan a multilateral trade agreement. In 1947, 18 countries signed the General Agreement on Tariffs and Trade (GATT) in Geneva. A multilateral trade mechanism has been established based on the principles of non-discrimination and MFN treatment and is committed to lowering trade barriers.

The second half of the 20th century saw the evolution of US trade policy closely related to the advance of the global trading system. In the 1950s, efforts to promote free trade within the United States and at the multilateral level were not successful. In 1962, the Trade Expansion Act provided a legal basis for the United States to significantly reduce tariffs, leading to the success of the Kennedy Round – the sixth session of GATT multilateral trade negotiations held between 1964 and 1967. In the early 1970s, the world economy ushered in a turbulent era, as conflicts in international finance and trade intertwined, and the emerging trade deficit and rising unemployment reintroduced protectionism in the United States. In March 1973, the exchange rate system of the Bretton Woods system collapsed, and a floating exchange rate system debuted. At the end of the year, the oil crisis broke out. Afterwards, the Trade Act of 1974 to some extent completed the institutional construction of US trade policy, trying to accommodate both trade liberalization and protection in the same system. The Tokyo Round, which ended in 1979, further reduced tariff levels in developed countries. In the 1980s, with the rapid rise of trade deficit, the manufacturing industry was in dire straits, and with the rise of US trade protectionism, Japan became the primary target.

With the end of the Cold War in 1989, the US trade policy also entered a new era of promoting free trade and globalization. In 1991, the negotiations of the North American Free Trade Agreement (NAFTA) started, sparking unprecedented controversy in the United States. In November 1993, finally, the agreement was passed marginally by the Congress after heated debates. One month later, the seven-year-long Uruguay Round negotiations were successfully concluded, reshaping the rules system of the multilateral trading system. In January 1995, the Uruguay Round package entered into force and the World Trade Organization (WTO) was established. For China, the “GATT re-entry” negotiations that began in 1986 had turned into the “WTO accession” ones, while the bilateral negotiations with the United States became the key. In November 1999, the China–US Bilateral WTO Agreement was signed. In May 2000, the US Congress granted the “permanent normal trade relations” (PNTR) to China, which would not anymore be subject to annual MFN reviews according to the Jackson-Vanik Amendment to the Trade Act of 1974. In November 2001, China entered the WTO, which initiated the country’s historic economic rise in the era of globalization. At the same time, the Doha Round of trade negotiations started, but unexpectedly fell into a deadlock.

In the context of the outbreak of the financial crisis in 2008 and the obstruction of multilateral trade negotiations, the US government focused its trade policy at the regional level and restarted negotiations on large-scale trade agreements. Negotiations on the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership kicked off in 2011 and 2013, respectively. Among the two mega agreements, TPP is related to the Obama administration’s “Pivot to Asia” strategy and shows a “anyone but ...

Table of contents

• Cover
• Half Title
• Series Page
• Title Page
• Copyright Page
• Dedication Page
• Contents
• Introduction
• 1 Trade wars: review of history and theory
• 2 The China–US trade war: context and cause
• 3 The China–US trade war: combat and compromise
• 4 The China–US trade war: impacts and implications
• Conclusion
• Appendices
• Bibliography
• Index