A very brief overview on the causes of the US-China trade conflict

Current developments against the backdrop of the coronavirus pandemic suggest that the trade conflict between the United States and China will continue. The conflict has a longer history. I think that there are three main causes for the trade conflict between the United States and China (the so-called “Phase 1” agreement signed in January 2020 brought some temporary relief, but I fear that the conflict will get more severe again in the coming months): (1) political-economic motives, (2) dissatisfaction with the World Trade Organization (WTO), (3) and reasons of political power.

First, the political-economic perspective is primarily about the public perception that many jobs – especially in industry – have been relocated from the USA to China. Scientific studies show that a significant part of the fall in employment in the American industrial sector could actually be related to China’s accession to the WTO in 2001, which has led to increasing economic ties between the United States and China.(1) However, it is unclear whether, as a result of globalization, jobs would not have been transferred abroad even without the integration of China into the world economy, for example to Mexico or countries in Southeast Asia. Many of the US regions affected by this job loss are located in states that belong to the so-called “swing states” and play a crucial role in presidential elections. Thus, the current trade conflict could give voters in these regions the feeling that something is being done for them. In contrast, the economic benefits of globalization – such as low prices on many consumer goods or newly created jobs in other sectors – play a minor role in the public debate. Part of the political-economic perspective is also the high trade deficit that the United States has against China. While this deficit plays a major role politically, it is only of limited economic significance from an economic point of view – especially if the trade deficit is derived from gross trade and not from added value. Since trade in intermediate goods has increased significantly over time, the bilateral trade balances are typically overestimated; in the case of trade between the United States and China potentially by over 20%.

Second, the United States is unhappy with the WTO’s policies because, according to U.S. perceptions, the Chinese state is giving unfair advantages to domestic companies to succeed in international competition.(2) The focus of criticism is the Chinese economic model, in which state and private companies are often closely intertwined with the state. This system makes it difficult to identify subsidies and other state aids and to check whether they are compatible with WTO rules. The US government also accuses China of forcing foreign investors to hand over corporate technology. These demands are often disguised, which makes it difficult to identify impermissible practices. In the United States’ view, the WTO’s rules and dispute settlement bodies are unsuitable for identifying any illegal measures taken by China and for enforcing their termination. The special tariffs that have been imposed since 2018 are a sign that the United States now wants to resolve issues with China through bilateral negotiations.

Third, there are also political reasons for the current trade conflict. China has become a serious competitor to the United States in important knowledge-intensive areas, such as artificial intelligence.(3) This is exemplified by the rise of the technology group Huawei. However, the balance of power might continue to change: China wants to take on technological leadership in the field of artificial intelligence, but also in other technologies, by 2030. This is not only economically significant. Advances in knowledge-intensive technologies are also important for military purposes. China’s development in important technologies is to be slowed down according to the will of the US government.

As I tried to briefly summarize, the causes of the current trade conflict between the United States and China are complex and have accumulated in recent years. The previous American governments had primarily pursued the approach of concluding multilateral free trade agreements without the involvement of China – such as in particular the Transpacific Partnership Agreement (TPP) – to set new rules, for example in the areas of state aid and investment protection, which were aimed at serving as a model for other free trade agreements and should, through the further development of multilateral regulations, bring China to a gradual change in its policies.

This approach has not been pursued since Donald Trump’s election as the new President of the United States – so far there has been no accession to the TPP. The areas of conflict are now discussed through bilateral negotiations between the United States and China. The current American government does not consider multilateral negotiations or dispute settlement procedures, for example within the framework of the WTO, to be suitable for a successful outcome of the conflict from the US perspective.

The nature of the dispute has now become much more confrontational. This is not only due to the negotiating style of the American president, but is also largely determined by the type of conflict, which goes beyond trade policy issues and is increasingly linked to security and power policy considerations. The progress so far suggests that there are two camps with different goals within the US government and advisory bodies.(4) One group is likely to see the special tariffs collected as a way to exert high pressure on the Chinese government and to persuade the Chinese government to make extensive concessions on issues such as investment protection or state aid. Another camp is pursuing the goal of decoupling the American economy from the Chinese economy, since China is seen as an economic and political rival. The American president does not yet seem to have clearly defined himself – at least in public – on the position of a camp. While, mainly in August 2019, some statements by the American president surrounding the escalation of the trade conflict could be interpreted as aiming to largely unbundle the two economies, other statements made since then are less confrontational. The so-called “Phase 1” agreement made in January 2020 also suggests that the US government has not yet given up on a negotiated settlement, although the scope of the agreement is limited.

(1) See, for instance: Acemoglu, D., D. Autor, D. Dorn, G. Hanson and B. Price (2016), “Import Competition and the Great US Employment Sag of the 2000s”, Journal of Labor Economics 34(S1): S. 141-S198; Autor, D., D. Dorn and G. Hanson (2016), “The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade,” Annual Review of Economics 2016(8): 205-240; Pierce, J. and P. Schott (2016), “The Surprisingly Swift Decline of U.S. Manufacturing Employment,” American Economic Review 106(7): 1632-1662; Feenstra, R., H. Ma and Y. Xu (2017), “US Exports and Employment”, NBER Working Paper No. 24056; Feenstra, R. and A. Sasahara (2017), “The ‘China Shock’, Exports and U.S. Employment: A Global Input-Output Analysis”, NBER Working Paper No. 24022.

(2) Office of the United States Trade Representative (2018): Section 301 Report into China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation. Bown, C. (2019): “The 2018 US-China Trade Conflict After 40 Years of Special Protection”, Working Paper 19-7, Peterson Institute for International Economics.

(3)  Fischer, S.-C. (2018): Künstliche Intelligenz: Chinas Hightech-Ambitionen, CSS Analysen zur Sicherheitspolitik Nr. 20, Center for Security Studies (CSS), ETH Zürich.

(4) See, for instance: Zoellick, R. (2019): “Donald Trump’s impulsive approach to China makes US vulnerable”, Financial Times, 26. June 2019.

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