Eagle versus Dragon: Respite in the Trade Conflict between the United States and China

Yokohama, China © Pixabay/megurawa

Yokohama, China © Pixabay/megurawa

During the G20 summit at the end of June 2019, the United States and China agreed to resume negotiations. The trade conflict between the two superpowers had re-escalated in mid-May 2019, when US President Donald Trump raised special tariffs from 10 to 25 percent on US imports of Chinese goods worth 200 billion US dollars. Whether the US and China will be able to finally settle their disputes remains uncertain.

The United States has had a large deficit in merchandise trade with China for many years. Amounting to around 419 billion U.S. dollars in 2018, it is higher than that with any other country. Due to the surplus in service trade, the overall trade deficit is somewhat lower but remains substantial at 379 billion U.S. dollars.

China has become a heavyweight in the world economy but has yet to assume the concurrent responsibility in the world economic order. European companies also suffer as a result of unfair trade practices. Therefore, in June 2018, the European Union filed a complaint against China in the World Trade Organization (WTO) with a focus on China’s inadequate protection of intellectual property rights. U.S. President Donald Trump has also sharply criticized Beijing’s trade practices. In late November 2018, the WTO agreed to establish a dispute settlement panel upon request of the United States concerning China’s measures pertaining to the protection of intellectual property rights.

The US-China trade conflict’s economic impact is clearly starting to bite. According to a study by Deutsche Bank Research, U.S. imports from China of product groups, on which additional tariffs were imposed, fell between 25.9 and 37.9 percent year-on-year (February 2019 compared to February 2018). The International Monetary Fund (April 2019) estimated a negative impact on annual GDP growth of 0.3 to 0.6 percentage points for the United States and around 0.5 to 1.5 percentage points for China, should all U.S. and Chinese goods be subject to an additional duty of 25 percent. This would not leave global economic growth unaffected. Earlier this year the German government also adjusted its forecast for German economic growth downwards, citing increased risks from trade conflicts and Brexit as reasons to do so. 

Tit-for-Tat Escalation

Trump wants a better “deal” for the United States, among others, to decrease the high U.S. trade deficit. Thus, he implemented high punitive tariffs – 25 percent on Chinese imports worth 34 billion U.S. dollars. This measure was based on Section 301 of the Trade Act of 1974 and is trying to address the inadequate protection of intellectual property rights in China. Following an investigation and political consultations, Section 301 allows for economic sanctions against countries which infringe trade agreements or disadvantage the U.S. economy through other unfair trade practices.

The duties relate primarily to high-technology product groups such as aircraft parts, batteries, flat-screen televisions, and specialist medical equipment – products which China has identified as being particularly important in the current five-year plan as part of the Made in China 2025 strategy. The Chinese government criticized the U.S. action sharply and took retaliatory action, covering a trade volume of around 34 billion U.S. dollars. However, Trump further turned up the heat. Duties were extended to imports worth 16 billion U.S. dollars in late August 2018. Again, China introduced retaliatory tariffs, also covering a trade volume of around 16 billion U.S. dollars that came into force the same day. 

From Trade Conflict to Trade War?

At the end of September 2018, Trump ordered additional tariffs of 10 percent on a trade volume of 200 billion U.S. dollars comprising 6,000 product categories from China. China promptly responded with retaliatory tariffs of 60 billion U.S. dollars. On the sidelines of the G20 summit in Argentina in late 2018, the United States and China agreed to de-escalate the conflict and negotiate a bilateral trade agreement. The two parties hoped to conclude an agreement by March 2019 that would cover market access, structural reforms in China and an enforcement mechanism. Trump first extended the March deadline citing a good negotiation process. However, sentiment reversed again at the end of April, when Trump criticized Beijing for withdrawing previously made concessions. In early May 2019, he then raised the 10 percent tariffs to 25 percent on a trade volume of 200 billion U.S. dollars. In addition, he threatened to impose further additional tariffs of 25 percent on the remaining U.S. imports of Chinese goods worth 325 billion U.S. dollars.

However, in June 2019, President Trump pulled back from this threat when he met with President Xi at the G20 meeting in Osaka. Both sides agreed to return to the negotiating table. The tariffs already levied remain in place. China has so far responded to U.S. tariffs, with tariffs affecting a total import volume of 110 billion U.S. dollars. Effectively, nearly all of China's imports from the United States are affected.

Threat to the Global Economy

The conflict between the United States and China is not just about competition for economic preeminence, but also about who will shape the world order in the future – it is about a battle between the systems. The old U.S. hegemonic power is massively challenged by the rise of China; this fuels fear in the United States.

The United States rightly blames China for taking advantage of the international trading system, considering that the country does not honor, in many cases, its promises of accession to the WTO. President Trump also justly criticizes the lack of intellectual property protection, huge government subsidies, and forced technology transfer via joint ventures in China.

However, the U.S. president relies on unilateral trading instruments and laws to persuade Beijing to relent. In its national security strategy of December 2018, the Trump administration disparaged the decades-long policy of turning China into a trusted partner through its involvement in international organizations and world trade, arguing that this did not result in anything of value.

Tariffs and unilateral measures are, however, not successful. The tariff spiral is a major threat to the U.S. and world economies. The United States should rather engage constructively in the reform process of the WTO and help to adapt modern trade rules. Only through multilateral cooperation can the United States remain a formative power in world trade. And only this way can the conflict with China be sustainably resolved.