U.S. - China trade war: Politics or economics?

This is an opinion piece written by Xi Jia.

Why is it important? A long-standing economic competition exists between the United States and China. It is crucial to understand the U.S.- China relationship nowadays because both countries account for 42% of the global GDP (see Figure 1). They have strongly impacted the complex and profound globalization wave in the 21st century. The world economy is gravely threatened by their mutual mistrust. It is therefore of the utmost importance to evaluate to what extent the U.S.-China trade war will impact the world order.

This is related to a question that has been present in international relations throughout history: Politics or economics? Left-liberals assert that political institutions should be employed to lessen market failure, while right-liberals believe state interference usually makes the market worse. However, republicans argue differently from the liberalists that politics ought to prevail over economics.

This article aims to establish a comprehensive perspective that explains the impact of political decisions on economics. I also briefly point out how economics plays a supporting role in politics in the context of the U.S.-China trade war.

Counterproductive – Politics determines the economy The trade war between the U.S. and China started for purely economic reasons: the U.S.-China trade deficit. In 2016, China’s trade surplus with the U.S. reached 347 billion U.S. dollars, causing a shift in American strategy to reduce its trade deficit with China in 2017. Unfortunately, the trade deficit has increased to nearly 376 billion U.S. dollars. Keynes (1936) once pointed out that the trade surplus is significant to national development. According to Keynes, a country should achieve a trade surplus through trade protection. This leads to an increase in investment and employment to ultimately increase economic prosperity. This assumption prompted the U.S. to launch a trade war in which the economy works as a powerful driving force for policy implementation. However, it is not quite as straightforward. The deficit between American and Chinese trade has existed since 1992 . Therefore, the primary incentive for the U.S. to change its policy towards China is not purely economic.

What pushed the U.S. to launch the trade war at the cost of nearly 300,000 jobs and approximately 0.3 Real GDP (Zandi et al. 2019)? The first reason is the American elite’s attitude toward China, which has changed in the last 20 years. The American political elite views China and Russia as its two greatest enemies in either ideological or material ways. But Russia’s stamina seems to come short, as its export mix consists of only 5 percent of agricultural products and almost 63 percent of fuels and energy (Trading Economics, 2011). China, on the other hand, has a highly diversified export structure: manufacturing goods and machinery make up the most (see Figure 2). Furthermore, a resource export, rare earth, is about 42.3 percent of all exports according to the China Power Team (2021), far more than the second exporter – the U.S. – with roughly 9.3 percent.

The second explanation relates to the personal political calculations of former president Trump. The U.S. midterm elections were about to be held, and Mr. Trump needed to increase public support. The external benefits of showing America’s strength to the rest of the world were far greater than focusing on internal economic development (which has a time lag). He also created these diplomatic sensational effects

Figure 2

to deflect the political pressure that was caused by the revelation of President Putin’s interference in the 2016 election, which was confirmed by six major intelligence agencies (Davis, 2018). Therefore, Trump prioritized politics over economics for his own political gain. Data confirms that Trump’s approval rate did indeed increase from 35 to 45 percent (Gallup, 2022).

A look at Trump’s use of Twitter helps to demonstrate how political considerations are sometimes prioritized over economics. Trump’s action is owing to the rigidity of the American class and the severe social division – the difficulty for traditional political propaganda to interact with the underprivileged voters. The America we see is an America constructed by the media and elites: through their perspectives, the United States is in a leading position in the world and has an amazing momentum of development. However, for ordinary people, what they actually feel is the widening gap between the rich and the poor in society (See Figure 3), the soaring prices, and stagnant income (View the article here). Under the downward pressure of the economy, talented and illegal immigrants from other countries have flocked to the United States, seizing their education and job opportunities, resulting in difficulties in employment, promotion, and schooling.

Figure 3

The emergence of Trump has undoubtedly broken the control of mainstream elite politics in the United States on the country, and the silent majority's antipathy to political correctness has finally been expressed. He started a movement that represents the interests of American citizens who feel neglected by traditional politics. Although he succeeded in increasing public support before the midterm elections, his policies were not the answer to America’s economic problems, which are deeply rooted in the country’s socio-economic structure. Since Trump could not tap Wall Street’s financial capital, and he could not recover the U.S. annually manufacturing capital loss.

Long before globalization took shape in 1930, the U.S. passed the Smoot-Hawley Tariff Act, raising tariffs on more than 20,000 items to an all) tue high (Kenton, 2021). Nevertheless, history shows that trade protection not only failed but also brought about the Great Depression, as well as a global trade recession. Needless to say, the degree of globalization today is much higher than in 1930. To alleviate the underlying contradictions, the U.S. government should employ subsidies and focus on policies that stimulate long-term economic development. The economic laws of globalization are a fate Trump cannot resist. However, the majority of Trump’s supporters appreciate his attitude and don't care what his policies are, or even whether they exist, e.g., Trump claimed that "thousands of kilometers of a wall will be built along the U.S.-Mexico border to keep out illegal immigrants” is simply impossible. So it doesn't matter at all whether Trump implements his policies in the end. To sum up, the cost-effectiveness of attaching importance to policies is much higher than that of governing the economy. Trump’s decision to prioritize politics was more reasonable for his own personal interest— win the election instead of making a real impact on solving U.S. issues.

The impact of the economic context on policy-decisions Theoretically, economics does not need to be political. To provide neutral advice on enhancing a nation’s economic performance, an economist should disregard any political biases. However, the story is different in practice. Politics and economics have a comprehensive relationship because one of the main political battlegrounds is how well the economy performs. Therefore, although political factors are weighted more than economics in the case of the U.S.-China trade war, the essential role of economics cannot be ignored. Discussing the timing of the launch of the trade war from a structural point of view, the following becomes apparent. First, it has been over ten years since the financial crisis in 2008. The market economy can self-regulate and already recovered in mid-2009 (see Figure 7). Second, the Obama administration provided a favorable economic environment, for instance through the withdrawal of troops from Iraq and the national health care reform. And the Trump administration enacted three policies to push these efforts further. Firstly, cutting U.S. corporate tax from 35 to 21 percent (Floyd, 2022). Secondly, attracting a large number of overseas funds through tax cuts from 35 to 10 percent on overseas investments, which according to recent estimation from the Institute on Taxation and Economic Policy, foreign investors have received $134 billion in tax cuts from 2018 through 2022 (Hanlon, 2020). Lastly, the Trump administration invested 1.5 trillion dollars in U.S infrastructure (Breuninger, 2018).

Overall, the combined effect of structure (i.e., market economy recovery from the financial crisis) and agency (i.e., Trump's further ‘push’ builds on the Obama administration) as the foundations created a favorable economic condition for political display.

Implications The reasons for the trade war between the U.S. and China, namely a shift in perceptions of the American elite and the political calculations of the Trump administration, show the crucial fact that politics prevail over economics. However, with evidence from the American suitable economic background, an implication is that the auxiliary role of economics cannot be ignored.

The coronavirus and the U.S. election in 2020, the Russia-Ukraine war, and the Arab Spring in 2022 - everything seems to have grabbed the headlines of the U.S.-China trade war. However, the U.S.-China trade war has never ended. The Biden administration signed The CHIPS and Science Act on 9th August 2022, aiming at lowering costs, creating jobs, strengthening supply chains, and most importantly, countering China (WH. GOV, 2022). Trade reflects the systemic problems that exist in today’s global economic order. The trade deficit concentrates on the contradiction between global capital flows and ordinary Americans. To alleviate this conflict, the U.S. needs to rely on international finance to extract profits from the global value chain. Along this line, the contradiction between American profit grabbing and the global division of labor has risen. The trade between China and the United States is a conflict that not only affects both countries. It represents a situation that all countries could face because of globalization. It implies slower global economic growth due to their relatively high share of real GDP and has a significant impact on the eurozone. International global supply chains might change if the euro zone’s current negative growth lasts for more than a year. Manufacturing might be transferred from China to countries like Vietnam. These widespread implications confirm Huang’s argument that the U.S.-China relationship is the most important bilateral relationship of the 21st century.

References

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