Trade Wars: The Backstory
Decades after the end of the Cold War, America became a prominent advocate for lowering trade barriers. The popular belief was that mutually beneficial exchanges would help create long-lasting peace and prevent war. Trading is known to be an incentive for countries not to go to war with one another. The other purpose of free trade was to make America more prosperous, but in current times, officials say it is equally essential to prevent certain countries from prospering. This view creates the concept of a global economic battlefield.
President Nixon’s visit to China in the early 1970s and the renormalization of trade relations in 1979, a new era of trade, investment, and economic cooperation began between the U.S. and China. In December of 2001, after negotiations with the U.S. and other W.T.O. countries, China joined the W.T.O. Beijing accepted the conditions of economic reform, steep tariff cuts for imports, I.P. protections, and laws and regulations transparency. China became one of the United States’ largest trading partners in the following decades. China’s economy is based on export-oriented growth, with manufacturers importing many raw materials worldwide. Once they are turned into finished goods, they are exported worldwide.
Unfortunately, the trade relationship between the U.S. and China has not been without its struggles. Over the years, trade disputes and imbalances over I.P. theft, market access, and state subsidies have existed. These conflicts have made trade challenging for both countries. Eventually, the U.S.’s concerns about Beijing’s manipulation and unfair trade practices led to the implementation of tariffs. These tariffs were placed on Chinese imports to force the Chinese government to stop the artificial manipulation of the markets and reduce state-given assistance to its domestic industries.
The markets were being manipulated, and another primary concern for the U.S. became intellectual property (I.P.) theft. Chinese manufacturers were stealing U.S. technology and designs from our companies; meanwhile, the Chinese government was not implementing global I.P. laws. The U.S. government. has long accused China of pressuring companies to hand over technology and stealing it. Eventually, China imposed counter-tariffs on U.S. exports going to China.
In 2018, to decouple the U.S. from China’s economy and pressure Beijing to change its unfair trade practices. Donald Trump launched a trade war and placed three rounds of tariffs against China. $250 billion worth of Chinese goods (exports) were placed under 25% tariffs. These tariffs included technology, tires, purses, and railway equipment. Beijing claimed, “The U.S. started the largest trade war in economic history,” leading them to retaliate with $110 billion in tariffs against U.S. goods.
Some of the Chinese tariffs against the U.S. included medical equipment, chemicals, soybeans, and coal paraphernalia. President Trump further escalated the trade war when he claimed businesses would leave China to do business in other Asian countries like Vietnam and the Philippines. The move was made to counter Chinese tariffs and manufacture products in a fair environment.
Current Climate
The tariffs imposed against China are estimated at over $200B annually, while Chinese tariffs register at a $100B value. Over the last 4 to 5 years, Protectionist policies have affected global trade adversely from several countries. In the U.S., retailers have struggled with their economic difficulties amid higher prices overall. Many companies have found it challenging to navigate the new international shipping and commerce rules. Various American retailers, including small businesses and large brands, have been affected. Macy’s and Nordstrom experienced a 7% decline, while Best Buy and Office Depot fell 10%. Luxury brands with manufacturing based in China also took a hit due to import tariffs. Initially, some brands tried to relocate factories to countries such as Vietnam and Cambodia to avoid taxes.
Eventually, many businesses found the ties with China too difficult to sever due to the quality price China could provide consistently. For this reason, many companies are still dependent on China despite the tariffs imposed. Outside of the U.S. and China, many countries find the trade war beneficial, with some of the top countries being Mexico, Brazil, Australia, Canada, Taiwan, and Vietnam. These countries may replace some Chinese suppliers. While China’s total competitiveness in pricing will reduce, sources say China’s total competitiveness as a sourcing base will stay the same.
In 2023, countries on the sidelines of the U.S.-China trade war increased product exports subject to U.S. and worldwide tariffs and boosted the production of targeted goods into new markets. Vietnam, Thailand, Korea, and Mexico boosted exports by substituting goods subject to U.S.-China tariffs. Meanwhile, countries like Ukraine and Colombia saw a decline because their exports complemented those hit by tariffs. Countries that could scale their production and create economies of scale allowed them to compete with the higher costs of taxed products successfully. These products also became competitive in markets not subject to tariffs.
China vs. U.S.A.
Throughout their trade relationship, the U.S. and China have been top exporters of each other’s markets. Over the decades, both countries have benefitted from the trade partnership. For the U.S., the relationship has meant lower consumer costs and higher corporate profits. However, the trade has not come without its own set of costs. U.S. consumers have greatly benefited from reduced costs but also struggled due to millions of manufacturing jobs being offshored to China and import competition. Other negatives brought about by the relationship include national security, subsidization/state-owned enterprises, currency manipulation, as well as labor and human rights violations.
Jennifer Hillman of C.F.R. says, “China has perfected the model of obtaining Western technology and uses it to develop domestic companies into giants and unleashing them into the world market.” This strategy makes it incredibly difficult for foreign companies to compete. She also cites 5g networks as an industry example in which the Chinese dominate. U.S. imports from China decreased from $38.27 billion in 2018 to $32.95 in 2020 and have gradually recovered. Imports of Chinese products with the highest tariffs commonly included intermediate products and capital goods, which ended up experiencing the sharpest decline in demand.
The U.S. imports of non-tariffed goods, mainly covering consumer products, have been largely shielded from economic decline. Industries that had a higher level of supply chain integration with China, such as auto parts and I.T. hardware, were hit with higher tariffs. And despite years of friction between the U.S. and China, Chinese imports reached record highs in 2022. Chinese imports, such as laptops and computer monitors, increased by 42%. The demand for Chinese imports subject to tariffs remains low, while products not subject to tariffs have continued to rise. Imports never subject to tariffs have increased by 50% before the beginning of the trade war.
Mexico
The tariffs on Mexico, ordered by Donald Trump, were placed to get the country to cooperate with his plans. President Trump believed that tariffs on imported goods would encourage more manufacturing to return to the U.S. An increase in manufacturing in America would stimulate the economy and provide jobs for American workers. Mexico has gradually increased its trade with the U.S. over the past decade and now surpasses China. Some industries that have grown the most include automobiles, computer parts, and microchips. Mexico has become the top supplier of goods to the U.S. The manufacturing relationship between the U.S. and China is highly integrated.
Logistical Impact U.S.
The U.S.-China trade war is an ongoing conflict without a projected end. With trucks being the primary transportation for goods arriving from China in West Coast Ports, the trade war has created a noticeable drop in ocean shipments from the East. This issue translates to fewer trucks needed to haul freight and reduces demand for truckers in the affected ports. Lower demand for trucking on the West Coast can open up opportunities for the East Coast. When products from China become too expensive, businesses will find new sources for their products.
In 2019, during the beginning of the trade war, global trade analysts predicted that ocean freight companies would first feel the consequences of the trade war. They believed tariffs on both sides would slow down trade and negatively impact supply-chain operations. In actuality, the impacts were the reverse of the analysts’ predictions. Imports arriving in U.S. container ports from China were at record high levels. As many U.S. retailers learned, changing product sourcing is time-consuming, costly, and creates uncertainty in quality control. This has led to many American companies continuing to utilize and import goods from their manufacturing facilities in China.
The need for truckers will not decrease; instead, truckers will be needed in new locations. Despite the ever-present trade-war tensions between the U.S. and China, trucking remains a crucial part of the U.S. economy, and owner-operators will always be needed. President Biden has continued Donald Trump’s trade war during his time in office. He has imposed export restrictions, offered distorting subsidies, and retained tariffs on hundreds of billions of Chinese exports. In 2022, he passed a $52.7 billion semiconductor-subsidy program.
It is believed that in the future, the U.S. will continue to subsidize job-creating American industries and impose more robust export controls and trade barriers. According to experts, other countries are taking notice, which may lead to a global subsidies race. The world is predicted to move toward an era of separate but interconnected trading blocs led by the U.S., the European Union, and China. Part of the Biden administration’s vision for American manufacturing is to “friend-shore” manufacturing and supply chains towards market-based economies with shared values.
National Security Adviser Jake Sullivan explains that a modern American Industrial Strategy works to identify sectors foundational to economic growth from a national security perspective. Another aspect of this strategy is setting the parameters so the private industry is not “poised” to make investments necessary to secure national ambitions.
Global Logistical Impact
In the years that followed the pandemic in 2020, households cut back on purchases following the pandemic spending spree. There was a 7% drop in goods imports globally, with the reduction in Chinese imports leading the decline. High-tech products such as laptops and computers were increasingly exported to the U.S. by Vietnam, Taiwan, India, and Mexico, while China lost sales. The trade war has heightened geopolitical and economic risks for company manufacturing plants in China. Big companies like Apple and Samsung moving production back to the U.S.A. prompted speculation that other multinational corporations were relocating to minimize these risks.
In 2022, the European Union Chamber of Commerce in China released the Business Confidence Survey, demonstrating that European companies remained committed to the Chinese markets throughout 2021 despite the effects of the pandemic and the trade war. In 2022, 11% of respondents said they were considering relocating out of China, increasing to 23% in April 2022. And for two-thirds of the respondents, China was a top three investment destination for sectors including petrochemicals, chemicals, and refining.
The Chinese market, as well as ties and relationships forged with China, have reduced the overall likelihood of large-scale changes in investment relations. Despite this, China’s position within the global supply chain will likely change because the U.S.-China trade, investment, and supply chain reconfiguration are still unfolding. Despite the need for rapid movement away from China, companies are still trying to explore their options by derisking and diversifying their supply chains.
In 2023, U.S. goods imports from China were reduced by 25%, and the Russia-Ukraine war has only bolstered geopolitical tensions, with Beijing and Moscow forming a closer partnership. Some experts believe this war marks a turning point for companies considering other suppliers. Despite many companies trying to move away from China, some in the electronics sector have struggled to replace supply chains created in China over the past few decades. And for those that have diversified out of China, those companies have struggled to reestablish their supply chains in other countries. Ending long-time partnerships can be challenging when quality control that meets product standards has been established in China.
Even amid the rising tensions, the business decision has to be well worth it for companies to relocate and rebuild their supply chain strategy. The process can take five to ten years, mainly if the changes can potentially price them out of the U.S. market. The idea behind export controls is to impose costs on adversaries and degrade their battlefield capabilities. The concept is a total trade war, with the conflict on exchange viewed through a military lens. The goal is to maintain relative advantages over competitors and impede their technological advances, especially within foundation technology. Foundational technology includes semiconductors and artificial intelligence.
Overall, Vietnam was among the most prosperous countries during the trade war. It has increased its exports of tires, sweatshirts, and vacuum cleaners worldwide. A study concluded that common trends for countries that have emerged triumphant from this trade war include having a strong labor market, specialized products, and preexisting trade agreements. Regarding overall global implications sparked by the trade war, it has disrupted global supply chains, raised business costs, and created uncertainty in the financial markets.
Agriculture and manufacturing were specifically affected. In addition, this conflict contributed to concerns over a global economic slowdown and international trade disruption. The new trading strategy impacted countries worldwide, forcing them to navigate the shifting dynamics of trade relations. The trade war is a product of a broader geopolitical rivalry, which included strategic competition and national security and technological leadership concerns. Tensions persist, and the process of decoupling the U.S.-China relationship continues.