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The trade war between the US and China is almost without precedent according to a new economic study into its impact.

A working paper from Chad P. Brown, a senior fellow with the Peterson Institute for International Economics and former White House economic adviser, constructs a new measure of ‘special tariff protection’ to put the sheer scope and coverage of the pre-2018 and 2018 actions into historical context.

The paper suggests that new US special tariffs of 2018 covered an even larger share of imports from China than the peak levels of US special protection during the “managed trade” era of the 1980s and that China’s 2018 retaliation was itself unprecedented for the World Trade Organisation era.

However, it suggests that many trade barriers had existed for much longer than 2018’s headline grabbing developments.

Brown suggests that since China joined the WTO, the US had applied “considerable new protection in a different form, increasingly using the unfair trade laws of antidumping and countervailing duties”.

The report says that for its part China had begun to use special protection policies against the United States, and by the early 2010s, it seemed to deploy them as a tool for retaliation.

The paper argues that some US measures now represent a fundamental challenge to China’s development strategy.

The paper also suggests that the US resorting to ‘security tariffs’ reveals a range of frustrations with the World Trade Organisation.

The scale of the trade war

The report found that in the years 2001 and 2017, the United States launched 130 antidumping and 69 countervailing duty investigations of imports from China, resulting in 103 and 55 restrictions imposed, respectively. The average US antidumping duty in force against China in 2018 was 151.5 per cent, and the average US countervailing duty was 72.4 per cent.

The report adds that in 2018, the United States increased its special protection toward China in 2018, though not through the laws it had used between 2001 and 2017. The result was that share of bilateral imports covered by US special tariffs increased from 7.5 percent in 2017 to over 50 percent in 2018.

In 2018, China retaliated against the Trump administration’s tariffs—on steel, aluminium, and $250bn of imports from China—by imposing higher special tariffs on imports from the United States. By the end of 2018, China’s combined retaliation covered roughly $110bn of US exports, or 70 percent of China’s total goods imports from the United States.

Yet it relates this to significant concerns about the Chinese model.

“The 2018 US tariffs on steel and aluminium imports punctuate the first major American concern with China. After its 2001 WTO accession, China did not fully transform into a market economy. And because of its size, China’s system of explicit and implicit subsidies imposed political-economic costs on trading partners.”

It adds: “First, because of China’s relatively high import tariffs, many foreign companies found it economically viable to serve the Chinese consumer market only by locating production in China, instead of exporting from the United States. However, to satisfy various regulatory requirements to produce in China, foreign firms had to form joint ventures with local partners, many of which were Chinese state-owned enterprises.”

Forced transfer of technology?

The report notes that the allegation is that, by forcing the joint venture relationship, the American companies could then be more easily held up or coerced into turning over their technology involuntarily, or on non-commercial grounds, to maintain access to Chinese consumers.

The report says that concerns over foreign investment and the “forced” transfer of technology may have been just as critical as those on industrial subsidies, state-owned enterprises, and China’s nonmarket evolution.

Brown remains concerned that US actions in 2018 represent the abandonment of a 70-year-old rules-based trading system.

Chad P Brown is a former White House and World Bank economist

However, he also poses a series of questions and says that future research is needed to “more critically evaluate these US arguments as well as its actions”. These questions include

  • How costly were the Chinese policies for the United States? What new rules could address systemic conflicts between market and nonmarket economies?
  • Would such rules be motivated out of efficiency concerns, or were they only motivated for political purposes?
  • How would new rules be sustained?
  • How would enforcement need to be different?

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