The US-China Trade War is Far from Over

The trade tensions between the world’s two largest economies – the US and China – are unlikely to dissipate anytime soon, even as two-day-long trade talks in London indicated a breakthrough. The two parties have agreed “in principle” to a framework to relax export restrictions, which now awaits final approval from their respective administrations.

Back and Forth

After the US and China engaged in a tariff frenzy in April this year, rendering bilateral trade virtually impossible, the two sides reached a 90-day truce in Geneva in May, where they agreed to roll back respective trade barriers significantly. While the US agreed to lower additional tariffs since Trump took office, from the existing 145 percent to 30 percent on all Chinese exports, China agreed to cut the additional tariffs on all US exports from 125 percent to 10 percent. Beijing also agreed to resume the supply of rare earth minerals, which had been facing extraordinary delays since April, when they were placed under stringent export restrictions.

However, US President Donald Trump accused China of dragging its feet in approving export licences to the suppliers of American buyers. The Chinese, on the other hand, accused the US administration of undermining the deal by issuing a warning against the use of Huawei’s AI chips.

The London talks were aimed at resolving the differences that had emerged after each side accused the other of reneging on the commitments made in Geneva, specifically with respect to export restrictions.

Politics, Economics and Security

While the two countries may have managed to bring down tariff and non-tariff barriers to trade, frictions are likely to persist. These frictions are neither superfluous nor transient. Rather, they are a manifestation of deeper, structural issues that plague the US-China bilateral trade relations. The political, economic, and security considerations underpinning Sino-US trade relations have created complex and incompatible propositions. The fact that these sources of discord remain unresolved means that a long-term solution will continue to elude the two countries.

The politics of the US-China trade war is modelled on the idea that trade deficits or imports are bad, and there is a need to address the massive trade imbalance that characterises the bilateral trade relationship. Trump believes that an influx of Chinese goods has “ripped off” America, and a sustained trade deficit makes for an unfair economic relationship. It was partly for this reason that he unleashed the trade war in 2018. A Phase I trade deal, concluded by the two countries in January 2020, imposed a requirement on China to increase its imports of US goods and services by an additional US$ 200 billion over 2017 import levels. Investigations by the Peterson Institute of International Economics (PIIE) confirmed that not only did China’s imports of US goods and services not reach the 2017 level, but they also fell short of meeting the purchasing commitments by more than 40 percent.

Thus, any similar proposition to get China to increase its imports of American goods, as suggested by Trump, is bound to fail again. To begin with, for Beijing’s imports of American goods and services to increase in general, China’s domestic consumption levels have to pick up. But, there isn’t enough demand in China to substantially allow for increased American imports. More specifically, China’s imports of agricultural products and manufacturing equipment, the key focus areas of the Phase I deal, are also unlikely to take off. Beijing is doubling down on achieving food security, including reducing reliance on the US for soybeans through diversification and domestic production. And as far as the manufacturing sector is concerned, China is dealing with industrial overcapacity in most areas. Thus, even as there may exist some room to expand US exports to China, the nature of the trade will continue to be asymmetric and unbalanced.

The economics of the US-China trade war relates to Beijing’s unfair trade practices and the need for a consequent course correction. The logic entails that China’s trade surpluses vis-à-vis the US are a result of deliberate foul play, which bends the rules of free and fair trade. These include Beijing’s efforts to ensure a surplus domestic savings rate over investment rate, financial repression of the population, suppressed interest rates, currency devaluation, and massive subsidisation of the industries. Together, these factors have kept China’s domestic consumption subdued while creating industrial overcapacity. In turn, this has eroded global competition, deindustrialised countries, and led to a ‘China shock.’ US Treasury Secretary Scott Bessent, in his statement after the London talks, has instructed China to undertake measures to rebalance its economy by expanding consumption and containing excess production.

However, Beijing faces difficulties and seems reluctant at the same time, to rebalance its economy towards greater consumption. Further, it argues that China’s trade surpluses are a result of its global competitiveness, and that its cheap exports create developmental opportunities for the world. China has also argued that its cheap solar panels, EVs, and lithium-ion batteries are critical to the global energy transition.

Lastly, there is a security logic to the US-China trade war. As China’s rise, in economic, military, and technological terms, poses a geopolitical challenge to the US, the latter feels pressured to maintain a technological lead in areas where it still enjoys a capability gap. This requires the US to engage in access denial through export controls in certain critical and emerging technologies, such as advanced semiconductors. As per reports, even exports of jet engines to China were facing hurdles. As the geopolitical competition between the two countries intensifies, the yards are expected to become bigger, and the fences are expected to become higher, thereby antagonising China.

China wins the battle, but the war continues

China's weaponisation of its monopolistic position as the sole supplier of seven rare earth minerals and their magnets, critical to the American auto, and civil & military aviation industry, seems to have inflicted enough cost on the US, for now, to cede some ground in London. While the details of the deal are yet to be public, the US will allow Chinese students to attend American universities and lift export controls on supplies of ethyne and airplane parts.

However, this does not mark the end of the trade war. Even after the 90-day truce, the trade-weighted average American tariff on all Chinese goods continues to be as high as 51.1 percent, up from 20.8 percent when Trump assumed office. The trade-weighted average Chinese tariff on all US goods, on the other hand, stands at 32.6 percent, up from 21.2 percent. The continued existence of political discontent, economic grievances, and security considerations means that the trade war between the two largest economies is far from over.

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