THE TRADE WAR BETWEEN CHINA AND THE UNITED STATES, launched with bluster and bravado by Donald Trump in 2018 and continued with muted enthusiasm by Joe Biden in 2021, celebrated its fourth birthday this April. U.S. tariffs on imports from China, first limited to washing machines and solar panels and quickly expanded to cover most U.S. purchases, ended a two-decade experiment in multilateral cooperation. When China joined the World Trade Organization in 2001, there was hope that it would manage its commercial relationship with the United States under rules accepted by the large majority of trading nations. Alas, that hope proved to be naïve. Instead, a chaotic and fractious relationship is emerging, which if not moving the countries toward a formal economic decoupling will leave in place barriers that prevent the deep integration that WTO-style globalization was supposed to engender.
The first set of barriers are the trade-war tariffs themselves. U.S. levies on Chinese imports are equivalent to an average sales tax of 19%; retaliatory levies by China on its purchases of U.S. goods likewise average 21%. Consider U.S. tariffs, first. Economic research shows that these barriers reduced U.S. imports from China in affected product lines by an average of more than 30%. If a trade decline of this magnitude seems impressive, it is also somewhat misleading. In clothing, footwear, and other labor-intensive goods, China responded to U.S. levies in part by moving the final production stage of assembling inputs into outputs ready for delivery to consumers to Vietnam or other nearby countries. Even if much of a good is produced in China, as long as the final stage of production occurs elsewhere the imports escape duties meant for China at the U.S. border. Hence, effective tariffs on value added in China have risen by less than the 19% headline number. But what has changed is the ability of Chinese firms to structure global supply chains as they wish. They are now obligated to organize these chains to evade U.S. levies, which raises production costs and dampens trade. U.S. exports to China are less fortunate. Because most of what U.S. firms ship to China are commodities—think soybeans farmed in Iowa—manipulating supply chains is not an option. China’s tariffs on U.S. imports therefore have had a strong bite.
“The trade war that began in 2018 has expanded beyond the flow of goods to affect the international movement of capital and labor. The longer the trade war lasts, the more corrosive these knock-on effects will be.”
Gordon Hanson
The U.S.-China trade war has proved to be about much more than tariffs. The bellicose posturing of each nation toward the other complicates how multinational enterprises plan their global investments. A U.S. tech firm considering operations in China, for instance, may fear more aggressive treatment by Chinese antitrust authorities (just ask Qualcomm) or less protection of their intellectual property within China (see Apple). For their part, a Chinese company considering licensing U.S. technology may fear losing access to this technology at some point in the future, if the U.S. government deems the company a security risk, as happened recently to Huawei and ZTE. Investors loathe uncertainty and the U.S.-China trade conflict has produced uncertainty in abundance. The result is weaker bilateral flows of investment and less engagement and fewer partnerships between U.S. and Chinese companies.
A third type of barrier created by the trade war is more subtle than those on goods and capital but perhaps no less consequential. The flow of people across borders—Chinese students seeking science and engineering degrees in U.S. universities, tech entrepreneurs from Silicon Valley searching for input suppliers in Shenzhen—moves ideas and information between countries and thereby greases the wheels of international commerce. The COVID-19 pandemic severely reduced travel between China and the United States. As this travel resumes, heightened tensions between the nations will act like an international roadblock. There is likely to be reduced interest in and fewer opportunities for academics, artists, businesspeople, and others to move back and forth between China and the United States. The result will be greater weakness in the cross-border networks that sustain international cooperation and trade.
As China and the United States sort out their geopolitical relationship in the aftermath of Russia’s invasion of Ukraine, they have an increasingly fragile economic foundation on which to rely. The trade war that began in 2018 has expanded beyond the flow of goods to affect the international movement of capital and labor. The longer that trade war lasts, the more corrosive these knock-on effects will be. How the two countries choose to order their commerce will determine what form globalization takes in the coming decades. Right now, that form is looking very distant from the spirit of 2001.
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Gordon Hanson is the Peter Wertheim Professor in Urban Policy at HKS and the chair of the School’s Social and Urban Policy Area.
Photograph by Li Xin/VCG/Getty Images