As If COVID-19 Wasn’t Enough... The US-China Trade War Is Still Smoldering
With COVID-19 taking center stage, manufacturers have been in overdrive, taking corrective actions to stay in business. These include keeping costs down and managing the supply chain. However, business continuity is still threatened by the ongoing U.S.-China trade war, which heaps more uncertainty on how to manage operations, control costs, and meet customer lead times during the time of COVID.
In July 2018, the Trump administration imposed tariffs on China for unfair trade practices, including restricting market access, intellectual property theft, and subsidies to state-owned enterprises. Between July 2018 and August 2019, the U.S. imposed tariffs on $550 billion worth of Chinese products; in retaliation, China set tariffs on $185 billion worth of U.S. goods.
Impacts so Far
By September 2019, the U.S.-China trade war had already cost the U.S. economy nearly 300,000 jobs and an estimated 0.3% of real GDP. Other studies put the loss of U.S. GDP as high as 0.7%. Bloomberg Economics estimates the trade war will cost U.S. economy $316 billion by the end of 2020. An analysis by Federal Reserve Bank of New York revealed that U.S. companies suffered a loss of about $1.7 trillion in the price of their stocks due to U.S. tariffs imposed on imports from China.
“Numerous studies also show that U.S. companies primarily paid for U.S. tariffs, with the cost estimated at nearly $46 billion,” said Ryan Hass and Abraham Denmark, foreign policy experts with the Brookings Institute.
In addition, they note that while the U.S. deficit with China decreased over this time, “its overall trade deficit did not,” says Hass and Denmark. “The unilateral tariffs on China diverted trade flows from China, causing the U.S. trade deficit with Europe, Mexico, Japan, South Korea, and Taiwan to increase as a result.”
Phase-1 Trade Deal
On January 15, 2020, the U.S. and China signed the Phase-One Deal, which commits China to buy at least $200 billion worth U.S. goods and services during 2020 and 2021, as well as roll back tariffs and renew commitments to protect intellectual property and technology transfer and improve currency practices.
So far, however, little has happened to meet these commitments.
In the nine months since the deal was signed, China’s imports of U.S. agricultural and manufactured goods, energy, and services are far behind the schedule in the agreement. Using Chinese Customs Administration data, Bloomberg states that through the first half of 2020, China had only purchased 23% of the total purchase target for the year.
Also, there have been no discussions regarding the follow-up “Phase 2” agreement that would tackle some of the larger structural issues, such as intellectual property and technology. “The Phase-2 negotiations, which were intended to finally address some of the core trade issues, have been quietly dropped,” said Stephen Olson, a senior research fellow at the Hinrich Foundation and a former U.S. trade negotiator.
On August 25, China and the U.S. agreed to accelerate the implementation of the Phase-1 agreement. The office of the U.S. Trade Representative recently announced that the “parties addressed steps that China has taken to effectuate structural changes called for by the agreement that will ensure greater protection for intellectual property rights, remove impediments to American companies in the areas of financial services and agriculture, and eliminate forced technology transfer.”
Even with this uncertainty as backdrop, a membership survey by the U.S.-China Business Council (USCBC), which represents more than 200 companies with decades of experience in China, showed surprising optimism regarding continuing to work with China.
The survey showed that, despite significant losses regarding sales and supply chain disruptions, its U.S. members “remain focused on a long-term commitment to China, with 83% viewing China as the number-one, or in the top five, priorities for global strategy,” states USCBC. “Almost 70% say they are optimistic about the commercial prospects of the market over the next five years.” In addition, 87% of the companies indicted they had no plans to reshore to the U.S.
Regardless of the outcome of the Phase-1 trade agreement, and “despite high tensions, all indicators suggest that companies will remain largely committed to the China market over the long term,” says USCBC.