Trade wars are rarely good, and never easy to win. Instead, they tend to produce economic losses on all sides, causing both short-term pain and long-term damage. We have previously explained why at some length (see CIO Special as of May 17, 2018). However, it often takes a while until the full impact starts to show up in trade statistics.
As our "Chart of the Week" shows, Chinese exports to the United States have held up pretty well in value terms since both sides started to impose tariffs in July 2018. They remain 8% higher compared to when President Trump took office. Meanwhile, U.S. exports to China slumped since the start of hostilities, and remain 8% lower than in January 2017.
A moment of reflection helps explain why. Over the past 20 years, China has become a dominant producer not just in a vast range of finished consumer goods, from clothing and toys to electronics, but also in many sub-components. As the world has painfully learned since the start of the Covid-19 pandemic, this includes such essential items as face masks as well as active ingredients in many pharmaceutical products.
Trying to reduce such dependency may seem like a good idea. Indeed, a more thoughtful trade warrior might well have started to build up self-sufficiency in essential items first. However, moving production out of China requires plenty of time and investment. Thanks to its cost advantages as it scaled up production, prices were increasingly determined in China. As the Economist recently pointed out, there are first signs of production being relocated as U.S. imports from other Southeast Asian countries are increasing. It is a slow process, though, with U.S. consumers footing the bill through higher prices.
By contrast, the United States mainly exports a mix of commodities such as oil (where China was swiftly able to find new suppliers elsewhere, at little cost) and higher-value products and services. The latter are suffering as increasingly stringent U.S. technology export controls make U.S. businesses look like unreliable suppliers. Whether such measures will help President Trump politically while seeking re-election remains to be seen. Even if he loses, however, the damage from the trade conflicts may prove hard to reverse.
* 12-month rolling total in U.S. Dollar
Sources: China Customs General Administration, Bloomberg Finance L.P., DWS Investment GmbH as of 4/30/20
2. Little thought appears to have been given to practical and logistical problems either. As the South China Morning Post recently (29 Apr, 2020) noted: "There is only one US export control officer currently stationed in Beijing, and while it is understood authorities are hiring a second to deal with an expected higher volume of inspections, delays and bottlenecks are expected." See: https://www.scmp.com/economy/china-economy/article/3082180/us-china-decoupling-be-accelerated-tightening-technology