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The US–China Trade War: Deal or No Deal?
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At its simplest, the intent of G20 summits was to encourage global economic growth through cooperation
among governments, central banks, and international organizations. The seeds of the summits were planted in
1975, when heads of state from six countries, known as the G6, gathered to discuss economic issues.1 Nearly
45 years later, it had grown into a forum of 20 countries’ leaders, and invited guests from nonmember countries
and international organizations that met to exchange thoughts and expertise on topics such as economic growth
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and disparities, sustainable development goals, innovation, infrastructure, global health, and free trade. At the
June 2019 G20 summit, two leaders—US president Donald Trump and Chinese president Xi Jinping—
attracted a lot of attention because of the trade war between their countries.
A trade war was an economic conflict resulting from trade protectionism, when nations used tariffs or
other barriers against each other to gain advantages in trade, business, economic, and political positions. Since
1947, tariffs between countries had been falling in line with the General Agreement on Tariffs and Trade
(GATT, originally signed by 22 countries) and its 1995 successor the World Trade Organization (WTO, with
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164 member countries in 2018), from a global average of 22% to less than 5%. The resulting boom in trade led
to the coining of the term globalization, meaning the integration of national and local economies, along with
social and cultural elements. But in the second half of the 2010s, protectionism reasserted itself in grand fashion
as the United States and China—the world’s two economic superpowers—initiated rounds of tariffs, counter-
tariffs, and uncertainties amid negotiations on a wide range of imports, exports, and structural trade issues.
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By June 2019, the United States had set a 25% tariff on $250 billion of Chinese imports, and China had
retaliated with 20% to 25% tariffs on more than 5,000 US products, with the promise of more to come. In early
August, Trump promised another 10% tariff on an additional $300 billion of Chinese imports. The meeting
between Trump and Xi at the G20 summit was a pivotal point, crucial to either ending the trade war or resuming
stalled negotiations between trade representatives that had been underway for two years. The trade war
contributed to China’s slower GDP growth in the first quarter of 2019 (see Exhibit 1).
Though many speculated on reasons for the heightening trade war, with increasingly complicated problems
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involving various agents and governments in the integrated world economy, there seemed to be three major
issues. Was the trade war about the US–China trade deficit and the economic repercussions for both countries?
Was it about politics and policies? Or was it about future competition in technology, and its role in the struggle
for economic dominance between the United States and China?
1 Those countries were France, Germany, Italy, Japan, the United Kingdom, and the United States. Canada was invited the following year to become
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the G7.
This technical note was prepared by Dennis Yang, Dale S. Coenen Free Enterprise Professor of Business Administration; Jiming Ha, Visiting Scholar;
Paul Holtz, Case Researcher; and Gerry Yemen, Senior Researcher. It was written as a basis for class discussion rather than to illustrate effective or
ineffective handling of an administrative situation. Copyright  2020 by the University of Virginia Darden School Foundation, Charlottesville, VA. All
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copyright. Permissions@hbsp.harvard.edu or 617.783.7860
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Genesis and Evolution of the Trade War
The trade war began to take root after Trump began his presidential campaign in 2015, during which he
proposed that all Chinese exports to the United States be subject to a 45% tariff. This threat was posited on
the notion that China had been gaining advantages in trade for several decades by “limiting imports with high
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tariffs and discriminatory regulations, subsidizing exports with an undervalued currency and generous credit
from state banks, bullying foreign investors, and stealing intellectual property from Western countries.”2 One
of Trump’s top economic advisers said that a 45% tariff would be “perfectly calculated” and “purely defensive,”
citing those concerns and other Chinese policies and violations.3 Those issues resonated with Trump’s voting
base, which was concerned about jobs lost to Chinese competition.
China’s response to US claims of unfair practices in trade included calling Trump’s claims “lies.” 4 In
addition, the approach US officials took, both in person or on social media, was considered impolite and adverse
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to China’s negotiations procedures, which allowed both sides to save face.5 Beyond cultural differences, some
officials and traders in China believed that the two economies had been integrated around supply chains for
many years, and that the trade war was a US tool to undo those links and slow China’s development.6 They
placed the blame squarely on the United States, pointing out trade advantages such as the US government
investing in private Chinese technology firms focused on artificial intelligence (AI).7 For China, lifting the US
tariffs would be seen as a step toward reconciliation.
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Once in office in 2017, Trump began ramping up his case for action to shrink the massive trade deficit
between the United States and China (see Exhibit 2 for early chronicles of the trade war). Trade imbalances
resulted from complicated interactions among governments, companies, and individuals and were influenced
by policies, institutions, and social norms. In 2018, China exported about five times as many goods to the
United States as it imported—roughly $540 billion compared with $120 billion—causing the US trade deficit
with China to balloon to a record $419 billion.8 Moreover, in 2018, Chinese investments in the United States
fell to less than $5 billion, about one-tenth the level of two years before.9 By contrast, major US multinational
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corporations such as Apple, General Motors, Intel, and Nike continued to operate and sell tens of billions of
dollars in goods and services in China.
Trump was not alone in his concerns. In December 2017, the US National Security Strategy had identified
China and Russia as rivals seeking to undermine US power and erode the country’s security and prosperity.10
In August of that same year, Democrats in Congress supported a proposed inquiry into China’s trade practices,
signaling wide bipartisan support for tariffs. Similarly, the January 2018 National Defense Strategy called China
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2 Peter Morici, “The 45 Percent Tariff,” Washington Times, January 22, 2017, https://www.washingtontimes.com/news/2017/jan/22/donald-trumps-
45-percent-tariff-on-china/ (accessed Jun. 10, 2019).

3 Peter Navarro, “Op-Ed: Trump’s 45% Tariff on Chinese Goods Is Perfectly Calculated,” Los Angeles Times, July 21, 2016,
https://www.latimes.com/opinion/op-ed/la-oe-navarro-trump-trade-china-tariffs-20160721-snap-story.html (accessed Jun. 10, 2019).

4 Miao Han, “Chinese State-Run Paper Singles Out Navarro for Trade ‘Lies,’” Bloomberg, September 9, 2019,
https://www.bloomberg.com/news/articles/2019-09-10/chinese-state-run-paper-singles-out-navarro-for-trade-lies (accessed Oct. 21, 2019).
5 Ken Wilcox, “US-China Trade Talks: The Five Mistakes Trump’s Team Keeps Making,” South China Morning Post, October 19, 2019,
https://www.scmp.com/comment/opinion/article/3033385/us-china-trade-talks-five-mistakes-trumps-team-keeps-making (accessed Oct. 21, 2019).

6 Nick Schifrin, Katrina Yu, and Dan Sagalyn, “Impact of U.S.-China Trade War Felt in Both Countries,” PBS Newshour, September 28, 2019,
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https://www.pbs.org/newshour/show/impact-of-u-s-china-trade-war-felt-in-both-countries (accessed Oct. 21, 2019).

7 https://www.pbs.org/newshour/show/impact-of-u-s-china-trade-war-felt-in-both-countries.
8 Kimberly Amadeo, “US Trade Deficit with China and Why It’s So High,” March 27, 2019, https://www.thebalance.com/u-s-china-trade-deficit-
causes-effects-and-solutions-3306277 (accessed Jun. 16, 2019).

9 Reshma Kapadia, “The Cold War in Tech Is Real and Investors Can’t Ignore It,” Barron’s, February 22, 2019, https://www.barrons.com/articles/the-
cold-war-in-tech-is-real-and-investors-cant-ignore-it-51550883601 (accessed Feb. 14, 2020).

10 Steve Holland and James Oliphant, “Trump Strategy Document Says Russia Meddles in Domestic Affairs Worldwide,” Reuters, December 18, 2017,
https://www.reuters.com/article/us-usa-trump-nationalsecurity/trump-strategy-document-says-russia-meddles-in-domestic-affairs-worldwide-
idUSKBN1EC109 (accessed Feb. 14, 2020).
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“a strategic competitor using predatory economics.”11 Among others, there were worries among US politicians,
businesspeople, defense officials, and academics that China had pirated US intellectual property, including
military technology, through joint ventures between Chinese and US firms. China did not take such actions
lightly. It had already identified a wide range of US exports on which it could impose tariffs, including soybeans,
cars, aircraft, and rare-earth metals essential to the production of nearly all high-tech goods.12 China was the
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world’s top producer of such metals.
Indeed, technology was among the biggest factors in the burgeoning trade war. China and the United States
had for many years fought a pitched battle for tech supremacy, with China seeing technology as central to its
ambitions to become a global export powerhouse beyond low-cost goods—a part of its Made in China 2025
program, and an intended shift from being a low-end to a high-end manufacturer of goods.13 Against the
backdrop of concerns about technology piracy and cybercrime, Trump signed an executive order in May 2019
restricting exports of US information and communications technology to “foreign adversaries” as a matter of
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national security—a retaliation against countries for breaking the law or violating sanctions.
Many observers saw this move as a direct hit to some of China’s largest firms, such as multinational
telecommunications giants Huawei and ZTE. Huawei, for example, depended on such imports to create its
cellphones and deliver other products and services to its clients in 170 counties. The United States also put
strong pressure on its allies, especially in Europe, to restrict such sales. And in 2018, Trump banned US exports
to ZTE, crippling its production. He lifted the ban a few months afterward, but then imposed a $1 billion fine
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on the company.14
Tariffs between the two countries started in January 2018, when Trump imposed a 30% tariff on foreign
solar panels. China, the world’s largest producer of such panels, cried foul, and later filed a complaint with the
WTO that the tariff harmed China’s legitimate trade activities and destabilized the global market for such panels.
In addition, Trump placed a 20% tariff on imports of washing machines. Then in March 2018, Trump
introduced a 25% tariff on imports of steel and 10% on aluminum (except from some US allies), also major
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Chinese exports to the United States.
The situation escalated quickly, and in July 2018, the United States announced a 25% tariff on $50 billion
of high-tech imports from China. China responded in kind, with the same tariff on the same amount of imports
from the United Sates. In September 2018, the United States imposed a 10% tariff on another $200 billion of
Chinese imports, then raised that to 25% in June 2019. Again, China retaliated, raising tariffs as of June 2019
from 10% to 25% on 2,000 goods from the United States, including beef, vegetables, microwaves, and liquefied
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natural gas, as well as from 10% to 20% on about 1,000 other US exports.
This bantering between the two countries coincided with the 11th failed round of negotiations between
senior officials.15 After that round, on May 5, 2019, Trump tweeted, “The Trade Deal with China continues,
but too slowly, as they attempt to renegotiate. No!”16 The resulting uncertainty rattled stock markets in both
countries (see Exhibit 3).
11 “Summary of the 2018 National Defense Strategy of the United States of America,” US Department of Defense, 2018,
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https://dod.defense.gov/Portals/1/Documents/pubs/2018-National-Defense-Strategy-Summary.pdf (accessed Jun. 11, 2019).

12 Tom Phillips, “China Has ‘All Kinds of Weapons’ to Take on Trump Threats, Says Ex-trade Adviser,” Guardian, August 3, 2017,
https://www.theguardian.com/world/2017/aug/03/trump-china-trade-investigation-response (accessed Feb. 14, 2020).

13 https://www.barrons.com/articles/the-cold-war-in-tech-is-real-and-investors-cant-ignore-it-51550883601.
15 Natasha Bach, “These Are the U.S. Goods Affected by China Tariffs,” Fortune, May 13, 2019, https://fortune.com/2019/05/13/china-tariffs-list-
us/ (accessed Feb. 14, 2020).

16 Donald J. Trump (@realDonaldTrump), “….of additional goods sent to us by China remain untaxed, but will be shortly, at a rate of 25%…,”
Twitter, May 5, 2019, 9:08 a.m., https://twitter.com/realdonaldtrump/status/1125069836088950784?lang=en (accessed Jun. 20, 2019).
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International Trade and Capital Flows
The trade war highlighted the interdependence of the Chinese and US economies. In 2018, the United
States was the largest importer of Chinese goods, and China was the third-largest importer of US goods after
Canada and Mexico. China was also the largest creditor of US debt, having provided $1.11 trillion as of July
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2019. 17 National income accounts (NIA) and balance of payments (BOP) data provided a framework for
understanding how trade imbalances were connected to other macroeconomic variables in an economy.
Applications of NIA and BOP could shed light on the causes of US–China trade imbalances, and the
connections of trade flows with capital flows and credit relationships between the two countries (see Exhibit 4).
Since the 1980s, China, the United States, and other major economies had become increasingly global. By
2018, the total value of exports and imports of the United States accounted for 27% of its GDP. That same
year, trade accounted for 39% of GDP in China, 87% in Germany, 43% in India, and 61% in the United
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Kingdom.18 In a given year, a country could spend more on goods and services than the value of its production
by borrowing funds from foreigners and importing goods from other countries, or a country could spend less
than it produced and lend the difference to foreigners.
National income identity (NII) divides GDP (Y) into four broad categories of spending (Equation 1):
𝑌 = 𝐶 + 𝐼 + 𝐺 + 𝑁𝑋, (1)
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where C (consumption) represents household spending on goods and services; I (investment) denotes business
fixed investments including spending on new structures, equipment, and intellectual property products such as
software and R&D; G (government purchases) represents the goods and services bought by governments at
various levels; and NX (net exports) equals exports (X) minus imports (M), or net sales of goods and services
to foreigners. A trade surplus implied positive NX, where the value of exports was greater than the value of
imports. A trade deficit was the opposite. Thus a trade surplus was associated with net outflows of goods and
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services and net inflows of funds as payment for net exports.
In an open economy, domestic production, consumption, and investment were closely related to
international trade. Rearranging NII in Equation 1 generates Equation 2:
𝑆 - 𝐼 = 𝑁𝑋, (2)
where 𝑆 = 𝑌 - 𝐶 - 𝐺 is national saving, and 𝐶 + 𝐺 is aggregate consumption. Equation 2 implies that the
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total output produced but not consumed by households or purchased by the government must be in the form
of investment goods or net exports. More specifically, if a country had high savings (or low consumption)
relative to investment, such that 𝑆 - 𝐼 0>, the country would be a net exporter of goods and services with a
trade surplus. That was the case for China in the late 2010s. If a country had low savings (or high consumption)
relative to investment, such that 𝑆 - 𝐼 < 0, the country would be a net importer with a trade deficit. That was
the case for the United States.
Equation 2 highlights the flow of funds connecting domestic saving and investment to international capital
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flows. When sales of goods and services occurred across the border, trade payments would flow in the opposite
direction. A country with a trade surplus would use the value of net exports to acquire yield-seeking assets and
17 “Major Foreign Holders of Treasury Securities,” Department of the Treasury/Federal Reserve Board, January 16, 2020,
https://ticdata.treasury.gov/Publish/mfh.txt (accessed Oct. 10, 2019).
18 “Exports of Goods and Services (% of GDP),” World Bank, 2019, DC, https://data.worldbank.org/indicator/ne.exp.gnfs.zs; and “Imports of
Goods and Services (% of GDP),” World Bank, 2019, https://data.worldbank.org/indicator/NE.IMP.GNFS.ZS (both accessed Oct. 10, 2019).
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make foreign direct investment (FDI) overseas, thus experiencing capital outflows and becoming a lender in
the context of its BOP. A country with a trade deficit would need to finance net imports by selling assets to
foreigners, thus experiencing capital inflows and becoming a borrower in the global economy. Equation 2
captures these relationships through domestic and international links. If total savings (S) were not invested
domestically (I), the remaining funds would need to be invested abroad, and the size of net capital outflows
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(CF) would equal net exports (NX); that is, 𝑆 - 𝐼 = 𝐶𝐹 = 𝑁𝑋 > 0. By contrast, if an economy had
insufficient savings, it would have to rely on borrowing to finance its trade deficit; that is, 𝑆 - 𝐼 = 𝐶𝐹 =
𝑁𝑋 < 0.
Two very different economies
By the late 2010s, China and the United States were fundamentally different economies in the context of
NII and BOP. In 2018, personal consumption accounted for 69% of US GDP, and net exports were −5%. In
other words, the total of US personal consumption, business investment, and government spending exceeded
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GDP by 5%.19 The United States had to rely on imports to fill that gap. In contrast, personal consumption
accounted for just 39% of China’s GDP, fixed capital investment for 45% (business and government
investment), and net exports for 2%.20 China’s savings and investment rates were extraordinarily high; net
exports accounted for between 8% and 9% of GDP in 2006–08, though net exports fell to between 2% and
3% of GDP in the late 2010s.21 In 2018, the United States registered a record $891.3 billion trade deficit in
goods. Among this total, $419.2 billion was with China, followed by Mexico at $81.0 billion, Germany at
$68.2 billion, Japan at $67.6 billion, and Canada at $20.0 billion.22 These countries were the five largest US trade
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partners. China’s large trade surplus mirrored the large US trade deficit, and it continued to increase in 2019.23
China’s persistent trade surplus also gave rise to huge official foreign reserves (see Exhibit 5). Because of
currency controls, Chinese exporters—as well as households and individuals—were subject to restrictions, and
could manage only limited foreign currencies to buy foreign assets. As a result, massive quantities of foreign
currencies from the trade surplus were brought to banks in exchange for Chinese renminbi. Chinese producers
used renminbi to cover production costs and turn them into corporate savings. Chinese banks, in turn, acquired
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yield-seeking assets abroad (such as US Treasury bills), contributing to the accumulation of official foreign
reserves. China’s foreign reserves were about $200 billion before China’s WTO accession in 2001, but the
accumulation accelerated with rapid growth in exports, and snowballed to about $4 trillion in 2014—20 times
its 2001 reserves. Though China’s foreign reserves fell afterward because of a smaller trade surplus and net
capital inflows due to slower economic growth, total reserves still hovered above $3 trillion in 2018.
Balance of payments data for China and the United States between 1990 and 2018 for transactions with
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the rest of the world—including trade in goods and services, financial assets, and foreign currency reserves—
are shown in Exhibit 4. The amounts for the United States mirrored those of China in several ways. The first
was the balance of goods in the current account: China was a net exporter, while the United States was a net
importer. The media often noted this discrepancy. Second, the balance in services (which included payments
for overseas travel, tourist and education expenses, transportation, purchases of intellectual properties, and the
like) showed that China was a large importer during the preceding decade, hitting $292 billion in 2018—an
amount much less widely known. In contrast, the United States was a net exporter of services ($260 billion in
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19 Bureau of Economic Analysis, “NIPA Handbook: Concepts and Methods of the U.S. National Income and Product Accounts,” US Department
of Commerce, November 2019, https://www.bea.gov/resources/methodologies/nipa-handbook (accessed Oct. 23, 2019).

20 “The World Fact Book: China Economy Overview,” Central Intelligence Agency, 2019, https://www.cia.gov/library/publications/the-world-
factbook/geos/ch.html (accessed Oct. 23, 2019).

21 Dennis Tao Yang, “Aggregate Savings and External Imbalances in China,” Journal of Economic Perspectives 26, no. 4 (Fall 2012): 125–46.
22 Kimberly Amadeo, “US Trade Deficit by Country, With Current Statistics and Issues,” Balance, February 10, 2020,
https://www.thebalance.com/trade-deficit-by-county-3306264 (accessed Oct. 23, 2019).
23 “China June Trade Surplus with U.S. Rises 11% to $29.92 Billion,” Reuters, July 12, 2019, https://www.reuters.com/article/us-china-economy-
trade-surplus-usa/china-june-trade-surplus-with-u-s-rises-11-to-29-92-billion-idUSKCN1U711Q (accessed Oct. 20, 2019).
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2018).24 Third, China had a persistent current account surplus, while the United States had a deficit (Exhibit 4).
Finally, China’s central bank played an active interventionist role in currency and international capital flows, as
shown by the large numbers in the reserves account; the US central bank played a limited role in in the currency
market. By contrast, China and the United States shared features in their financial accounts, with both being
the two largest recipients of FDI, yet having liabilities that exceeded assets in most years. Moreover, both
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countries received increasing portfolio inflows for most of the 2000s.
The United States had a persistent trade deficit in goods with China since the late 1970s. Net exports flowed
from China to the United States, while dollar payments flowed from the United States to China (see Exhibit 6).
In addition, many American companies invested heavily in China through FDI. These companies included
prominent consumer global brands such as GM, Nike, and Procter & Gamble, as well as technology
heavyweights such as Apple, Cisco, Intel, and Qualcomm. By 2018, in the food and retail industry, KFC had
5,910 outlets, McDonald’s owned 2,700, and Starbucks had 4,000 in 160 cities in China.25 Funds flew from the
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United States to China when American companies made FDI in China to capture high returns in the world’s
fastest-growing economy. With capital controls, most dollar inflows from FDI were deposited in Chinese
banks, which in turn were invested in yield-seeking assets of the United States. As US households and
companies obtained funds to finance the trade deficit, China became an ever-larger creditor of the United
States.
Evolution of the imbalances

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How did China and the United States develop such huge imbalances in trade and capital flows? Many
economists believed it was the outcome of globalization, from which both countries benefited. From US
president Richard Nixon’s meeting with Chinese chairman Mao Zedong in 1972, through the 1980s under US
president Ronald Reagan—who advocated for, deregulated, and opened free markets—the United States
brought political drive and initiated globalization worldwide. The idea was to leverage the comparative
advantages of nations and thereby increase efficiency and welfare. This process would ultimately lead to the
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loss of American manufacturing jobs, but the benefits far outweighed the costs.
The United States was able to tap into China’s low labor costs—which were 10% to 20% of US costs—to
produce household goods such as electronics, clothing, footwear, toys, and furniture, massively improving the
welfare of US consumers. Meanwhile, US companies made FDI in China, and sold products both there—in
the world’s most populous country—and back home. Although the United States lost manufacturing jobs and
suffered pain during a transition period, its economy became increasingly specialized in R&D, technology,
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marketing, and other high-value services based on comparative advantage. With unemployment at 3.7% in
2019, phenomenally low by historical standards, the United States continued to prosper.
These macroeconomic imbalances also reflected the global value chain. In recent decades, trade in
intermediate inputs through FDI and arm’s-length offshoring had become more prominent in the global
economy. About two-thirds of world trade consisted of transactions in intermediate inputs, and about half of
such transactions were trades and transfers of goods within multinational corporations.26 Though China had
large trade surpluses with the United States and the European Union, it had trade deficits with the resource-
rich economies of Australia, Brazil, and Saudi Arabia, as well as the high-tech economies of Japan, South Korea,
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and Taiwan.
24 IMF data, http://data.imf.org/?sk=7A51304B-6426-40C0-83DDCA473CA1FD52&sId=1542633711584.

25 YumChina annual report, 2018; McDonald’s annual report, 2018; Starbucks annual report, 2018.
26 See Robert C. Johnson and Guillermo Noguera, “Accounting for Intermediates: Production Sharing and Trade in Value Added,” Journal of
International Economics 86, no. 2 (March 2012): 224–36. Corroborative estimates from “World Investment Report: Foreign Direct Investment and the
Challenge of Development,” UNCTAD (United Nations Conference on Trade and Development), 1999, p. 232 show that one-third of global trade
comprised intermediate inputs exchanged within firms.
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As part of a complex global supply chain, China imported raw materials and intermediate goods, hosted
outsourcing from the United States and other advanced economies, and then exported large quantities of
processed goods to the United States and the European Union. Between 1992 and 2008—the early stage of
global outsourcing to China—its processed exports jumped from $39 billion to $674 billion, or about half of
its exports by the end of that period.27 Among processed exports, the share contributed by foreign companies
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through FDI shot from 10% to 64%.
When the United States proposed imposing a 25% tariff on $200 billion of Chinese imports in 2018, 52%
of the tariffs were on intermediate inputs and 22% on capital goods (see Exhibit 7).28 By contrast, only 27%
were on final consumer goods. These figures highlighted the scope of the tariffs’ impacts on the global supply
chain. In terms of ownership structure, foreign firms bore 40% and joint ventures 13% of the burdens from
the initial tariffs on $50 billion of Chinese goods, while the burdens for multinational corporations were 32%
for foreign firms and 12% for joint ventures from the second-wave tariffs on $200 billion of Chinese goods.
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Though the main intent of the US tariffs was to contain Chinese exporters, unintended consequences spread
to multinational corporations.
Trade imbalances between the United States and China were outcomes of behaviors and interactions
among consumers, companies, and governments, going beyond comparative advantages in manufacturing and
developments in global supply chains. As suggested by Equation 2, the high savings rate in China and the low
savings rate in the United States were fundamental reasons for the trade imbalances between the world’s two
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largest economies. Over the past two decades, China’s gross savings rate had fluctuated between 40% and 50%,
exceeding its domestic investment rate and the global average savings rate of 20%. 29 Outputs that were
produced but not consumed or invested domestically had been exported to the rest of the world, with a large
share going to the United States.
By contrast, the US gross savings rate had been about 18% during that period. Reasons for China’s high
savings rate included its persistence in consumption habits amid rapid income growth, anticipated lower future
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growth, major shifts in the age-earnings profiles of the labor force, and a lack of social security provisions for
the population. On the US side, a long-term downward trend in private and personal savings and federal deficits
had contributed to low aggregate savings. More recently, accommodative monetary policies had kept interest
rates low, which encouraged borrowing and consumption. With the low savings rate, much of the US domestic
investment and trade deficits had been financed by inflows of international capital.
Trade policies and programs

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Policies and institutions for FDI and trade also affected the prices and quantities of exports and imports.
China vigorously promoted exports from the start of its economic reforms in the late 1970s. Before it was part
of the WTO in 2001, China used export-promoting and import-restricting policies such as tariffs, quotas, and
import licenses. The government’s main concern in the early years of economic reform had been to limit
imports to avoid BOP problems arising from high borrowing and trade deficits. To comply with WTO
membership, by the late 1990s China had phased out many of its import barriers. But many export-promoting
strategies that had been in place since the 1980s remained. These strategies included “self-balancing regulation”
on exports by foreign firms, creation of special economic zones, easing of ownership limits on FDI, provision
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27 Liugang Sheng and Dennis Tao Yang, “Expanding Export Variety: The Role of Institutional Reforms in Developing Countries,” Journal of
Development Economics 118 (January 2016): 45–58.

28 Liugang Sheng and Hongyan Zhao, Changes in the China–U.S. Economic Relations (Peking: Peking University Press, 2020).
29 Dennis Tao Yang, Junsen Zhang, and Shaojie Zhou, “Why Are Saving Rates So High in China?,” in Capitalizing China, eds. Joseph P. H. Fan and
Randall Morck. (Chicago: University of Chicago Press (2012): 27882.
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of export tax rebates, and changes to exchange rate policies. China’s accession to the WTO exacerbated the
effects of export-promoting policies and led to an extremely large trade surplus.
Self-balancing regulation, part of Chinese law on multinational corporations, required that FDI be geared
toward export industries.30 A 1990 law said that exports had to exceed half the annual output of foreign firms.
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That share was lowered in 2001, but the law was still in place in 2019. Partly influenced by this regulation, the
share of foreign enterprises invested in Chinese exports rose from about 20% in the early 1990s to 56% in
2009.31
China had established special economic zones for exports from coastal cities in the early 1980s. Because of
the zones’ initial success, they were expanded to inland cities. Multinational corporations in these zones enjoyed
stronger protection of intellectual property rights, a (lower) corporate tax rate of 15%, duty-free treatment of
imported inputs, cheap land, and free property taxes for their first five years. Foreign firms received additional
yo
benefits if they exported most of their products.32 These zones experienced their first boom between 1990 and
1993, when their number skyrocketed from 18 to 130. The second boom was between 1999 and 2003, when
their number shot from 139 to 196.33 By 2006, China had created 221 special economic zones.
These zones attracted FDI in export-oriented industries. 34 The Chinese government also slowly lifted
restrictions on FDI in these zones.35 As a result, the number of industries in the zones jumped in 2002 and
2007, years when restrictions were relaxed. These national initiatives to liberalize ownership increased the
amount of processed exports and the variety of products manufactured by multinational corporations.
op
The Chinese government also used export tax rebates to promote exports. These rebates refunded tariffs
on imported inputs and value-added taxes on exports. Such policies discriminated against goods sold
domestically—especially those using imported inputs—and encouraged firms to sell products abroad.
Conceivably, some foreign buyers paid less for such goods. After the East Asian financial crisis of 1997, China
raised the rebate rates several times, to reach an average of 15% in 1999, to make Chinese exports more
tC
competitive before joining the WTO.36 Moreover, the value of the rebates quintupled between 2002 and 2008,
after China acceded to the WTO.37
Thus these export tax rebates were significant. In 2006, they equaled 10% of corporate savings and 14%
of government tax revenue. 38 Duty drawbacks and value-added tax rebates helped promote exports from
China. 39 Although the WTO allowed export tax rebates, China made far greater use of them than most
countries. A 2007 survey of 55 developing countries found that less than half had laws or regulations on duty
drawbacks, limiting their use.40
No
Chinese tariffs on US exports were extraordinarily high in the 1990s: the simple average index started at
40% in 1992, but it more than halved to 17% in 2000 because of WTO requirements for China’s accession in
2001 (see Exhibit 8, panel A). Chinese tariffs continued to decline to an average of 8% in 2016. In contrast,
30 Yu Yongding, “Global Imbalances and China,” Australian Economic Review 40, no. 1 (2007): 3–23.
31 Sheng and Yang, “Expanding Export Variety.”
32 Jing Wang, “The Economic Impact of Special Economic Zones: Evidence from Chinese Municipalities,” Journal of Development Economics 101 (March
2013): 133–47.
Do

34 Wang, “The Economic Impact of Special Economic Zones.”
36 Yang, “Aggregate Savings and External Imbalances in China.”
39 Chi-Chur Chao, Eden S. H. Yu, and Wusheng Yu, “China’s Import Duty Drawback and VAT Rebate Policies: A General Equilibrium Analysis,”
China Economic Review 17, no. 4 (2006): 432–48.

40 Elena Ianchovichina, “Are Duty Drawbacks on Exports Worth the Hassle?,” Canadian Journal of Economics 40, no. 3 (August 2007): 881–913.
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US tariffs on Chinese imports were low during this period, with a modest decline from 5% to 3%. The higher
Chinese tariffs on US exports contributed to China’s trade surplus with the United States. This narrowing of
the gap between the tariffs should have helped reduce the US trade deficit. But since the start of the trade war,
import tariffs between the two countries rose to 21.0% in the United States and 21.1% in China—the highest
levels in more than 20 years (see Exhibit 8, panel B). These tariffs presented obstacles to the long-term
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integration of the two countries.
US restrictions on high-tech exports to China also affected the trade imbalance. As a developing country,
China needed advanced technology. But in its trade with the United States, Chinese imports of 15 categories
of goods with the highest technology content were far below imports of the same goods by countries such as
Canada, Japan, the Netherlands, and even India and Mexico.41 These limited imports were the result of export
restrictions imposed by the United States or of complicated application and approval processes.
yo
Finally, some critics and policy makers argued that exchange rate policy, resulting in the undervaluation of
the renminbi to the US dollar, was a major reason for China’s large trade surplus. But disagreements abounded.
Empirical research had not yet established that changes in China’s exchange rates significantly affected imports
and exports.42
The nominal exchange rate of the renminbi to the dollar for 1981–2019 is shown in Exhibit 9. Changes in
the exchange rate suggested that the dramatic increase in China’s trade surplus between 2000 and 2010 wasn’t
the result of shifts in exchange rate policy. Between 1994 and 2005, China stabilized its nominal exchange rate
op
at about RMB8.28 to USD1.43 China also had a trade surplus of less than 2% of GDP for most of those years.
In July 2005, after a 2004 bounce in foreign exchange reserves, China allowed the renminbi to appreciate 2.1%
and initiated a steady appreciation of the currency.
By January 2012, the nominal exchange rate of the renminbi to the dollar had jumped more than 30%. This
considerable appreciation of China’s currency should have reduced the country’s trade surplus by raising the
tC
cost of exports and lowering the cost of imports. But the appreciation was not enough to reverse the movement
in the trade balance. Instead, many factors fostered the continued upsurge in the trade surplus. Thus exchange
rate policy could not have been the only factor driving the external imbalance—and it might not have even
been among the most important.
This argument did not rule out that a weaker renminbi could have been part of China’s policy solution to
its external imbalances. During the 2010s, the exchange rate of the renminbi against the dollar fluctuated
between RMB6 and RMB7 per USD1. Many observers believed that market forces increasingly influenced the
No
determination of the exchange rate. The strengthening of the dollar against many international currencies in
2018–19, including the renminbi, reflected relatively tight monetary policies and healthy economic performance
in the United States.
The severe imbalances of trade and capital flows between China and the United States were rooted in
complex social, behavioral, and institutional contexts. Though many analysts considered the outcomes
beneficial to most consumers and producers, there were persistent concerns about intellectual property
protection in China and unfair trade policies, government interferences, and unequal market access in both
countries. Pushbacks to globalization become even more open during Trump’s election campaign. Despite low
Do
41 Jiandong Ju, Ziru Wei, and Hong Ma, “Anti-Comparative Advantage: A Puzzle in U.S.-China Bilateral Trade” (working paper, School of Economics
and Management, Tsinghua University, 2015).

42 W. Max Corden, “China’s Exchange Rate Policy, Its Current Account Surplus and the Global Imbalances,” Economic Journal 119, no. 541 (November
2009): F430–41; Yin-Wong Cheung, Menzie D. Chinn, and Eiji Fujii, “China’s Current Account and Exchange Rate,” in China’s Growing Role in World
Trade, eds. Robert C. Feenstra and Shang-Jin Wei (Chicago: University of Chicago Press, 2010).
43 RMB = renminbi; USD = US dollars.
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unemployment and rapid expansion of high-tech and service jobs, the rhetoric of “America First” and “Make
America Great Again” had strong appeal to many US politicians and voters who did not reap the fruits of
globalization. Relative wages of unskilled US workers stagnated during globalization. And in the United States,
the Gini coefficient—a common measure of income inequality—rose from 0.40 in the early 1990s to 0.48 in
the late 2010s.44 Such changes provided strong ammunition for the US–China trade war.
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Politics and Policies
Politics clearly played a huge role in the trade war. The idea of tariffs had officially originated from Trump’s
presidential campaign and was consistent with his personal beliefs dating back several years. Tariffs were also
a component of Trump’s presidential agenda, which included lowering the US trade deficit and resolving border
issues, and were closely related to his strategies for security, diplomacy, and global economic competition.
yo
Moreover, tariffs reflected broad concerns of US businesses, which wanted easier access to China’s
markets, intellectual property protection, reduced state subsidies to Chinese companies, and less interventionist
Chinese industrial policies—though at the same time, they didn’t like tariff retaliations from China because of
their investments there, their desire to expand global sales, and their expectations for future growth in Asia.
Finally, as noted, there was bipartisan US political support to win the long-term economic and technological
competition with China.
op
The Trump administration began preparing for the trade war soon after entering office, partly due to the
pressure on Republicans to win the 2018 midterm elections and, ultimately, Trump’s 2020 presidential
campaign. In May 2019, Trump also threatened escalating tariffs on Mexico if it didn’t crack down on the flow
of Central American immigrants to the United States, entangling trade and immigration policy. But that threat
was abandoned a week later.
tC
Other political factors that facilitated the trade war included the resignations of moderate Trump
administration officials such as top economist Gary Cohn and Secretary of State Rex Tillerson. This was
compounded with the hiring and advancement of such hawkish advisers as US trade representative Robert
Lighthizer, trade adviser Peter Navarro, Secretary of State Mike Pompeo, and National Security Adviser John
Bolton. Lighthizer, for example, defended protectionism,45 accused China of unfair trade practices,46 believed
that China should make substantive changes to its trade policies,47 and said that the use of tariffs to promote
US industry was Republican ideology guided by the pro-business founders of the party.48 Similarly, Navarro
No
was a strong advocate for reducing US trade deficits and accused China of being a currency manipulator.49 His
views on trade were widely considered misguided by mainstream economists.50 Such personalities, appointed
by Trump, consolidated a strong stand for using tariffs against China and intensifying trade negotiations.
Initially, much of the US public thought Trump’s trade war would result in a better outcome for the United
States, in the belief that China had more to lose. There was also confidence that what Trump and his
44 US Census Bureau, “U.S. Household Income Distribution from 1990 to 2018 (by Gini-coefficient),” Statista, September 10, 2019,
https://www.statista.com/statistics/219643/gini-coefficient-for-us-individuals-families-and-households/ (accessed Oct. 20, 2019).
Do
45 Robert E. Lighthizer, “The Venerable History of Protectionism,” New York Times, March 6, 2008,
https://www.nytimes.com/2008/03/06/opinion/06iht-edlighthizer.1.10774536.html (accessed Feb. 14, 2020).
46 Jennifer Jacobs, “Trump Taps China Critic Lighthizer for U.S. Trade Representative,” Bloomberg, January 3, 2017.
47 Glenn Thursh, “As China Talks Begin, Trump’s Trade Negotiator Tries to Keep President from Wavering,” New York Times, January 1, 2019,
https://www.nytimes.com/2019/01/01/us/politics/robert-lighthizer-president-trump.html (accessed Feb. 14, 2020).
48 Robert E. Lighthizer, “Lighthizer: Trump Is No Liberal on Trade,” Washington Times, May 9, 2011,
https://www.washingtontimes.com/news/2011/may/9/donald-trump-is-no-liberal-on-trade/ (accessed Feb. 14, 2020).
49 Annite Lowrey, “The ‘Madman’ behind Trump’s Trade Theory,” Atlantic, November 20, 2018.
50 “Peter Navarro: Free-Trader Turned Game-Changer,” Economist, January 21, 2017.
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administration had proposed would strengthen US intellectual property rights and open markets, and would
contain China’s technological advancement. But those views changed as the trade war deepened and fears of a
recession emerged. The Americans most hurt by Chinese tariffs on their goods and services became increasingly
aware of the costs and risks of the trade war—and they let their views be known. They got support from such
organizations as the US Chamber of Commerce, which issued a statement outlining the trade relationship with
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China as “for the most part productive, constructive and mutually beneficial.”51 And when following a plunge
in the stock market around the same time, Trump asked three of the most powerful bankers in the country
(Jamie Dimon, Brian Moynihan, and Michael Corbat) for their views on the economy, and they made it known
that things would be better if the trade war ended.52
A Cold War in Technology?
yo
The trade war triggered US sanctions on some Chinese technology companies, including ZTE and Huawei,
dealing a considerable blow to China’s ambition of advancing technology in the context of the Made in China
2025 plan. For instance, Huawei reportedly imported more than $10 billion of components (such as computer
chips) and intermediate products from the United States alone.53 If the United States could restrict Huawei’s
global expansion and cut off crucial supplies of high-tech US inputs, it would ease challenges for US firms
facing Chinese competitors.
op
The US–China trade war could spill over to other areas including technology restrictions and competition.
A June 2018 research note titled “China-US Trade Frictions and Implications”54 by Dr. Jiming Ha of China
Finance Forum 40, a Beijing-based think tank, showed that China’s economic growth since the country’s
accession to the WTO in 2001 was largely due to imports of high-tech products and inflows of FDI, followed
by public investment in infrastructure. The long-term negative impacts of these patterns were expected to be
much greater than the short-term ones. This finding implied that the Chinese economy and the Made in China
2025 program could be tremendously impaired if the United States and other Western countries stopped or
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restricted technology sales to China and reoriented FDI to other countries out of concerns about uncertainties
stemming from deteriorating US–China trade and other relations.
The sizes of the US and Chinese economies began converging in the 2000s and were poised to continue to
do so through 2024 (see Exhibit 10). Much of China’s economic growth was due to the government’s vigorous
promotion of the Made in China 2025 plan. For example, strategic competition emerged between top producers
of telecommunications equipment, with the US firm Cisco reaching revenue of $48 billion in 2018 (with 41%
No
from international sales), while Huawei had $109 billion (with more than 55% from international sales).55 Other
major suppliers included Ericsson, Nokia, and Intel. This competition focused on various telecommunications
equipment including 5G, a technology closely tied to information infrastructure, with potential implications for
sensitive information and national security.
Accordingly, the US government had a desire to contain Huawei and tilt the balance of global competition.
As part of these efforts—and part of the trade war—it tried several approaches in 2019. First, it introduced
51 “U.S. Chamber Statement on Escalating Tensions in U.S.-China Trade,” US Chamber of Commerce press release, August 23, 2019,
Do
https://www.uschamber.com/press-release/us-chamber-statement-escalating-tensions-us-china-trade (accessed Oct. 21, 2019).

52 Hugh Son, Brian Schwartz, and Kayla Tausche, “Trump Called The CEOs of the Biggest US Banks on Wednesday as the Stock Market Plunged,”
CNBC, August 16, 2019, https://www.cnbc.com/2019/08/16/trump-reportedly-held-call-with-major-bank-ceos-on-wednesday-as-the-stock-market-

plunged.html?__source=iosappshare%7Ccom.yahoo.Aerogram.ShareExtension (accessed Oct. 21, 2019).
53 Sijia Jiang and Michael Martina, “Huawei’s $105 Billion Business at Stake after U.S. Broadside,” Reuters, May 16, 2019,
https://www.reuters.com/article/us-usa-trade-china-huawei-analysis/huaweis-105-billion-business-at-stake-after-us-broadside-idUSKCN1SM123
(accessed Oct. 21, 2019).
54 Forthcoming.
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regulation restricting purchases of Huawei products by US companies, a move that led Huawei to sue the US
government. Second, it banned exports of US-made intermediate goods to Huawei. Finally, the US government
asked allies to join it in banning or strictly regulating Huawei devices and telecommunications equipment,
including through diplomatic presentations by Vice President Mike Pence and Pompeo in Canada, the
Netherlands, and the United Kingdom.
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In June 2019, the US government broadened its Entity List of Chinese entities beyond Huawei and ZTE
to competitors in areas such as supercomputing and AI, which relied on US chips and other technology to
make high-end electronics.56 These restrictions were likely to hamper Chinese entities in the short run, but
could encourage it to redouble its efforts to replace US technology.
In response, China’s Ministry of Commerce said in May 2019 that it was making a list of foreign enterprises,
organizations, and individuals deemed to be “unreliable entities”—those who failed to comply with market
yo
rules, broke the spirit of contracts, and blocked or stopped supplying Chinese enterprises for noncommercial
reasons, undermining the rights and interests of Chinese enterprises. This list ultimately included FedEx, Flex
Ltd, and HSBC. 57 The ministry also said that it would soon announce “necessary measures” against the
transgressors.58
Impact of Tariffs on China

op
The US tariffs were expected to deal a blow to China’s economy even if the country took countervailing
measures. China’s exports to the United States accounted for 20% of its exports (4.1% of GDP), while US
exports to China accounted for only 8% of its exports (0.6% of GDP).59 Moreover, US imports from China
(mostly consumer goods) could be more easily replaced than could Chinese imports from the United States
(e.g., soybeans, machinery, and high-tech components). Though China could find other exporters for the
aircraft and automotive products it imported from the United States, their prices could be higher.
tC
The trade measures could have resulted in three scenarios for the Chinese economy. The first, as of July
2019, was the US-imposed tariff of 25% on $250 billion of Chinese products. A worst-case scenario would be
that the trade war continued to escalate, and the United States expanded the 25% tariff to an additional
$325 billion of Chinese imports. A better-case scenario would be that China purchased more US agricultural
exports and implemented structural reforms, and the two countries reached an agreement through negotiations.
The two countries could then withdraw the tariffs imposed since the onset of the trade war.
No
China’s GDP growth was estimated to fall by 0.45 percentage points a year under the July 2019 scenario,
and by a full percentage point under the worst-case scenario. In the better-case scenario, increased purchases
of US farm products would benefit Chinese consumers as well as US farmers. In addition, opening up China’s
services sector—in areas like finance, education, tourism, medical care, and intellectual property services—
would raise Chinese consumption and reduce the country’s trade surplus with the United States. In the worst-
case scenario, Chinese consumer goods, notably electronics, furniture, toys, and knitwear, would be hit the
hardest (see Exhibit 11, panel A). There would also be important implications for employment since these
industries were labor intensive.
Do
56 Ana Swanson, Paul Mozur, and Steve Lohr, “U.S. Blacklists More China Companies over National Security Concerns,” New York Times, June 21,
2019, https://www.nytimes.com/2019/06/21/us/politics/us-china-trade-blacklist.html (accessed Feb. 14, 2020).

57 Thompson Reuters, “China Likely to Target FedEx, Flex, HSBC in Unreliable Entities List–Global Times,” Reuters News, July 26, 2019.
58 Associated Press, “Huawei Retaliation? China Draws up List of ‘Unreliables,’” Market Watch, June 1, 2019,
https://www.marketwatch.com/story/huawei-retaliation-china-draws-up-list-of-unreliables-2019-06-01?mod=mixifeed&mod=mixi (accessed Feb. 14,
2020).
59 “Exports of Goods and Services (% of GDP),” World Bank, https://data.worldbank.org/indicator/NE.EXP.GNFS.ZS (accessed Mar. 9, 2020).
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China needed to boost consumer spending because household spending was only 39% of GDP, well below
the levels of developed countries and many developing countries (see Exhibit 12). In 2017, China’s consumer
imports totaled RMB1.1 trillion, or 1.3% of GDP and 3.2% of consumption, much lower than the United
States or a developing country such as Malaysia (see Exhibit 13). This was partly due to China’s high tariffs on
consumer goods, such as its 25% tariff on automobiles (relative to 2.5% in the United States and 10% in the
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European Union). Agricultural products also faced steep tariffs, including on cotton (40%), wine (20%), beef
(12%), and frozen fish (10%), not including value-added taxes of 13% to 17%.60
Yet Chinese consumers had strong demand for imported goods. Outbound Chinese tourists spent an
average of $5,565 in 2017, including $3,064 per person at tourist destinations. Their per capita spending was
highest in the United States ($4,462) and Europe ($3,754). Spending patterns also differed. Shopping accounted
for 25% of spending by outbound Chinese tourists, compared with 15% for their counterparts from other
countries (see Exhibit 14). But Chinese tourists spent smaller shares on lodging and dining.
yo
The US tariffs made Chinese exports more expensive than similar products from other countries. One way
to mitigate the effects of tariffs was through exchange rate depreciation, which would partly neutralize the tariff
impact by making exports cheaper. Insights could be gained by calculating the increases in effective tariffs used
to estimate the exchange rate depreciations needed to neutralize the impact of tariff increases on exports. First,
of China’s $575 billion in exports to the United States, $50 billion had been subject to a 25% tariff since July
2018, and $200 billion had been subject to a 10% tariff as of May 2019, for an effective overall tariff of 5.65%
op
((25% × 50 + 10% × 200)/575).
The United States then accused China of reneging on trade negotiations, and in June 2019 raised the tariff
to 25% on the USD200 billion. As a result, the effective tariff rose to 10.87%, an increase of 5.22%.
Theoretically, then, a renminbi depreciation of 5.22% would be needed to neutralize the tariff increases. Given
that the exchange rate was at RMB6.7/USD1 before the tariff increase, the renminbi would be expected to
depreciate to a level around RMB7/USD1 to offset the recent tariff increases. Second, if the United States
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imposed a 25% tariff on all Chinese exports in the aforementioned worst-case scenario, the effective tariff
would rise to 25% as well—an increase of 19.35% from the May 2019 level. Then the renminbi would have to
depreciate to RMB8/USD1 to offset the impact. China had refrained from such sharp exchange rate
depreciation because of significant implications for the price of imported inputs, inflation, and potential capital
flight.
No
Impacts of Tariffs on the United States
China imposed retaliatory tariffs on US products at varying rates. But the overall US economy and financial
markets fared well despite the trade war, as reflected in historically low unemployment, robust GDP growth,
benign inflation, and record stock market highs. This outcome was not surprising given the low dependence of
the United States on exports to China. Yet some sectors, notably US farms, suffered from China’s retaliatory
tariffs. Farmers in the Midwest were also hit by a flood in 2019 that greatly damaged commodities.
The largest US exports to China—agricultural products and aircraft—were difficult to substitute for those
Do
from other producing countries without triggering price inflation, quality deterioration, or both (see Exhibit 11,
panel B). In other words, by imposing tariffs on these products, China could hurt itself as well as the United
States. One example was China’s sharp inflation in the price of pork, which rose 21% between June 2019 and
60 “China Country Commercial Guide,” International Trade Administration, 2019, https://www.export.gov/article?id=China-Import-Tariffs;
http://gss.mof.gov.cn/zhengwuxinxi/zhengcefabu/201812/t20181221_3101662.html, and
http://gss.mof.gov.cn/zhengwuxinxi/zhengcefabu/201808/t20180803_2980950.html (all accessed Oct. 28, 2019).
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June 2018. This increase was due to reduced imports from the United States and increased imports from other
countries that brought swine flu into China.
A hotly debated issue was whether the cost of US tariffs on China would be paid by Chinese exporters or
US consumers. Trump claimed the tariffs brought the United States billions of dollars in tax revenues and
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asserted that the brunt of the tariffs would be borne by China. Yet a study by Goldman Sachs found that the
cost was carried entirely by US consumers,61 although the firm’s former chairman, Lloyd Blankfein, said the
opposite in an interview, echoing Trump’s assertion.62
A back-of-the-envelope calculation indicated that the bulk of the tariff burden was, in fact, likely held by
US consumers. Data showed that the pre-tariff price index of US imports from China had fallen by about 1%
in the previous year, while the effective tariff on imports from China rose 5.65%.63 This finding suggested that
prices of Chinese products sold in the United States rose 4.6%. Thus the bulk of the tariff revenues flowing
yo
into US coffers were paid by US consumers, at least in the short term. In the long run, however, the United
States might be able to find substitutes from other exporting countries and reduce imports from China,
effectively lowering the cost of the trade war for US consumers.
Other countries that might be part of the US endeavor to find substitutes for Chinese goods and alternative
buyers of China’s products had yet to be seen, but would depend on whether the US–China trade war persisted.
China was the largest supplier of major consumer goods to the United States, followed by countries such as
Bangladesh, Mexico, Taiwan, and Vietnam (see Exhibit 15). Indeed, in 2018–19, Vietnamese exports to the
op
United States surged, contrasting with a decline in Chinese exports (see Exhibit 16). But Vietnam saw sharply
higher imports from China and exports to the United States, especially in computers and electronics. These
changes showed how transshipment—the minimal processing or alteration of goods during short stops in a
third port that are then exported from that port—can evade tariffs. The Trump administration tried to crack
down on transshipment, but it was common not only from Vietnam but also Cambodia, Mexico, Serbia,
Taiwan, and other economies.64
tC
One analysis found that China’s average tariff was rising for US goods and falling for the rest of the world.65
The study showed that China had increased tariffs on US exports to an average of 20.7%, and had cut tariffs
on competing imports from everywhere else to an average of 6.7%. These findings were echoed by statistics
showing that while China maintained its trading rate with other countries, its trade rate with the United States
had fallen (see Exhibit 17 for China’s exports to and imports from various countries).
No
Deal in Sight?
The trade war between the United States and China clearly showed the change in relations between the two
countries. As a result, China sought to reduce its dependence on the US economy and its technology. The
United States, in turn, sought to ease its reliance on Chinese consumer goods—even seeking other countries to
61 Daniel Moritz-Rabson, “Donald Trump’s Trade War Has Been Paid For Entirely by U.S. Businesses and Consumers, Says Goldman Sachs,”
Newsweek, May 13, 2019, https://www.newsweek.com/trade-war-trump-china-tariff-cost-1423554 (accessed Oct. 21, 2019).

Do
62 Maggie Fitzgerald, “Former Goldman CEO Lloyd Blankfein on Trump’s Tariffs: ‘I Don’t Think He’s Wrong Here,’” CNBC, May 16, 2019,
https://www.cnbc.com/2019/05/16/former-goldman-ceo-lloyd-blankfein-on-trumps-tariffs-i-dont-think-hes-wrong-here.html (accessed Oct. 21,

2019).
63 Author’s calculations based on China Ministry of Finance data and https://www.export.gov/article?id=China-Import-Tariffs.
64 Chuin-Wei Yap, “American Tariffs on China Are Being Blunted by Trade Cheats,” Wall Street Journal, June 26, 2019,
https://www.wsj.com/articles/american-tariffs-on-china-are-being-blunted-by-trade-cheats-11561546806 (accessed Jan. 7, 2020).

65 Chad P. Bown, Euijin Jung, and Eva (Yiwen) Zhang, “Trump Has Gotten China to Lower Tariffs. Just Toward Everyone Else,” Peterson Institute
for International Economics, June 12, 2019, https://www.piie.com/blogs/trade-and-investment-policy-watch/trump-has-gotten-china-lower-its-tariffs-

just-toward (accessed Oct. 21, 2019).
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replace China. As the two countries gradually became decoupled in trade and economic relations, contradictions
in political, diplomatic, military, cultural, and other fields became harder to reconcile by the summer of 2019.
In addition, the two sides saw the issues from different perspectives. The US version of the confrontation
was that China had backtracked on terms to which it had previously agreed. China’s official statements, on the
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other hand, blamed the United States for being responsible for stalled trade talks, especially around
protectionism, and the undermining of mutual trust. In a white paper released before a July meeting with the
United States, China reemphasized that the trade war hurt many countries around the world, not just China
and the United States. The paper denounced US protectionism, criticized US backtracking on trade talks, and
indicated China’s stance on trade discussions and desire for reasonable solutions.
The paper proceeded to set three conditions for continued negotiations. First, once a final agreement was
reached, the United States would withdraw all tariffs. Second, the purchase of US goods would reflect the
yo
Chinese reality. Finally, resolution would be based on “mutual respect, equality and mutual benefit.”66 By the
end of July 2019, face-to-face meetings concluded with a simple agreement—to meet again in September. Both
countries then announced intentions to raise tariffs again.
Though both countries would be hurt and there would be no winner in a trade war, questions remained
about what had moved the United States to raise tariffs in the first place.
op
tC
No
Do
66 “China’s Position on the China-US Economic and Trade Consultations,” China Daily, June 3, 2019, (accessed Oct. 21, 2019).
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Exhibit 1
GDP Growth in China and the United States, 2000–19Q1 (%)
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14
12
10
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8
4
op
2
‐2
tC
‐4
China United States
Data source: “World Development Indicators,” World Bank, https://data.worldbank.org/products/wdi (accessed Feb. 18, 2020).
No
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Exhibit 2
Early Chronicles of the Trade War
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2017: US authorities initiated three investigations: two of imports that potentially threaten US national security—
steel and aluminum (section 232 investigations conducted by the US Department of Commerce in April)—and one
of Chinese trade practices deemed detrimental to American corporations, particularly the mandatory transfer of
technology to Chinese partners (section 301 investigation conducted by the Office of the US Trade Representative
in August).
February 2, 2018: Department of Commerce published the results of its investigations on steel and aluminum, and
recommended that US president Donald Trump raise tariffs on imports of both.
yo
February 7, 2018: Trump placed a global 30% tariff on imports of solar panels (except from Canada), and 20% on
washing machines.
March 8, 2018: Trump set a 25% tariff on steel imports and 10% tariff on aluminum imports for all countries except
Canada and Mexico. Measures were set to go into effect on March 23, 2018.
March 22, 2018: Trump added Argentina, Australia, Brazil, the European Union, and South Korea to the countries
temporarily excepted from steel and aluminum tariffs. Trump also signed a memorandum to file a World Trade
Organization (WTO) case against China for discriminatory licensing practices, to restrict investment in key
op
technology sectors, and to impose tariffs on Chinese products such as machinery, aerospace equipment, and
information and communications technology.
March 23, 2018: China announced a “rebalancing” of trade concessions through the WTO, arguing that by raising
tariffs on steel and aluminum, the United States used the usual special protective measure. China also announced its
intention to suspend equivalent concessions to the United States on 128 products.
March 26, 2018: The United States submitted a request for consultations with China on mandatory technology
tC
transfer.
April 2, 2018: China imposed a 15% tariff on 120 goods and 25% tariff on 8 goods from the United States for
“rebalancing” of obligations in the WTO.
April 3, 2018: US trade representative published for public comment a list of imports from China worth $50 billion
a year subject to a potential 25% tariff.
April 4, 2018: China responded to the US trade representative’s list with a proposed $50 billion of goods subject to
a 25% tariff.
No
April 16, 2018: Department of Commerce concluded that Chinese telecom firm ZTE violated US sanctions. US
companies were heretofore banned from doing business with ZTE for seven years.
May 3–7, 2018: The United States and China engaged in trade talks in Beijing, where the United States demanded
that China narrow the trade imbalance between the two countries by $200 billion within two years. Talks ended with
no resolution.
June 7, 2018: The United States and ZTE made a deal that would allow ZTE to resume business.
July 6, 2018: US Customs and Border Protection began collecting 25% tariff on 818 imported Chinese products
worth $34 billion. A second round of tariffs was also under review, which proposed a 25% tariff on 284 Chinese
Do
products worth $16 billion. China responded by imposing a 25% tariff on 545 US goods worth $34 billion.
Source: Igor N. Pankratenko, “The Chronicles of U.S.-China Trade War,” Center for Strategic Assessment and Forecasts, August 4, 2018,
http://csef.ru/en/politica-i-geopolitica/416/hroniki-amerikano-kitajskoj-torgovoj-vojny-8404 (accessed Jun. 16, 2019); Dorcas Wong and Alexander
Chipman Koty, “The US-China Trade War: A Timeline,” China Briefing, February 7, 2020, https://www.china-briefing.com/news/the-us-china-trade-
war-a-timeline/ (accessed Aug. 12, 2019).
Page 18 UV8014
t
os
Exhibit 3
Stock Market Performance in China and the United States, January 2018–June 2019
rP
CHSCOMP DJINDUS
3400 32400
3200
27400
yo
3000
22400
Chinese yuan
2800
US dollars
17400
2600
op
12400
2400
7400
2200
2000 2400
tC
Note: CHSCOMP = China Shanghai Composite Price Index, yuans; DJINDUS = Dow Jones Industrials, US dollars.
No
Source: Datastream.
Do
Page 19 UV8014
Exhibit 4
Do
Balance of Payments for China and the United States, 1990–2018
China United States

(in millions of US dollars) 1990 2000 2010 2018 1990 2000 2010 2018
Current Account 11,997 20,518 237,810 49,092 -78,952 -403,460 -431,271 -490,991
No
Goods, credit (exports) 51,519 111,332 1,486,412 2,417,443 387,398 784,939 1,290,279 1,674,330
Goods, debit (imports) 42,354 124,897 1,239,986 2,022,272 498,440 1,231,722 1,938,952 2,561,666
Balance on goods 9,165 -13,566 246,426 395,171 -111,042 -446,783 -648,673 -887,336
Services, credit (exports) 5,855 78,708 117,532 233,567 147,860 290,382 562,756 826,975
tC
Services, debit (imports) 4,352 36,269 140,934 525,816 117,670 216,121 409,311 567,326
Balance on services 1,503 42,439 -23,402 -292,249 30,190 74,261 153,445 259,649
Primary income, credit 3,017 12,550 142,424 234,807 171,750 356,704 680,166 1,084,184
Primary income, debit 1,962 27,216 168,324 286,227 143,190 338,639 511,948 830,203
Secondary income, credit 376 6,861 49,521 27,757 10,040 37,621 90,784 150,191
op
Secondary income, debit 102 550 8,835 30,167 36,700 86,624 195,045 267,476
Capital Account 0 0 4,630 -569 -7,220 -2 -158 3,235
Financial account -3,255 -1,958 -282,234 -130,567 -60,222 -478,684 -448,255 -450,459
Direct investment, assets 0 3,100 4,270 17,468 59,940.0 186,370.0 349,828.0 -78,456.0
Direct investment, liabilities 0 4,307 18,110 49,096 71,230.0 349,125.0 264,039.0 258,390.0

yo
Portfolio investment, assets 241 11,307 -787 35,795 28,771.0 159,713.0 199,619.0 334,036.0
Portfolio investment, liabilities 0 405 324 99,537 22,010.0 441,966.0 820,434.0 315,673.0
Other investment, assets 231 43,864 116,262 198,421 13,140.0 241,308.0 407,419.0 50,261.0
Other investment, liabilities 1,070 12,329 188,708 121,427 68,833.0 274,984.0 306,572.0 161,516.0
Net errors and omissions -3,205 -11,783 -53,016 -160,213 28,183 -74,927 -15,001 42,301
rP
Reserves and related items 12,047 10,693 471,659 18,877 2,233 295 1,825 5,004
Source: IMF data, http://data.imf.org/?sk=7A51304B-6426-40C0-83DDCA473CA1FD52&sId=1542633711584 (accessed Mar. 9, 2020).

os
t
Page 20 UV8014
t
os
Exhibit 5
China’s Foreign Exchange Reserves, 1981‒2018 (in USD100 million)
rP
40,000
35,000
30,000
25,000
yo
20,000
15,000
10,000
5,000
op
0
Source: Data Planet Statistical Datasets.

tC
No
Do
Page 21 UV8014
t
os
Exhibit 6
Imbalance in Trade and Capital Flows between China and the United States
rP
yo
op
Source: Created by author.
tC
No
Do
Page 22 UV8014
t
os
Exhibit 7
Incidents of US Tariffs on Chinese Exports by Goods Type and Ownership Classification
rP
Export Losses in Broad Economic Categories-Goods Type
yo
op
tC
Export Losses by Firm Types

No
Do
Source: Liugang Sheng and Hongyan Zhao, Changes in the China–U.S. Economic Relations (Peking: Peking University
Press, 2020).
Page 23 UV8014
t
os
Exhibit 8
Import Tariffs of the United States and China
rP
Trends in Long-Term Tariffs from 1992 to 2016
China Simple Average China Value-Weighted Average
40 US Simple Average US Value-Weighted Average 6
35
5
30
yo
4
25
China (%)
US (%)
20 3
15
2
10
1
op
5
0 0
Source: Liugang Sheng and Hongyan Zhao, Changes in the China–U.S. Economic Relations (Peking: Peking University Press, 2020).
tC
Trends in Short-Term Tariffs since Inception of Trade War (%)

No
Do
Source: Chad P. Brown, “US-China Trade War Tariffs: An Up-to-Date Chart,” PIIE, February 14,
2020, https://www.piie.com/research/piie-charts/us-china-trade-war-tariffs-date-chart (accessed
Mar. 9, 2020).
Page 24 UV8014
t
os
Exhibit 9
Renminbi and US Dollar Exchange Rate, Period Average
rP
9.00
8.50
8.00
7.50
7.00
yo
6.50
6.00
5.50
5.00
4.50
op
4.00
Source: IMF data.

tC
No
Do
Page 25 UV8014
t
os
Exhibit 10
GDP in China and the United States, 2000–24 (in USD billions)
rP
30,000
25,000
yo
20,000
15,000
op
10,000
5,000
tC
0
2000 2010 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
United States China
Note: Data are in current prices. Data for 2019–24 are estimates.
Source: World Economic Outlook 2019 database, International Monetary Fund.
No
Do
Page 26 UV8014
t
os
Exhibit 11
Composition of US Imports from China: 2016
rP
Source: Deutsche Bank, CEIC.
yo
op
Composition of Chinese Imports from the United States: 2016
tC
No
Source: Deutsche Bank, CEIC.

Do
Page 27 UV8014
t
os
Exhibit 12
Household Consumption/GDP Ratios of Major Countries
rP
80% 69%
70% 63% 63% 59% 56%
60% 54% 53%
48%
50% 39%
40%
30%
20%
10%
yo
0%
Source: Wind Economic Database, https://www.wind.com.cn/en/edb.html (accessed Mar. 9, 2020).

op
Exhibit 13
Consumer Imports versus GDP and Consumption
tC
China US Malaysia
10%
9%
8%
7%
No
6%
5%
4%
3%
2%
1%
0%
Import of consumer goods/GDP Import of consumer goods/consumption
Do
Source: Jiming Ha, “China-US Trade Conflict: Causes and Impact,” China Finance 40 Forum, June 11, 2018,
https://www.piie.com/system/files/documents/ha20180611ppt.pdf (accessed Mar. 12, 2020).
Page 28 UV8014
t
os
Exhibit 14
Spending of China Outbound Tourists versus Other Countries
rP
35%
29%
30%
25%
25%
19%
20% 18%
16%
15%
yo
15%
10%
5%
0%
Shopping Lodging Dining
op
Chinese tourists Other countries
Source: https://www.nielsen.com/wp-content/uploads/sites/3/2019/05/outbound-chinese-
tourism-and-consumption-trends.pdf
tC
No
Do
Page 29 UV8014
t
os
Exhibit 15
Major US Imports from China and Alternative Import Sources, 2016
rP
Electrical equipment Machinery Equipment Furniture Apparel
Market % of US Market % of US Market % of US Market % of US

imports imports imports imports
1 Mainland 39.2 Mainland 31.7 Mainland 31.7 Mainland 34.9
China China China China
2 Mexico 18.5 Mexico 16.2 Mexico 16.2 Vietnam 13.2
3 Malaysia 7.3 Japan 9.4 Japan 9.4 Bangladesh 6.3
yo
4 Japan 4.9 Germany 7.4 Germany 7.4 Indonesia 5.8
5 South Korea 4.8 Canada 6.1 Canada 6.1 India 4.5
6 Taiwan 4.2 South Korea 3.3 South Korea 3.3 Mexico 4.2
Toys Autos and Related Plastic and Plastic Products Footwear and Socks
Accessories
Market % of US Market % of US Market % of US Market % of US
op
imports imports imports imports
1 Mainland 81.8 Mexico 26.4 Mainland 30.9 Mainland 57.9
China China China
2 Mexico 3.2 Canada 20.5 Canada 21 Vietnam 19.2
3 Taiwan 3.2 Japan 17.7 Mexico 9.5 Indonesia 5.7
4 Vietnam 1.7 Germany 10.2 Germany 5.6 Italy 5.2

tC
5 Canada 1.4 South Korea 7.6 Japan 4.5 India 2
6 Thailand 1 Mainland 5 South Korea 4.2 Mexico 1.6

China
Source: UN Comtrade; DESA/UNSD, United Nations Comtrade database.
No
Do
Page 30 UV8014
t
os
Exhibit 16
Recent Chinese and Vietnamese Exports to the United States
rP
Chinese exports to the US Vietnamese exports to the US
Chinese exports, YoY Vitenamese exports, YoY
60,000 60%
50,000 50%
Annual change
40,000 40%
USD millions
30,000 30%
yo
20,000 20%
10,000 10%
0 0%
‐10,000 ‐10%
‐20,000 ‐20%
Jan. 2018
Feb. 2018
Mar. 2018
Apr. 2018
May. 2018
Jun. 2018
Jul. 2018
Aug. 2018
Sep. 2018
Oct. 2018
Nov. 2018
Dec. 2018
Jan. 2019
Feb. 2019
Mar. 2019
Apr. 2019
May. 2019
op
Source: https://www.wind.com.cn/en/edb.html.
tC
No
Do
Page 31 UV8014
t
os
Exhibit 17
China’s Exports to Various Countries
rP
China’s exports to the US(YoY,%) China’s exports to the EU(YoY,%)
China’s exports to Japan(YoY,%) China’s exports to the UK(YoY,%)
40.00
30.00
20.00
yo
10.00
0.00
‐10.00
‐20.00
op
China’s Imports from Various Countries

tC
China’s imports from the US(YoY,%) China’s imports from the EU(YoY,%)
China’s imports from Japan(YoY,%) China’s imports from the UK(YoY,%)
60.00
40.00
20.00
No
0.00
‐20.00
‐40.00
‐60.00
Do

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45-percent-tariff-on-china/ (accessed Jun. 10, 2019).

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Evolution of the imbalances

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Trade policies and programs

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33 Sheng and Yang, “Expanding Export Variety.”

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Impact of Tariffs on China

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Impacts of Tariffs on the United States

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for International Economics, June 12, 2019, https://www.piie.com/blogs/trade-and-investment-policy-watch/trump-has-gotten-china-lower-its-tariffs-

China United States

China United States

copyright. Permissions@hbsp.harvard.edu or 617.783.7860

Source: IMF data, http://data.imf.org/?sk=7A51304B-6426-40C0-83DDCA473CA1FD52&sId=1542633711584 (accessed Mar. 9, 2020).

Source: Data Planet Statistical Datasets.

Export Losses by Firm Types

Trends in Short-Term Tariffs since Inception of Trade War (%)

Source: IMF data.

United States China

Source: Deutsche Bank, CEIC.

Source: Wind Economic Database, https://www.wind.com.cn/en/edb.html (accessed Mar. 9, 2020).

Market % of US Market % of US Market % of US Market % of US

3 Malaysia 7.3 Japan 9.4 Japan 9.4 Bangladesh 6.3

5 South Korea 4.8 Canada 6.1 Canada 6.1 India 4.5

3 Taiwan 3.2 Japan 17.7 Mexico 9.5 Indonesia 5.7

4 Vietnam 1.7 Germany 10.2 Germany 5.6 Italy 5.2

5 Canada 1.4 South Korea 7.6 Japan 4.5 India 2

6 Thailand 1 Mainland 5 South Korea 4.2 Mexico 1.6

China’s Imports from Various Countries

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