World Economics I.

The political economy of trade policy

US-China trade war

Week 10
(16-11-2022)
Structure of the seminar
• Short summary of the trade war by the seminar instructor

• Watch the videos (youtube):

• Group work 1 – supporting the use of a trade war to achieve policy objectives
• Group work 2 – opposing the use of a trade war to achieve policy objectives

• Short explanation of the first deal by the seminar instructor

• Read the articles evaluating the first deal between the US and China and
formulating future scenarios for the US-China relationship
• Group work 3 – evaluation
Trade war in pictures

Liu He (Vice-Premier)
Definitions
Trade war and currency war
Trade war
• A trade war is when a nation imposes tariffs or quotas
on imports and foreign countries retaliate with similar
forms of trade protectionism. As it escalates, a trade
war reduces international trade.
• A trade war starts when a nation attempts to protect its
domestic industry and create jobs. In the short run, it
may work. Tariffs are supposed to give a competitive
advantage to domestic producers of that product. Their
prices would be lower by comparison. As a result, they
would receive more orders from local customers. As
their businesses grow, they would add jobs.
• But in the long run, a trade war costs jobs. It depresses
economic growth for all countries involved. It also
triggers inflation when tariffs increase the prices of
imports.
„Currency war”
• Currency war, also known as competitive
devaluations, is a condition in international affairs
where countries seek to gain a trade advantage over
other countries by causing the exchange rate of their
currency to fall in relation to other currencies.
• As the exchange rate of a country's currency falls, exports
become more competitive in other countries, and imports
into the country become more and more expensive.
• Both effects benefit the domestic industry, and thus
employment, which receives a boost in demand from both
domestic and foreign markets.
• However, the price increases for import goods (as well as in
the cost of foreign travel) are unpopular as they harm
citizens' purchasing power; and when all countries adopt a
similar strategy, it can lead to a general decline in
international trade, harming all countries.
The pros and cons of trade wars
• A trade war happens when
one country retaliates
against another by raising
import tariffs or placing
other restrictions on the
other country's imports.
• Advocates say trade wars
protect national interests and
provide advantages to
domestic businesses.
• Critics of trade wars claim
they ultimately hurt local
companies, consumers, and
the economy.
• Pros
• Protects domestic companies from unfair competition
• Increases demand for domestic goods
• Promotes local job growth
• Improves trade deficits
• Punishes nation with unethical trade policies
• Cons
• Increases costs and induces inflation
• Causes marketplace shortages, reduces choice
• Discourages trade
• Slows economic growth
• Hurts diplomatic relations, cultural exchange
Other ways of dispute settlement?
• Resolving trade disputes is one of the core activities of the WTO. A
dispute arises when a member government believes another member
government is violating an agreement or a commitment that it has
made in the WTO.
• The WTO has one of the most active international dispute settlement
mechanisms in the world. Since 1995, 607 disputes have been
brought to the WTO and over 350 rulings have been issued.

• Dispute map:
https://www.wto.org/english/tratop_e/dispu_e/dispu_maps_e.htm
US – China trade deficit before the trade war
US - China trade deficit „after” the trade war
Brief history of the
trade war
Large increase
in average tariff
rates
Videos explaining the US-China trade
war
America v China: why the trade war won't end soon, The Economist:
https://www.youtube.com/watch?v=ErwIlvQ_RVk

The origins and impact of the US-China trade war, South China Morning Post:
https://www.youtube.com/watch?v=xYG8Hef54ZA
Group work 1 – supporting the use of a trade
war to achieve policy objectives
• Please form groups of approximately 3-4 students.
• Take 8 minutes to answer these questions:
• How has global trade affected workers in some areas of the United States?
• What positive effects might a trade war have on the United States, and what
negative on China?
• Will tariffs improve the US economy?
• How would you guarantee free and and fair competition between China and US
• What are the intended and unintended effects of the tariffs for the US economy?
• What are the possible impacts on US consumers?
• How can be the impacts of tariffs on US consumers be minimized?
Group work 2 – opposing the use of a trade
war to achieve policy objectives
• Please form groups of approximately 3-4 students.
• Take 8 minutes to answer these questions:
• Are tariffs appropriate policy tools? Or, do tariffs create economic
uncertainty?
• What are the short-term and long-term impacts of US tariffs on China?
• Should the US work with political and economic allies to address concerns
about China?
• What other options did the US have for dispute settlement with China?
• What positive or negative effects might a trade war have on Global trade?
• Under what conditions might a trade war escalate further? How might the
United States or China de-escalate tensions?
The „end” of the trade war
US president Donald Trump and China’s Vice Premier Liu He signed
the US-China Phase One Deal (Economic And Trade Agreement
Between The Government Of The United States Of America And
The Government Of The People’s Republic Of China)
• China agreed to expand purchases of certain US goods and services by a
combined $200 billion for the two-year period from January 1, 2020, through
December 31, 2021, above the 2017 baseline levels.
• For covered agricultural products, China committed to an additional $32.0
billion of purchases combined over 2020 and 2021 above 2017 levels
• For covered manufactured products, China committed to an additional
$77.7 billion of purchases combined over 2020 and 2021 above 2017 levels
• For covered energy products, China committed to an additional $52.4 billion
of purchases combined over 2020 and 2021 above 2017 levels
• For all uncovered products—making up 29 percent of China's total goods
imports from the United States and 27 percent of US total goods exports to
China in 2017—the phase one agreement does not include a legal target
Source:
https://www.piie.com/research/piie-charts/us-china-phase-one-tracker-chinas
-purchases-us-goods
Group work 3 – Evaluation after the Phase
One Deal
• Please form groups of approximately 3-4 students.
• Take 8 minutes to answer these questions:
• Did the trade war hurt the US economy, and how?
• What were the major costs of the trade war for the US economy and for the Chinese economy?
• What are the unintended consequences of the trade war for the global economy and global arena?
• What future for the US-China trade war? And what future for the US-China relations?
• How did the subsequent crisis of the Covid-19 pandemic impact the US economy?

• Read the articles to answer the questions (half of the groups read the Brookings’ paper,
other half the Carnegie’s paper)
• https://www.brookings.edu/blog/order-from-chaos/2020/08/07/more-pain-than-gain-how-the-us
-china-trade-war-hurt-america/

• https://carnegieendowment.org/2021/09/16/u.s.-china-trade-war-has-become-cold-war-pub-853
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Trade between the US and China
The current situation
• On the one hand, US imports of certain products from China—including semiconductors, some IT hardware,
and consumer electronics—have fallen dramatically. Even clothing, footwear, and furniture imports are
down.
• But on the other, imports from China of laptops and computer monitors, phones, video game consoles, and
toys are higher than ever. Demand for these products surged in response to the COVID-19 pandemic. Stuck
at home, Americans switched their spending away from services and toward many of these goods
manufactured in China.
• US and Chinese policymakers certainly seem determined to reduce the two countries’ economic
interdependence, built over many decades but now buckling under the weight of their animosities. So far,
the decoupling that is—and is not—occurring is partly the result of President Donald Trump’s trade war, the
selective way it was waged, and the continuation of many of those policies under the Biden administration.
• A more recent motivating factor that may be spurring decoupling is the desire for increased diversification
of imports to make supply chains for certain goods more resilient. Other drivers include human rights,
democracy, and geopolitical concerns.
Source: Chad P. Brown (PIIE): Four years into the trade war, are the US and China decoupling?
https://www.piie.com/blogs/realtime-economics/four-years-trade-war-are-us-and-china-decoupling
Thank you
for your attention!