Political Shadows in the USA - China Trade Dispute

The start of the USA – China trade dispute was given on July 6, 2018 – when the United States introduced an additional 25% ad valorem duty on $34 billion of Chinese imports. The official reasons, mentioned in a Statement by the President, were to prevent the unfair transfers of U.S. intellectual property and technology to China, and to restore the balance in the trade relationship between the two countries. Whether tariffs – a key instrument from the trade policy toolkit – can be used effectively against (alleged) intellectual property theft is debatable, and their deployment toward the reduction of the massive trade deficit with China ($375.2 billion in 2017) is only a country-specific solution. Because of its relatively high labor costs, the U.S. does not have the comparative advantage to produce the vast majority of Chinese imports, and therefore the expected long-term effect of higher tariffs would be to reallocate parts of the trade deficit to other countries. The assumption that U.S. policymakers are unaware of this fact seems doubtful, and that brings us to the conjecture about the role of political considerations in the trade dispute. This paper looks at both the economic and the political aspects of the dispute, as it examines the deficit’s dynamics over the last 20 years (incl. its impact on employment and household median income), plus the possible political influences: the Belt – and – Road initiative, the Chinese military build-up, and cyberespionage. The paper concludes with a short overview of the effect of U.S. tariffs on China’s GDP growth, exports, and trade balance.