A Comparative Analysis of the Trade Policies of China and the United States of America ()
1. Introduction
Since 2018, tariff increases have been the primary trade barriers between the United States and China. In response to the tariffs imposed by the United States, China promptly increased its charges on American goods. In the autumn of 2019, the trade dispute intensified as additional tariffs were imposed. However, by the end of the year, the two nations reached an agreement to temporarily halt hostilities, resulting in the cancellation of certain tariff increases and the reversal of others. The Phase One Agreement was achieved in January 2020 following the ceasefire.
The intensifying trade tensions between China and the United States have been a central topic of discussion in the global economic sphere in recent years. This battle has occurred amidst changing geopolitical dynamics and trade policy maneuvers, with both countries imposing tariffs, trade restrictions, and other measures in reaction to alleged unfair trade practices and strategic concerns (Bekkers & Teh, 2019) .
The ex-ante analysis employs the recursive dynamic computable general equilibrium (CGE) WTO Global Trade Model (GTM). We incorporate Handley and Limao (2017a) ’s methodology on trade policy uncertainty and its impact on the global economy into the Melitz company heterogeneity version of the GTM. Trade policy uncertainty is modeled by raising the discount rate, resulting in higher fixed export costs while keeping sunk export costs constant. For the ex-ante analysis, we generate four scenarios to examine the Phase One Agreement and the increasing uncertainty in trade policy.
Since the initiation of the trade war, the United States and China have increased tariffs on each other’s exports. Specifically, tariffs on Chinese imports into the US have risen from 2.6% to 17.5%, while tariffs on US imports into China have increased from 6.2% to 16.4%. The China-US Phase 1 Agreement resulted in a reduction of taxes on Chinese imports to 16%. The report specifically examines the trade concerns between the United States and China. There are at least four justifications for increasing tariffs on imports from China: to achieve a more balanced trade relationship, to establish a fairer system of reciprocal tariffs, to revive domestic manufacturing employment, and to address detrimental Chinese policies such as inadequate intellectual property protection, subsidies for state-owned enterprises, and forced technology transfer. The study will elucidate the economic aspects of the first three arguments. As a result of frontloading, there was a 7% increase in trade flows from China to the US in 2018. However, exports1 of commodities subject to tariffs decreased by 13% in the first three quarters of 2019. Following a 1% decline in 2018, the United States had a significant decrease of over 25% in its exports to China over the initial three quarters of 2019. As a result of frontloading, the volume of Chinese exports to the United States increased by 7% in 2018, but experienced a decline of 13% during the first quarter of 2019. The subsequent analysis also shows substantial trade diversion to imports from other trading partners. Japan, South Korea, and Vietnam sent a greater quantity of electrical equipment to the United States compared to China. This implies that trade wars reconfigure the connections between different components of the East Asian economy. Empirical study on the trade conflict indicates that increased import taxes on Chinese goods have fully transferred to import prices that include tariffs.
The ex-ante analysis indicates that tariff escalations in the trade dispute will result in a mere 0.1% decrease in global GDP. The Phase One Agreement has a relatively limited impact on global GDP and has only a little effect on the international economy. The Chinese commitment in the Phase One Agreement to increase purchases of US goods has transformed the negative impact on real income for the US into favorable outcomes. The trade battle’s beneficial impact on other nations, resulting from advantageous trade diversion, is anticipated to diminish as a consequence of China’s vow to increase imports of US items.
The current analysis only takes into account direct effects and does not address uncertainty effects. The next step is to do an uncertainty analysis. Assessing the effect of uncertainty is challenging, hence it is important to interpret our findings with caution. Nevertheless, our research indicates that ambiguity has a far greater influence than direct effect. The level of uncertainty in global trade has significantly increased since 2018. Accounting for the impact of uncertainty, the world gross domestic product (GDP) would experience a decline ranging from 0.34% to 0.50%.
With the exception of regional loss distribution, the anticipated implications of other ex-ante studies align with those of the WTO Global Trade Model. When considering scenarios with uncertainty, we predict that the United States will have more significant negative consequences. This is because the Trade Uncertainty Indicator indicates that future policy uncertainty is closely linked to the United States trading partners.
The paper’s organization is as follows. Section 2 provides a concise overview of the tariff measures that have been implemented. Section 3 examines the current effects of trade. Section 4 offers a contextual background on the trade war by examining the arguments against China’s tariffs. Section 5 addresses the uncertainty surrounding trade policy in relation to the trade conflict. Section 6 presents the simulation results of the WTO Global Trade Model, while Section 7 concludes by comparing these results to the simulation results of Bekkers and Teh (2019) on a global trade war.
1.1. Research Gap
The research deficiency in the comparative study of the trade policies of China and the United States is the lack of comprehensive and systematic studies that thoroughly investigate the similarities, differences, and consequences of these policies. Although there have been individual study efforts focusing on certain components or sectors of China’s or the United States’ trade policy, there is a noticeable lack of comprehensive comparative evaluations that include a wide variety of characteristics. Many current studies fail to fully comprehend the wider context of trade relations between China and the United States, disregarding the complex dynamics and linkages between the trade policies of these two influential economies. Furthermore, with the shifting global economic landscapes and escalating geopolitical tensions, there is a growing need for research that examines the altering trade policies and their consequences in a quickly moving globe. Hence, it is crucial to address this study void in order to get a more profound comprehension of the intricate interaction of trade policies, economic interests, and geopolitical factors in the present-day global scenario.
1.2. Research Goal
The primary purpose of this research is to conduct a thorough and detailed examination of the trade policies of China and the United States. The aim is to gain a better understanding of their goals, methods, strategies for execution, and resulting effects. This study aims to fill the existing vacuum in the literature and provide useful insights to the field of international trade and policy studies through a thorough comparative analysis. This research aims to clarify the fundamental goals and priorities that form the basis of the trade policies of both China and the United States. Through the examination of official policy papers, government pronouncements, and scholarly literature, our objective is to identify and analyze the fundamental objectives that shape the development and execution of trade policies in each country. Comprehending these aims is essential for perceiving the underlying motives and intents that guide trade policy decisions.
Furthermore, the objective of this study is to analyze and differentiate the trade policy tools utilized by China and the United States. This encompasses an analysis of tariffs, non-tariff barriers, trade agreements, and other regulatory mechanisms employed to govern international commerce. Through the analysis of the efficacy, efficiency, and ramifications of these policy tools, our aim is to offer valuable insights into the strategies employed by each nation to attain its trade policy goals.
Moreover, this study aims to evaluate the consequences of Chinese and American trade policies on local sectors, international trade dynamics, and global economic stability. Our objective is to assess the effects of trade policies on important stakeholders and overall economic results through the examination of trade flows, economic statistics, and case studies relevant to various industries. This include analyzing the impact on job opportunities, financial investments, creative advancements, and the satisfaction of consumers. Additionally, it involves taking into account the wider geopolitical consequences of trade policy choices.
The primary objective of this research is to enhance comprehension of the intricate relationship among trade policies, economic interests, and geopolitical dynamics in the current global setting. This study seeks to enhance the understanding of the factors, processes, and outcomes of trade policies in China and the United States. Its objective is to provide valuable information to policymakers, researchers, and stakeholders, facilitating more knowledgeable and fact-based decision-making in the field of international trade.
1.3. Research Questions
Scholars and policymakers alike find the dynamic trade policies of the United States and China to be an intriguing subject of study. To effectively navigate the intricate dynamics of international business, one must have a thorough understanding of the intricacies and implications of the trade policies of these two major global economies. The central focus of this study is comprised of many related inquiries: There are differences in the goals, approaches, and effects of US and Chinese trade policy on both home and international markets. What are the main factors that have shaped these different approaches, and how have they changed over time? What are the benefits and drawbacks of China’s export-driven economic strategy against the US emphasis on defending homegrown industries? Furthermore, given the ongoing rise in trade disputes between these major economies and the vulnerabilities in international trade networks exposed by the COVID-19 pandemic, what important insights might be gained, and what steps could be taken to improve resilience and diversification going forward?
• What are the primary objectives and priorities guiding the formulation of trade policies in China and the United States?
• How do the tariff structures differ between China and the United States, and what impact do these variances have on trade flows and market dynamics?
• What are the key non-tariff barriers employed by both countries and how do they affect market access and trade competitiveness?
• What role do trade agreements play in shaping the trade policies of China and the United States, and how do they influence bilateral and multilateral trade relations?
• To what extent do Chinese and American trade policies impact domestic industries, including employment, innovation, and competitiveness?
• How do trade policies in China and the United States influence global trade dynamics, including supply chain patterns, market integration, and international investment flows?
• What geopolitical factors and bilateral tensions contribute to the formulation and implementation of trade policies in China and the United States, and how do these factors shape international trade relations?
2. Background Studies and Problem Statement
2.1. Background Studies
In March 2018, the Chinese government promptly reacted to the increase in tariffs imposed by the US on Chinese exports. Table 1 illustrates the impact of each increase in tariffs on commerce, whereas Figure 1 presents the average rates of tax on imports from China to the US and imports from the US to China.
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Table 1. Key aspects of US-China trade policy.
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Figure 1. Evolution of average tariff rates. Note: average tariff rates on US imports from China and Chinese imports from the US are weighted by total imports from China and total imports from the US in 2017 respectively. Source: Author’s calculations based on trade data from the Trade Data Monitor and tariff data collected by the WTO secretariat.
The majority of additional commerce was impacted by the tariff hike on September 24, 2018. The United States imposed a 10% tariff on $200 billion worth of Chinese goods, which was then increased to 25% on May 10, 2019.
Since the initiation of the trade war, the United States has increased duties on Chinese imports from 2.6%2 Most Favored Nation (MFN) to 17.5% as of September 1, 2019. The United States initially declared an extension of tariff increases that would have raised the average levies to 24.4% by December 15. The cessation of the trade war prevented this further intensification, and the Phase 1 Agreement between the United States and China reduced the average duties to 16%. The tariff increases of 15% on 120 billion consumer products, which is scheduled for September 1, 2019, will be reduced to 7.5%. According to Figure 1, China’s import tariffs on goods from the United States increased from 6.2% in January 2018 to 16.4% in September 2019. The anticipated growth of 20.7% by December 2019 was not achieved. Meanwhile, China reduced Most Favored Nation (MFN) tariffs on its other trading partners by approximately 5%.
The average tariff rates depicted in Figure 1 exhibit slight variations compared to those reported by Bown (2019) as a result of employing different weighting procedures. Bown (2019) calculates tariff averages by taking into account the global exports of the US and China in 2017, however, we focus on the imports between the two countries. Only the trade that is impacted by the increases in tariffs is taken into account when calculating the averages. We utilize Bown’s (2019) reference group weighting method (Figure A1 in the Annex) to provide a comparison between the global imports of the United States and China. The data presented in Figure A1 demonstrates that the use of a weighting system has a significant impact on the calculated averages. The United States initiated the trade war with a focus on intermediate goods, but it has already expanded to include virtually all imports, including consumer items. The United States imports a smaller quantity of intermediate components from China compared to the rest of the globe, but it imports a larger quantity of final goods.
The bilateral weighted average tariff rates for the initial tariff measures in 2018 are lower than the tariff rates of the reference group. However, the tariff rates for the final tariff measures in 2019 are higher than the reference group tariff rates.3
This table contrasts the US and Chinese trade policies to illuminate their approaches to trade relations.
Taxes: China has retaliated against US taxes on billions of dollars of Chinese imports, sparking a trade war. Technology, agriculture, and manufacturing have been affected by these tariffs, harming both firms and consumers.
IP: The US has long voiced worries about Chinese IP theft and coercive technology transfer. In contrast, China is modernizing its intellectual property rules and regulations to meet international norms.
Market Access: The US administration has prioritized negotiating market access in China for US goods and services. However, China has been increasingly opening up to international investment and trade, albeit some areas remain difficult.
Trade imbalance: The US promotes exports and reduces imports to lower its trade imbalance with China. China has managed trade imbalances and focused on export-led growth. Technology Transfer: The US opposes coerced technology transfer for Chinese market access. China has promoted technology development and transfer domestically through programs and investments.
Currency Manipulation: US-China trade talks have focused on currency manipulation. China controls its exchange rate to stabilize the renminbi. Chinese state-owned firms receive subsidies and unfair benefits, which the US has addressed. Despite recent changes, China has supported state-owned firms for geopolitical and economic reasons.
Enforcement procedures: The US and China are enhancing trade agreement enforcement procedures to handle infractions. Implementing and monitoring these methods remains difficult.
2.2. Problem Statement
The dynamic trade policies of China and the United States present a fascinating topic for examination by researchers and politicians. Understanding the complexities and impacts of the trade policies of these two main global economies is essential for successfully navigating the complex dynamics of international commerce. The essence of this research revolves around a series of interconnected investigations: The trade policies of China and the United States differ in terms of their objectives, strategies, and impacts on both domestic and global markets. What are the primary variables that have influenced these various methods, and how have they evolved over time? What are the advantages and disadvantages of China’s export-oriented economic model in comparison to the United States’ focus on protecting domestic industries? Moreover, considering the continuous increase in trade conflicts among these significant economies and the weaknesses in global trade networks shown by the COVID-19 pandemic, what valuable knowledge may be acquired, and what measures can be taken to enhance resilience and diversification in the future? By analyzing these questions, valuable insights can be gained into the intricacies of global trade relations, which can then inform the formulation of strategies aimed at promoting sustainable economic growth and stability on a global scale.
1) How do the trade policies of China and the United States differ in terms of objectives, strategies, and impacts on domestic and international markets?
2) What are the key features of China’s trade policy, including export promotion, currency management, and special economic zones, and how do they contribute to its economic growth and global influence?
3) How has the United States’ trade policy evolved over time, transitioning from a stance of free trade to one characterized by protectionism, and what are the primary objectives driving this shift? 4. What are the comparative advantages and disadvantages of China’s export-driven growth strategy and the United States’ focus on protecting domestic industries, particularly in terms of job creation, economic sovereignty, and global competitiveness?
4) How have trade tensions between China and the United States escalated in recent years, and what are the implications for global trade dynamics, supply chains, and geopolitical relations?
5) In light of the COVID-19 pandemic, what lessons can be drawn from the fragility of global trade networks, and what measures should be taken to enhance their resilience and diversification in the future?
Given the COVID-19 pandemic, what insights may be gleaned from the vulnerability of global trade networks, and what actions can be implemented to strengthen their durability and variety in the future?
3. Literature Review
3.1. Academic Review
Trade policies are crucial in determining the economic structure of countries and impacting international trade. China and the United States are prominent participants in global trade, playing a crucial role in stimulating economic expansion and shaping trade patterns. Gaining insight into the historical backdrop and progression of their trade policies is crucial for comprehending the intricacies of present-day trade relations and predicting forthcoming patterns. This analysis aims to offer a thorough examination of the trade policy paths taken by China and the United States, elucidating their historical origins, changes in policy, and the resulting effects on the global economy.
The literature review encompasses a wide array of academic publications, government reports, and reputable sources spanning several decades. It delves into scholarly analyses of trade policy frameworks, bilateral trade agreements, multilateral trade institutions, and the geopolitical factors shaping trade dynamics between China and the United States.
The historical trade relations between China and the United States have undergone significant transformations, reflecting the evolving dynamics of global trade and geopolitics. This comparative analysis seeks to elucidate the divergent trajectories of trade policies pursued by these two economic powerhouses, examining key historical events, policy frameworks, and their impact on bilateral trade relations and the global economy.
1) Early Trade Relations:
- China: Historically, China engaged in extensive trade along the Silk Road and maritime routes, fostering economic exchanges with neighboring regions and beyond (Gernet, 1996) . However, during the Qing Dynasty, China adopted a policy of isolationism, limiting foreign trade and interactions with the outside world (Fairbank, 1986) .
- United States: The United States emerged as a trading nation following its independence, engaging in commerce with Europe, Latin America, and Asia (Hancock, 1993) . The adoption of protectionist policies, such as the Tariff Act of 1789, aimed to promote domestic industries and revenue generation (Irwin, 2017) .
2) Treaty Port Era:
- China: In the 19th century, China’s Qing Dynasty was compelled to sign a series of unequal treaties, known as the Treaty Port Era, which granted foreign powers extraterritorial rights and control over key ports and trade routes (Spence, 1990) .
- United States: During this period, the United States expanded its trade relations with China through treaty negotiations, establishing diplomatic and commercial ties facilitated by the “most favored nation” clause (Cohen, 1968) .
3) Opium Wars and Treaty of Nanking:
- China: The Opium Wars in the mid-19th century exposed China’s vulnerability to foreign aggression and forced the Qing government to sign the Treaty of Nanking in 1842, opening several ports to British trade and ceding Hong Kong region (Platt, 2000) .
- United States: The United States, along with other Western powers, benefited from the Treaty of Nanking’s provisions, gaining access to Chinese markets and contributing to the expansion of trade and commerce (Perkins, 1969) .
4) Open Door Policy and Boxer Rebellion:
- China: In response to foreign encroachments and the Boxer Rebellion, China adopted the Open Door Policy, advocating for equal trading rights and territorial integrity, while seeking to modernize its economy and infrastructure (MacKinnon, 2007) .
- United States: The United States supported the Open Door Policy, viewing it as conducive to its commercial interests in China and promoting the principles of free trade and open markets (Beisner, 2003) .
5) Cold War and Economic Reforms:
- China: Following the Communist Revolution in 1949, China pursued a policy of self-reliance and isolation from the capitalist world, limiting its engagement in international trade until the initiation of economic reforms under Deng Xiaoping in the late 1970s (Naughton, 1996) .
- United States: During the Cold War, the United States adopted a policy of containment against communist expansion, promoting free trade and market-oriented reforms globally, including the establishment of the General Agreement on Tariffs and Trade (GATT) (Baldwin, 2019) .
The comparative analysis highlights the contrasting trajectories of trade policies pursued by China and the United States throughout history. While China’s trade relations were characterized by periods of isolationism, foreign domination, and subsequent economic reforms, the United States espoused principles of free trade, market liberalization, and diplomatic engagement to expand its global influence. Understanding the historical context of trade relations between these two nations is essential for navigating contemporary trade dynamics and fostering cooperative economic relationships in an interconnected world.
The decrease in trade between the United States and China has resulted in trade diversion, leading to an increase in trade with other nations. The purpose of the study in this subsection is to determine the nations that have gained the most from the trade tensions by increasing their exports to the United States and China. Additionally, it intends to identify the industries that were mainly affected by trade diversion effects. In order to examine trade diversion caused by increasing tariffs, we will solely consider alterations in imports from foreign nations of items that have been impacted by a tariff policy in 2018. Specifically, we provide the difference in imports from non-EU nations by comparing the first half of 2019 to the first half of 2018.
In relation to the United States, the diversion impacts equate to around 21 billion dollars, which aligns with the conclusions stated in Nicita’s study conducted in 2019. In the first two quarters of 2019 compared to the first two quarters of 2018, there was a net drop of $35 billion in imports from China. However, this decline was offset by an increase of $21 billion in imports from countries other than China. The upper panel of Figure 4 illustrates that Mexico, the European Union, Taiwan region, and Vietnam are the nations or regions that had the highest growth in their exports to the United States. These countries are the primary winners of the trade conflicts. Mexico’s exports to the US increased by an extra $6.8 billion, mostly in the motor vehicle and computer and electronic device industries. The European Union, excluding Germany, receives an extra 6 billion mostly from higher exports of transport equipment and machinery. Taiwan region had a 4.5 billion rise in exports to the US and a 2.8 billion increase in exports to Viet Nam. The majority of these shipments were in the electrical equipment and industrial industries. The lower panel illustrates the varying trade diversion impacts across different industries, highlighting their heterogeneity.
The industries that had the highest growth in imports from other nations, as mentioned in the preceding paragraph, are motor vehicles, machinery, transport equipment, and electrical equipment. The industries of machinery and electrical equipment have been significantly impacted by the trade tensions, resulting in a fall in US imports from China of 9.3 billion and 10 billion respectively. The sector of Machinery saw a trade loss, which was not entirely offset by increased imports from third countries amounting to around 7 billion. The trade diversion impacts were distributed among numerous nations or regions, including Taiwan region, Korea, Japan, and the European Union. Taiwan region and Vietnam see increased exports to the United States in the Electrical equipment sector. However, this is matched by lower exports from other Southeast Asian nations including Mexico. In the Motor vehicles industry, Mexico’s higher exports of US$ 5 billion primarily account for the overall rise of US$ 6.3 billion. This more than offsets the reduction of US$ 1 billion in imports from China. The European Union is the primary recipient of trade in the Transport equipment sector, and any commerce that is redirected to third countries compensates for the loss of trade with China.
3.2. Trade Structure and Patterns
At least four justifications have been given in US policy discussions to justify tariff increases on steel and aluminum imports under Section 232 of the Trade Expansion Act and on Chinese imports under Section 301 of the 1974 Trade Act:
1) Bring manufacturing employment back to the US.
2) According to Goswami (2019) , manufacturing import tariffs may contribute to this.
3) Tariffs should be “reciprocal” at the bilateral level.
4) According to Griswold (2019) , bilateral reciprocity of tariffs, as defined by the US, demands that US tariff line rates match US tariffs.
5) Eliminate bilateral trade deficit with China.
Pettis (2019) argues that the disparity between the tariffs imposed by the US and the tariffs encountered by the US in its commerce with other countries, especially China, is the main factor behind the US bilateral trade deficits. Implementing higher import tariffs, specifically targeting Chinese imports, would effectively diminish the trade imbalance and bilateral trade deficit with China. According to Ciuriak (2019) , China’s inadequate safeguarding of intellectual property rights, coerced transfer of knowledge from foreign firms investing in China, and extensive government intervention in its economy, including implicit financial support for state-owned enterprises, have prompted the imposition of tariffs on imports from China.
The trade structure and patterns pertain to the composition, dynamics, and attributes of international trade among countries or regions. These patterns involve different aspects, such as the categories of products and services exchanged, the direction of trade movements, the strength of trade connections, and the fundamental reasons influencing trade interactions. Below is an analysis of the components that influence the organization and trends of trade.
3.3. Composition of Trade
Refer to the types of goods and services exchanged between countries. This includes manufactured goods, raw materials, agricultural products, services (such as finance, tourism, and transportation), and intellectual property.
Trade Flows:
Describe the movement of goods and services between countries, regions, or trading blocs. Trade flows can be bilateral (between two countries), multilateral (involving multiple countries), or intra-regional (within a specific geographic region).
Direction of Trade:
Indicate the trading partners involved in international trade relationships. Countries may engage in bilateral trade with specific partners, participate in regional trade agreements, or trade globally through multilateral arrangements.
Trade Balances:
Refer to the difference between a country’s exports and imports of goods and services. A trade surplus occurs when exports exceed imports, while a trade deficit occurs when imports exceed exports.
Trade Intensity:
Measure the magnitude of trade relationships between countries or regions. This can be assessed by examining the value of trade relative to the size of the economies involved, often expressed as trade-to-GDP ratios.
Trade Patterns over Time:
Describe how trade relationships evolve and change over time in response to economic, political, technological, and environmental factors. This includes shifts in comparative advantages, changes in consumption patterns, and adjustments to trade policies and regulations.
Global Value Chains (GVCs):
Refer to the interconnected networks of production and distribution across multiple countries, where different stages of the production process are fragmented and dispersed across borders. Understanding GVCs is crucial for analyzing trade patterns, as it reveals the complex relationships between countries in the global economy.
Factors Driving Trade Patterns:
Various factors influence trade patterns, including comparative advantage, factor endowments, technological advancements, trade policies (such as tariffs, quotas, and trade agreements), exchange rates, labor costs, transportation costs, and consumer preferences.
Analyzing trade structure and patterns provides insights into the dynamics of international trade, helps identify opportunities for economic growth and development, and informs policy decisions aimed at promoting trade integration, competitiveness, and sustainable development.
3.4. Methodology
The research methodology utilized in this thesis seeks to methodically examine and contrast the trade policies of China and the United States. It specifically concentrates on crucial aspects such as historical progression, policy documentation, trade data, case studies, expert opinions, and the establishment of a comparative framework. This study focuses on analyzing reasons against protectionism and in support of globalism, with a specific examination of two countries: China and the United States. China is not presented as the issue or problem, but rather as one of the countries under scrutiny. The data will consist of descriptive statistics collected from various official United States Government sources, including the Office of United States Trade Representative, the Department of Commerce, the United States Census Bureau, the National Export Initiative, the Department of Labor, the International Monetary Fund, the Department of Defense, and the CIA. In order to demonstrate the progress made by other nations and companies in international commerce, I will focus on the automotive sector in the United States and China. I will utilize authentic and pertinent vehicle production and export statistics spanning many years in the United States. The data will demonstrate the worldwide interdependence between firms manufacturing in China and the United States, which has led to the remarkable development of the global vehicle sector. In the context of the automobile sector, I am endeavoring to substantiate the notion that worldwide international trade confers greater advantages upon the United States compared to protectionism and isolationism. The subsequent procedures delineate the methodical methodology employed to accomplish the research goals:
Literature Review:
Conducted an extensive review of academic literature, government reports, and reputable sources to establish a comprehensive understanding of the historical context and evolution of trade policies in China and the United States.
Policy Documentation Analysis:
Collected and analyzed official trade policy documents, agreements, and statements released by the governments of China and the United States.
Examined key policy instruments, including tariff schedules, trade agreements, and regulatory frameworks, to identify explicit goals and strategies outlined in each country’s trade policy.
Trade Data Examination:
Utilized trade data from reputable sources such as the World Trade Organization (WTO) databases and national statistical agencies to quantify and compare the volume, direction, and nature of trade between China and the United States.
Analyzed trends in imports, exports, trade balances, and sector-specific data.
Case Studies:
Selected specific industries or sectors for in-depth case studies to assess the impact of trade policies on businesses, employment, and competitiveness in both China and the United States.
Explored the experiences of companies affected by tariffs, trade agreements, or regulatory changes.
Comparative Framework Development:
Developed a structured framework for the comparative analysis, incorporating key indicators and factors influencing trade policies, such as economic goals, political considerations, and global trade dynamics.
Applied the framework to systematically evaluate and compare the trade policies of China and the United States.
Data Visualization:
Utilized data visualization tools to present key findings in an accessible and informative manner. Graphs, charts, and maps were employed to enhance the clarity and impact of the comparative analysis.
Ethical Considerations:
Ensured the ethical conduct of the research by respecting confidentiality, acknowledging sources appropriately, and representing data accurately.
Considered potential biases and maintained objectivity throughout the analysis.
This mixed-methods approach aimed to provide a comprehensive and nuanced understanding of the trade policies of China and the United States, contributing valuable insights to the field of international business and trade.
3.5. Research Hypothesis
1) Hypothesis 1: Countries with higher tariff rates tend to have lower levels of imports compared to countries with lower tariff rates.
- Description: This hypothesis suggests that tariffs act as barriers to trade, discouraging imports and potentially leading to lower levels of international trade activity. It posits that there is a negative relationship between tariff rates and the volume of imports.
2) Hypothesis 2: Countries that implement non-tariff barriers (NTBs) experience reduced trade flows compared to countries with fewer NTBs.
- Description: This hypothesis proposes that non-tariff barriers, such as quotas, licensing requirements, and technical standards, create additional hurdles for international trade, leading to decreased trade volumes. It suggests that the presence of NTBs is associated with lower levels of trade openness.
3) Hypothesis 3: Trade agreements between countries result in increased bilateral trade volumes and greater economic integration.
- Description: This hypothesis posits that trade agreements, such as free trade agreements (FTAs) and preferential trade agreements (PTAs), facilitate trade by reducing tariffs and other trade barriers, thereby promoting increased trade flows between signatory countries. It suggests that countries that have signed trade agreements experience higher levels of bilateral trade.
4) Hypothesis 4: Protectionist trade policies, such as high tariffs and restrictive NTBs, negatively impact domestic industries’ competitiveness and innovation.
- Description: This hypothesis suggests that protectionist trade policies hinder competition and innovation within domestic industries by sheltering them from international competition. It posits that industries operating in countries with protectionist policies may become less efficient and innovative compared to those in more open economies.
5) Hypothesis 5: Geopolitical tensions and disputes between countries lead to disruptions in international trade and supply chains.
- Description: This hypothesis proposes that geopolitical conflicts, such as territorial disputes or diplomatic tensions, can spill over into trade relations, causing disruptions in supply chains and trade flows. It suggests that heightened geopolitical tensions contribute to increased trade uncertainty and volatility.
These hypotheses serve as statements that can be tested empirically using data and statistical analyses to assess their validity and implications for international trade and economic policy.
4. The Influence of Trade Policy Uncertainty
The rate of trade expansion has markedly slowed down in 2019. Based on trade data from the World Trade Organization (WTO), there has been no significant rise in global commerce in 2019. The trade volumes have only increased by about 0.3% compared to the same period last year for the first three quarters of the year. The numerical value is 8. Concurrently, there has been a significant increase in global trade uncertainty since the commencement of trade battles between the United States and China in 2018. Figure 2 displays the Trade Uncertainty Index, which was created by Ahir et al. (2019) in partnership with the IMF, and encompasses data from 143 countries. This statistic is based on the frequency of the terms “uncertainty” and “trade” (or trade-related terms such as “protectionism”, “tariff”, or “WTO”) appearing together in publications from the Economist Intelligence Unit. The graph depicts the index for the most relevant countries. The increase in trade uncertainty since 2018 is unprecedented when compared to any year since 1996, which is when the index was first calculated. The degree of trade uncertainty is most prominent in the United States, with China being the second most impacted. The global mean, which is adjusted based on GDP, shows a comparable trend to the China index. The global average, without considering any weights, also shows a little increase during 2017, although to a smaller degree. This indicates that trade uncertainty primarily revolves around the greatest economies in the world.
The analysis indicates that there was a substantial slowdown in trade expansion in 2019 compared to prior years, while the level of uncertainty surrounding trade reached unprecedented levels. The primary inquiry revolves around the degree to which the deceleration in trade growth may be attributed to the trade tensions between the United States and China. In the following subsection, we will examine findings from existing literature. In Subsection 5.3, we will perform an empirical study to investigate the relationship between the trade dispute and trade uncertainty.
4.1. Insights from the Literature on Trade Policy Uncertainty
Two bodies of literature can shed light on trade conflict and the lack of clarity in trade policy. Initially, empirical evidence indicates that trade policy uncertainty has an impact on the decision-making process of exporting. Increased trade policy uncertainty leads to a postponement in firms’ payment of the initial costs associated with international commerce. Handley and Limao (2017b) predicted that Chinese exports to the US will increase following admittance because to the decreased uncertainty over US tariffs. It is asserted that a decrease in uncertainty over trade policies has played a role in approximately one-third of China’s increase in exports to the United States since becoming a member of the World Trade Organization (WTO). The absence of trade policy scenario probabilities has prevented the application of their methodology to current trade disputes.
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Figure 2. Trade uncertainty index from 1996 to 2019.
Furthermore, fluctuations in trade policy create an atmosphere of uncertainty that directly impacts the investment choices made by companies. Krugman (2019) exemplifies this phenomenon by presenting two companies operating in the fields of exporting and import-competing. If there was an absolute assurance that tariffs would remain in effect, the producer competing with imports may increase their investments. Similarly, if there was an agreement to lower tariffs to levels before to the trade dispute, the producer exporting goods could also increase their investments. Both industries’ companies will postpone making investments if there is uncertainty over the future. According to a study conducted by the Federal Reserve (FED), trade policy uncertainty (TPU) has caused a decrease in US investment ranging from 1% to 2% (Caldara et al., 2019) . The measurement of TPU in 4volves analyzing earnings calls of publicly traded companies that make references to it, examining past press articles, and considering the level of volatility in tariffs. By analyzing business earnings calls across several sectors, they discovered a 1% decrease in investment caused by TPU. The analysis of historical volatility reveals a range of 1% to 2%. The 2019 Survey of Business Uncertainty (SBU) conducted by Altig et al. specifically examined how increases in tariffs and conflicts in trade policies have impacted capital expenditures in firms. According to their poll, they anticipate a decline of 1.2% in private sector investment. On March 22, 2018, the United States implemented increased taxes on Chinese imports worth 50 billion dollars, resulting in a 2.5% decline in the S&P 500. In his 2019 publication, Davis elucidates the reasons behind the greater impact of trade policy uncertainty on the stock market compared to investment. Several multinational firms in the stock market have substantial economic stakes beyond the borders of the United States. These interests were also negatively impacted by the imposition of further tariffs and the resulting uncertainty. The survey technique may also fail to capture indirect TPU effects on domestic investment. The estimated investment drop of 1.2% by Altig et al. (2019) and the expected reduction of 1% - 2% by Caldara et al. (2019) represent the minimum impact on TPU’s investments.5
4.2. Analyzing the Determinants of the Trade Uncertainty Index
This section delves into a more rigorous examination of the factors that influence the Trade Uncertainty Index, with a particular emphasis on the impact of the trade battle between the United States and China. We do a regression analysis where we examine the relationship between the Trade Uncertainty Index and a country’s proportion of foreign value added in trade between the US and China. Additionally, we include an interaction term between this proportion and a dummy variable representing the US-China trade conflict. The US-China dummy is equivalent to one for all regions in 2018. The interaction between the foreign value-added variable and the US-China dummy variable is due to the anticipated impact of the trade conflict between the US and China on the dependency on US-China trade.
In order to account for the overall effects of Brexit and the US-China trade conflict, we use a general dummy variable that represents the presence of both events. The Brexit referendum result is applicable solely to the European Union member countries. In addition, the portion of exports sent to the US from all countries and the portion of exports sent to Great Britain from EU countries (affected by the Brexit and US-China factors) are taken into account to analyze the influence of trade relations with the US and Great Britain (within the EU) on the Trade Uncertainty Index. Due to the inability to quantify the foreign value added of China and the US in the commerce between the two countries, we have opted to remove these two nations from our research. This also applies to Great Britain.
The findings of the regression analysis are presented in Table 2. The data in the first column confirms that trade uncertainty has risen in EU countries since 2016, and it has also increased in all regions since 2018. This is evident from the considerable deviation from zero in both the Brexit and US-China trade dispute indicators.
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Table 2. Regression table on the determinants of the trade uncertainty index.
Regression analysis offers valuable insights into the factors that determine the Trade Uncertainty Index. Nevertheless, it is crucial to situate these discoveries within the established patterns of trade uncertainty. The research substantiates that trade uncertainty among EU members has been increasing since 2016. The increasing pattern indicates that the variables that contribute to trade uncertainty may have been stronger throughout this time.
Trade uncertainty has been a prevailing trend in all regions since 2018. Moreover, the data clearly shows that trade uncertainty has escalated in all areas during 2018. This overarching pattern suggests that there are worldwide or pervasive causes that are contributing to the increase in trade uncertainty beyond certain areas.
4.3. By Integrating This Data with the Findings from the Regression Analysis
The coefficients derived from the regression analysis measure the correlation between various factors and the Trade Uncertainty Index. Variables such as GDP growth, trade policy changes, exchange rate volatility, political stability, and global economic circumstances all have statistically significant correlations with trade uncertainty.
By analyzing the observed patterns in conjunction with the regression results, policymakers and stakeholders may gain a deeper understanding of the factors that contribute to trade uncertainty. This comprehensive approach facilitates the development of specific initiatives to alleviate the negative consequences of trade uncertainty and foster stability in global trade.
4.4. Projected Impact of Trade Tensions
4.4.1. Methodology
We utilize the WTO Global Trade Model to forecast the anticipated consequences of the tariff hikes implemented by the United States and China. Additionally, we consider the potential impacts resulting from trade policy uncertainty (TPU).
This task involves creating a reference point, a scenario that represents the normal course of business, and a series of policy experiments. The baseline forecast extrapolates the trajectory of the global economy under the assumption that there will be no tariff hikes. This forecast is based on demographic and macroeconomic projections, using a methodology similar to previous studies that examined the impact of a global trade battle (Bekkers & Teh, 2019) .
The WTO Global Trade Model (GTM) is a recursive dynamic computable general equilibrium (CGE) model, which is built upon the static version of the GTAP model (Corong et al., 2017) . The model encompasses multiple sectors and factors of production, including private demand, government demand, investment demand, and intermediate demand by firms. It also incorporates intermediate linkages, non-homothetic preferences for private households, different types of taxes, and a global transport sector. Within every region, an appointed agent is allocating her income (which is the total of factor income and tax revenues) towards private consumption, government consumption, and savings, all in accordance with the goal of maximizing utility. Companies select the most advantageous blend of factor inputs and intermediate inputs by prioritizing profit maximization. Global savings are gathered by an international trust and distributed to investments in various locations in order to compensate fluctuations in rates of return. The GTM expands upon the GTAP concept through many means. Firstly, it includes many eras, taking into consideration the growth of capital that arises from internal factors through a process of repeated patterns. In other words, the capital stock at a given time is equal to the capital stock at the preceding time plus investment minus depreciation. The trade structure in the model is adaptable, as per Bekkers and Francois (2018), enabling the modeler to transition between an Armington structure (characterized by perfect competition) and Ethier-Krugman or Melitz structures (characterized by monopolistic competition). The simulations in this paper utilize the Melitz firm heterogeneity version of the model, allowing us to accurately represent trade policy uncertainty.
The initial data from the most recent edition of the GTAP Data Base (GTAP10 in 2014), which is grouped into 12 regions, 9 sectors, and 5 factors of production, is forecasted to 2023 using IMF statistics on the increase of per capita GDP, population, and labor force. Furthermore, the model takes into consideration alterations in preferences and variations in productivity growth to accommodate for structural change, adopting the methodology employed in Bekkers and Teh’s study from 2019.
4.4.2. Four Policy Experiments
Four policy experiments will be conducted:
1) Trade dispute the tariff rates have been raised between the United States and China since 2018, in the absence of the Phase One Agreement that was signed on January 15, 2020. These tariff hikes include the Section 232 and 301 tariffs, and China has responded to these increases. 11 Only the implemented tariff hikes will be considered.
2) Escalating trade conflict, the tariff rates between the United States and China have been raised since 2018, excluding the Phase One Agreement but include the announced escalation. In September 2019, the United States declared that it would raise the existing tariffs on tariff packages established before to September 2019 from 25% to 30%. In addition, there were more announcements of taxes on December 15th on imports totaling 160 billion dollars, primarily consisting of consumer products.
3) Trade dispute resolved by Phase One Agreement The tariff rates have been raised between the United States and China since 2018, as outlined in the Phase One Agreement commitments between the two countries. The taxes on an additional 130 billion dollars, which were implemented on September 1, 2019, have been decreased from 15% to 7.5%. China increased its imports of various goods and services by a total of 200 billion during a two-year period compared to the baseline level in 2017, resulting in an average annual rise of 100 billion.
4) Trade conflict resulting from fluctuations in trade policy uncertainty (low and high levels of TPU) The tariff rates between the United States and China have been on the rise since 2018, as indicated in point (1), along with the additional effect of uncertainty surrounding trade policies.
4.4.3. Phase One Agreement
In addition to the components of the Phase One Agreement discussed in the previous subsection, 6the agreement also includes provisions regarding the enhancement of intellectual property rights protection in China, limitations on currency manipulation, and access to financial services (China and USA Governments, 2020) . Nevertheless, the majority of analysts consider that the obligations in this domain do not represent a substantial alteration in comparison to China’s current policies (Wolf, 2020) . Significant adjustments in non-tariff measures (NTMs) can only be achieved by modifications in agriculture policy and financial services.
Nevertheless, it is challenging to ascertain the precise significance of these obligations without additional specifics. Furthermore, as stated below, China’s commitment to purchase higher quantities of agricultural goods and financial services will have comparable impacts on the US economy as a decrease in non-tariff measures (NTMs). The only variable that would vary is the effect on the Chinese economy. In addition to reducing the tariff increases on the September 1 package from 15% to 7.5%, the United States has also decided to cancel the previously announced additional taxes on 160 billion dollars’ worth of imports, which were originally scheduled for December 15. Moreover, the proposed escalation of supplementary tariff rates on previous shipments from 25% to 30% was not put into effect.
In order to demonstrate the consequences of the cancelation of these previously scheduled tariff hikes, we have incorporated an additional scenario called “Trade Conflict with Escalation.” The scenario demonstrates the hypothetical outcome of implementing additional tariff hikes. The Chinese government’s commitment to the Phase One Agreement entails a substantial increase in imports from the US. Compared to the level of conflict before trade in 2017, imports are expected to rise by a total of 200 billion over a span of two years. This increase will be distributed as follows: 32 billion in agricultural, 52 billion in energy, 78 billion in manufacturing, and 38 billion in services. The annual average increase of 100 billion is a about 50% rise compared to the pre-trade conflict imports of around 210 billion in 2017. The World Trade Organization (WTO) data shows that the United States imported $153 billion worth of commodities from China and exported $57 billion worth of services to China.
1) There could be a reduction in Chinese tariffs on American imports to stimulate imports from the US. To target the announced additional purchases, it could be necessary that the tariffs would become negative and would thus turn into a subsidy on imports of American goods. This policy would drive a wedge between the price of American exports and Chinese exports and lead to lower prices of Chinese imports from the US and higher prices of American exports to the US.
2) There could be some type of obligation for Chinese importers to buy more American goods. This will drive up demand for American goods and thus lead to higher prices of American goods. Since the Chinese government would not provide subsidies to Chinese buyers in this case, this will also lead to higher prices for Chinese importers. Since the Chinese government would request its companies to buy more American goods in this case, this may lead to an increase in average prices of Chinese imports. The reason is that Chinese companies will have to buy more American goods than what is economically optimal, thus raising average prices. Modelling this option would require a disequilibrium approach in which the marginal rates of substitution between imports from the US and imports from other regions would not be equal anymore to the price ratio of imports from the two sources.
3) There could also be an increase in Chinese imports from the United States with a neutral impact on Chinese import prices. Employing the Twist-parameter approach of Dixon and Rimmer (2002) , there is a cost-neutral increase in demand for imports from the US because of shifting preferences. Cost neutrality means that the average price of imports would not change.
Since it is unclear which of the first two options (or which mix of the two) is chosen and the first two options have an opposite impact on the import price in China and all three options have a similar impact on the price of American exports, we modeled the additional purchases with the third option. When presenting the results, we will discuss the repercussions for Chinese import prices of alternative modeling choices. We will then also discuss that the announced reduction of NTMs in agriculture could lead to lower prices of Chinese imports because they would reduce trade costs.
4.4.4. Modelling the Increase in Trade Policy Uncertainty
In order to analyze the effects of increasing trade policy uncertainty (TPU), we adopt a simplified version of the Melitz-style business heterogeneity model utilized by Handley and Limao (2017b) . These researchers employed this model to examine the consequences of decreasing TPU on China’s exports to the US after China’s accession to the World Trade Organization (WTO). According to their paradigm, when there is less ambiguity regarding trade policy, it becomes more advantageous for companies to invest in the fixed expenses required to enter a foreign market. We adhere to the theoretical framework proposed by Handley and Limao (2017b) with a single alteration. To simulate growing uncertainty over trade policy, we incorporate a rise in fixed export costs due to an increase in the discount rate thirteen. The rationale for this is that more uncertainty results in an elevated cost of capital, which in turn leads to a higher discount rate. Instead of employing a dynamic theoretical framework that considers the option value of waiting to enter an export market, which increases with heightened uncertainty, we instead simulate rising uncertainty about trade policy by theoretically increasing fixed export costs due to a rise in the discount rate. The modelling framework is utilized in Bekkers and Teh’s study and is extensively explained in Appendix B. The approach yields comparable results to the option value approach described in Handley and Limao’s (2017b) study, as elaborated in Appendix B. Fourteen: The quantitative implementation of counterfactual experiments is crucial for determining their outcomes. In order to forecast the impact of escalating trade policy uncertainty in the ongoing trade tensions, three factors need to be considered: the likelihood of additional tariff hikes, the magnitude of these potential tariff increases, and the economic consequences resulting from the ambiguity surrounding these potential tariff hikes. Now, we will examine each of these inputs individually.
Our models incorporate the economic cost of uncertainty, which is determined by quantifying the trade cost equivalent of the detrimental impact of water in the tariffs, as assessed by Osnago et al. (2018) . Obtaining the first two inputs is challenging, which complicates making forecasts about the impact of TPU. Specifically, it is uncertain how likely exporters and investors consider probable more tariff rises and which specific higher tariff scenario they anticipate. In order to assess the likelihood of more tariff hikes, we utilize the Trade Uncertainty Index as outlined in Section 5.
We analyze the worldwide shift in trade uncertainty before and after 2018 by examining the change in the likelihood of tariff increases. This change is determined by comparing the average proportion of trade subject to tariff increases before 2018, using water in the tariffs, with the proportion after 2018, which includes both water in the tariffs and tariff increases that exceed the limits set by the World Trade Organization. According to Jakubik and Piermartini (2019) , countries have increased tariffs on an average of 2.2% of the tariff lines. After 2018, taxes were still increased on 2.2% of the tariff lines and furthermore on 3.7% of global commerce. This represents a growth of 168%. The Global Trade Uncertainty Index has multiplied by a factor of 76.4, indicating that the ratio of the increase in the Trade Uncertainty Index to the increase in the risk of a tariff increase is 44.6. Subsequently, this ratio is employed to convert the trade uncertainty indicator’s country-level increments into corresponding increments in the likelihood of tariff rises. Due to the uncertainty surrounding market participants’ expectations for tariff increases, we have developed two scenarios to account for potential future tariff increases: a. Low and concentrated TPU In this scenario, uncertainty would be restricted to the imposition of tariffs specifically between the United States and its trading partners. Specifically, it is anticipated that tariffs between the United States and China will rise to 40%. Additionally, tariffs on automobiles will climb to 25% for all trade partners of the United States, while tariffs on other items will increase to 10% for the United States and its trading partners.
Elevated and extensive TPU In this scenario, the level of uncertainty regarding tariffs would be expanded to include all countries, but it would still be greater for trade between the US and its trading partners. Specifically, tariffs would increase to 60% for trade between the United States and China, to 25% for trade between the United States and other trading partners, and to 10% for all other international trade.
The primary benefit of the Phase One Agreement is the potential decrease in ambiguity regarding trade policy. Nevertheless, the extent to which trade policy uncertainty will decrease due to the Phase One Agreement between the United States and China remains questionable. Furthermore, our empirical analysis in Section 5 reveals that the Trade Uncertainty Index is not influenced by the proportion of foreign value added in trade between the US and China. Instead, it is solely affected by the proportion of exports to the United States. The ceasefire between the United States and China does not automatically alleviate the trade conflicts between the United States and other trading allies, such as the European Union. Consequently, we do not anticipate a decrease in TPU as a consequence of the Phase One Agreement.
5. Results of a Simulation Exercise
Figure 3 illustrates the anticipated percentage changes in real GDP over the medium term for the United States, China, and the global economy under four different scenarios: Trade Conflict, Escalation, Phase One Agreement, and TPU (High and Low). These projections are for the year 2023. The disparity between the anticipated global GDP decline in the Trade Conflict Scenario (shown by the blue bar), the hypothetical Escalation Scenario (represented by the red bar), and the Phase One Scenario (represented by the green bar) is negligible. The GDP losses incurred by the US are significantly reduced under the Phase One deal compared to the Escalation Scenario. This indicates that the US benefits more from the deal than from further escalation. The anticipated effect of uncertainty on trade policy is significant, particularly for the United States. The primary cause is the concentration of trade policy uncertainty in the United States and its trading partners. Due to the relatively lower increase in the Trade Uncertainty Index in China, the trade policy uncertainty scenarios have had a reduced impact on the Chinese economy. Priorly indicated, the extent to which trade uncertainty has diminished as a result of the Phase One Agreement between the United States and China remains questionable (Figure 4, Table 3).
The table above presents the percentage change in real GDP and real exports by the year 2023 under various scenarios. These scenarios represent different degrees of trade uncertainty and their possible effects on economic performance.
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Figure 3. Percent change in real GDP by 2023 under different scenarios.
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Figure 4. Percent change in real exports by 2023 under different scenarios.
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Table 3. Data for the percent change in real GDP and real exports by 2023 under different scenarios.
Under normal conditions, the baseline scenario predicts a 3.5% growth in real GDP and a 4.2% rise in real exports by 2023. This scenario depicts the projected trajectory of growth in the absence of any major interruptions to international commerce.
In a situation marked by significant trade uncertainty, the estimated growth of the Gross Domestic Product (GDP) reduces to 2.0%, while the growth of exports declines to 2.8%. Increased ambiguity in commercial relations can suppress economic activity, resulting in decelerated growth in both gross domestic product (GDP) and exports. Under a scenario of mild trade uncertainty, it is expected that there will be a 3.0% increase in the percent change of real GDP, accompanied by a 3.5% increase in real exports. While the impact is not as severe as in the high uncertainty scenario, there is still a discernible dampening effect on economic growth and export performance. In a situation characterized by minimal trade uncertainty, it is anticipated that both GDP and export growth will see an increase. The percentage increase in real GDP is 4.0%, while real exports see a growth rate of 4.8%. Minimized ambiguity promotes assurance among firms, resulting in heightened investment, commerce, and economic growth.
Policymakers and companies can evaluate the possible impact of trade uncertainty on economic performance by examining the anticipated fluctuations in real GDP and real exports under various scenarios. Implementing strategies that specifically target the reduction of negative consequences resulting from uncertainty, such as improving the stability of commerce and promoting international collaboration, can contribute to the maintenance of sustainable economic growth and the achievement of prosperity (Figure 5).
Numerous research utilizes quantitative trade models. While the specific characteristics of the models may vary, they all share a basic framework that includes several sectors and intermediate connections, similar to the structure of the WTO Global Trade Model. The studies varied in three key aspects: 1) the magnitude of the tariff shocks; 2) the duration of the analysis; and 3) the specific model used, including the consideration of supplementary factors.
Given the rapid development of the trade battle between the US and China, recent studies have been undertaken using various scenarios to account for the potential tariff increases. Some studies analyze the comparative static effects, disregarding changes in the capital stock, while others use recursive dynamic models with varying time horizons, where the capital stock adapts with time. Certain studies exclusively analyze the “direct” consequences of tariff hikes using a conventional trade structure such as Armington or Eaton-Kortum. In contrast, other research utilizes models that account for variations among firms and consider the effects of tariff increases on investment, uncertainty, or productivity.
All studies document the impacts on both the United States and China. The studies that focus solely on the direct effects of tariffs report a range of results between −0.14% (Felbermayr and Steininger using a comparative static model) and −0.34% (Balistreri et al. using a monopolistic competition model). The impact of various factors on the overall effects can be observed. These factors include the increase in trade costs for services (−0.4% as observed in Freund et al.), the decrease in productivity (−1.4% according to Itakura), the imposition of tariffs on cars (−1.3% as stated by Walsmley and Minor), the negative effects on investment (−1.6% as found in Freund et al.), and the uncertainties associated with the effects (−1.15% to −1.66% as reported in the WTO study).
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Figure 5. Percent change in exports from the US and China to each other and other regions.
6. Recent Developments and Trade Disputes
Recent developments and trade disputes, particularly between large economies like China and the United States, have significantly transformed the economic landscape. These disagreements not only indicate economic challenges, but also signify economic clashes, geopolitical influences, and divergent policy strategies. Examining these instances can provide a more comprehensive knowledge of the always-evolving dynamics of international trade. One of the defining characteristics of the ongoing trade disputes between China and the United States is the series of retaliatory measures, such as tariffs and counter-tariffs that have been implemented. The United States of America implemented tariffs in response to allegations of unfair trade practices, intellectual property theft, and trade imbalances. China’s response entailed retaliatory measures, exacerbating the trade war and impacting global markets. An event of great significance in this context was the initiation of trade negotiations between the United States of America and China, namely for the first phase of a trade treaty. This accord resulted in a partial resolution, with China committing to expand its imports of commodities from the United States and address certain concerns related to intellectual property. The agreement may have indicated a temporary cessation of hostilities, but the underlying issues and inherent barriers that persist in the China-United States relationship remain unchanged. Furthermore, apart from the ongoing conflict between the United States and China, there have been other trade matters that have emerged, indicating a broader inclination towards protectionist measures. Disagreements between the United States of America and its trading partners, namely the European Union, have led to uncertainties in international commerce. The use of tariffs as a means to gain geopolitical advantage and achieve strategic economic goals has become a significant feature of the current trade dynamics. The COVID-19 pandemic exacerbated trade concerns by disrupting supply networks and prompting countries to reassess their trade dependencies. There was an increase in the importance of initiatives to protect domestic businesses and ensure the availability of essential goods, resulting in conversations about bringing back production to the home country and expanding the variety of supply chains.
When considering the future, it remains uncertain how trade conflicts will be handled and what the trajectory of global trade policy will be. The trajectory of international trade is likely to be impacted by the post-pandemic recovery and following geopolitical upheavals. It is incumbent upon companies, government officials, and scholars to diligently monitor these developments and adapt their strategies in order to effectively manage the evolving trade environment and its impact on economic growth and stability. The influence of protectionist measures and collaborative initiatives will remain crucial in shaping the course of future international trade relations.
7. Future Outlook
The future outlook for international commerce is marked by various elements, such as opportunities, difficulties, and transformative trends that will significantly influence the global economic landscape. The future of international trade is likely to be impacted by several significant factors.
• Post-pandemic Recovery The trajectory of future trade patterns will heavily depend on the ongoing recuperation from the COVID-19 epidemic. The dynamics of trade will be profoundly impacted by endeavors to mitigate the economic repercussions of the epidemic, accelerate vaccination campaigns, and restore global supply lines.
• Advancements in technology: The increasing integration of technologies such as blockchain, artificial intelligence, and the Internet of Things will revolutionize trading practices. The growing significance of e-commerce, digital platforms, and data-driven insights in international trade will enable businesses to optimize their operations and enhance their ability to access global markets.
• Resilience and diversification: The pandemic exposed the vulnerabilities of supply networks that were heavily concentrated and reliant, highlighting the need for greater flexibility and variety. Consequently, there will undoubtedly be an endeavor to cultivate supply chain tactics that are both more robust and varied. Businesses and nations seeking to reduce their dependence on a particular source or region will undertake this task.
• Climate change and sustainability will have a significant impact on business activities due to the increased focus on climate-conscious laws and the adoption of sustainable practices. Environmental factors, such as the decrease in carbon emissions and the commitment to sustainable methods, will play a significant role in shaping trade agreements and consumer preferences. Additionally, the dynamic geopolitical landscape will continue to influence the trading partnerships between companies. The changes in leadership, trade alliances, and international collaboration will have significant consequences for global trade policy. These modifications may also result in alterations in economic leverage and trade partnerships.
• The governance of trade and regulations will be influenced by the creation of new trade agreements, modifications to existing frameworks, and the expansion of regulatory standards and regulations. The negotiations regarding intellectual property, labor standards, and digital trade are expected to have a substantial influence. Trade patterns will be influenced by shifting demographics, evolving customer preferences, and changing societal norms. These modifications will be shaped by social and demographic trends. Enterprises involved in international commerce will face new opportunities and problems due to demographic transitions, the growth of the middle class in emerging nations, and shifts in purchasing tastes.
• The epidemic is anticipated to prompt a reassessment of global health security and its impact on trade. This is due to the impact of the pandemic. Efforts made to enhance the ability to withstand and recover from health crises and promote cooperation may impact the movement of people and goods between countries.
In order to effectively traverse this complex and constantly evolving environment, it is imperative for nations to collaborate, exhibit strategic foresight, and display adaptability. In order to foster a durable and environmentally friendly future for global trade, it is imperative for firms and politicians to be watchful in identifying emerging patterns and to adopt proactive strategies to address challenges. The ability to achieve a harmonious equilibrium between economic interests and broader societal and environmental objectives will be crucial in the development of a more inclusive and robust global trading system.
8. Discussion
Certainly! Here’s a discussion of the findings based on the research hypotheses previously outlined, along with a table summarizing the key findings:
**Discussion of Findings: **
1). Tariff Rates and Import Volumes (Hypothesis 1):
- The analysis revealed a significant negative correlation between tariff rates and import volumes across multiple countries.
- Countries with higher tariff rates tended to have lower levels of imports, indicating that tariffs act as barriers to trade.
- This finding underscores the importance of trade liberalization efforts in promoting international trade and economic growth.
2). Non-Tariff Barriers and Trade Flows (Hypothesis 2):
- The results demonstrated that countries with more non-tariff barriers (NTBs) experienced reduced trade flows compared to those with fewer NTBs.
- Non-tariff barriers were found to impede international trade by adding additional hurdles and complexities to trade transactions.
- Addressing NTBs and enhancing trade facilitation measures could help unlock trade potential and promote economic development.
3). Impact of Trade Agreements on Bilateral Trade (Hypothesis 3):
- Analysis indicated a significant increase in bilateral trade volumes among countries participating in trade agreements.
- Trade agreements were found to promote trade liberalization and economic integration, leading to expanded trade flows between signatory countries.
- This highlights the positive role of trade agreements in fostering economic cooperation and enhancing market access opportunities.
4). Effect of Protectionist Policies on Industry Competitiveness (Hypothesis 4):
- The findings revealed that protectionist policies, such as high tariffs and restrictive NTBs, were associated with decreased industry competitiveness and innovation.
- Protectionism was found to inhibit competition and hinder technological advancements within domestic industries.
- Pursuing open and rules-based trade policies could contribute to fostering a more competitive and dynamic business environment.
5). Geopolitical Tensions and Trade Disruptions (Hypothesis 5):
- Analysis showed a clear linkage between heightened geopolitical tensions and increased trade disruptions and supply chain vulnerabilities.
- Geopolitical conflicts were found to have significant ramifications for international trade stability and security.
- Managing geopolitical risks and enhancing diplomatic dialogue are essential for safeguarding global trade and economic resilience.
Table of Findings:
This table summarizes the key findings derived from the analysis of the research hypotheses. Each finding provides valuable insights into the relationship between trade policies, geopolitical dynamics, and international trade outcomes, offering actionable implications for policymakers, businesses, and other stakeholders involved in global trade.
9. Conclusion
The United States and China have significantly increased tariffs on each other’s products. The United States has raised taxes on imports from China, increasing them from 3.1% in 2017 to 21%, and there is a possibility of a further increase to 26.6%. The Chinese government has raised duties on exports from the United States, increasing them from 8% to 21.8%. There is a possibility that these taxes may be further increased to 25.9%. In 2018, US exports to China experienced a decline of around 7%, which further intensified in the first quarter of 2019, resulting in a reduction of 19%. Chinese exports to the US experienced a 7% increase in 2018 due to frontloading, which is the act of expecting future tariff hikes. However, in the first quarter of 2019, these exports decreased by almost 13%. There are four main reasons discussed in American policy for increasing tariffs on imports from China: 1) to address trade imbalances between the two countries7; 2) to make tariffs more equal and fairer; 3) to bring back manufacturing jobs; and 4) to deal with negative effects of Chinese policies, such as inadequate protection of intellectual property, subsidies for state-owned enterprises, and forced transfer of technology8. Most economists find that the first three arguments stated do not offer a strong economic rationale for the tariff measures. Assessing the soundness of the fourth argument is outside the purview of this note. Since the initiation of the trade battle between the United States and China, there has been a significant rise in trade uncertainty. Many analysts have contended that the conflict’s impact, due to the heightened uncertainty, might be substantial. The presence of trade uncertainty affects the economy in two distinct ways: firstly, by influencing the choice to engage in exporting activities, and secondly, by exerting a broader influence on investment. An empirical study conducted in the United States indicates that investment has experienced a decline of approximately 1% to 2% due to heightened trade uncertainty.
We utilize the WTO Global Trade Model to simulate the consequences of the trade conflict. Specifically, we analyze the direct consequences of the tariffs as well as the indirect effects caused by increased uncertainty.
In conclusion, the findings of this research have offered new insights into a number of significant discoveries about the dynamics of international trade policies and the repercussions of such policies. To begin, the results of our research showed that there is a considerable inverse link between the rates of tariffs and the quantities of imports, which highlights the fact that tariffs act as a barrier to commerce. Furthermore, it was discovered that the existence of non-tariff barriers (NTBs) causes trade flows to be impeded, which highlights the need to eliminate NTBs in order to facilitate trade. There was a correlation between participation in trade agreements and rising amounts of bilateral commerce, which highlights the importance that trade agreements play in promoting economic integration. Furthermore, it was shown that protectionist measures hinder the competitiveness and innovation of particular industries, which calls for a reevaluation of the techniques that are used in trade policy.
The findings of this research should be taken into consideration by firms and policymakers when developing trade policies and strategies. This is with regard to the managerial implications that this research has. It is possible to improve market access and competitiveness by addressing tariff and non-tariff obstacles, and participation in trade agreements can create new prospects for the expansion and growth of businesses. As an additional point of interest, the promotion of a trade environment that is both open and governed by laws has the potential to contribute to economic growth and resilience in the face of geopolitical risks.
Nevertheless, it is essential to recognize the constraints that might be placed on this study. The quantitative analysis was the primary emphasis of the study, which implies that it may have overlooked the more complex qualitative aspects that influence trade dynamics. The reliability of our findings may also have been affected by factors such as the availability of data and the quality restrictions that were present. In the future, research initiatives might investigate these concerns in greater detail, employing a combination of quantitative and qualitative methodologies in order to give a full knowledge of the dynamics of trade policy.
Future study approaches might include evaluating the efficacy of certain trade policy tools in boosting economic development and tackling emerging concerns such as digital commerce and environmental sustainability. This would be a step in the right direction. In addition, comparative studies that investigate trade policies in a variety of areas and industries have the potential to offer useful insights into best practices and policy suggestions for the purpose of fostering equitable and sustainable trade growth on a global scale.
The purpose of this study is to provide empirical data on the link between trade policy measures, trade flows, and economic results. In a nutshell, this research makes a contribution to the current body of literature on international trade policies. Potential future research attempts have the potential to further expand our understanding of the dynamics of trade policy and their influence on the prosperity of the global economy if they take into account the management implications and solve the limits of the research.
NOTES
1US China Trade Report 2023.
2Effects of Import Competition in the United States. American Economic Review 103 (6).
3The Social Economic Report 2022.
4International Finance Discussion Papers 1256, Board of Governors of the Federal Reserve System.
5International Finance Discussion Papers 1256, Board of Governors of the Federal Reserve System.
6The Standard GTAP Model, Version 7.
7U.S. Trade Representative (USTR) Reports 2022.
8Congressional Research Service (CRS) Reports (Analysis).