The escalation of the U.S.-China trade war

Beliefs and the U.S.-China trade war

In this paper, Alessandria et al. analyze how the credibility of the U.S.-China trade war has changed during the Trump and Biden presidencies and the implication going forward. They use disaggregated U.S. import data and a dynamic trade model where heterogeneous firms make forward-looking export participation decisions, and tariff risk varies across products and time. Their findings include:

• There was no increase in the probability of a U.S.-China trade war before it actually began in 2018, despite Trump’s campaign rhetoric. This is identified by the stable elasticity of U.S. imports from China to the “trade-war gap” (difference between trade war and normal tariffs) prior to 2019.
• When the trade war started in 2018, it was initially expected to end quickly, with over 90% probability of returning to normal tariffs in 2019-2020. However, the probability of ending the trade war fell sharply after 2020, reaching only 24% by 2024 under Biden’s administration.
• Although Trump raised tariffs on China and Biden maintained them, Trump’s administration lowered the discounted expected mean tariff by 2.6 percentage points, while Biden’s raised it by 1.6 percentage points. This is because Trump’s trade war was initially expected to be short-lived.
• The trade response to the current U.S.-China trade war shows parallels to the response after the 1980 trade liberalization that granted China normal tariff relations, but in reverse. In both episodes, the credibility of the policy change was initially low and grew over time.

Trade War and Peace: U.S.-China Trade and Tariff Risk from 2015–2050
Authors: George A. Alessandria, Shafaat Y. Khan, Armen Khederlarian, Kim J. Ruhl, Joseph B. Steinberg
From: University of Rochester, Syracuse University, Hunter College CUNY, University of Wisconsin-Madison, University of Toronto 

The U.S.-China trade war keeps escalating

Pinelopi Koujianou Goldberg in this commentary argues that the US and China are now in a full-blown economic war, as indicated by the latest tariffs imposed by the Biden administration:

First, the latest tariffs —which include steep increases for several other products, ranging from semiconductors to needles and syringes —are the final nail in the coffin of US-China trade cooperation. Denials of a complete decoupling can be put to rest. Gone is any pretense that America is merely erecting a “high fence” around a “small yard,” or trying to manage national-security risks without endangering bilateral economic cooperation. The United States and China are now in a full￾blown economic war —one that will have far-reaching geopolitical consequences.
Second, the tariffs signal defeat. Trailing in the polls as this year’s election approaches, Biden and his team feel obliged to join the anti-China, anti-trade fervor that has emerged as one of the very few unifying issues in a polarized country. Moreover, the tariffs, combined with US complaints that China is producing too much and putting pressure on the global economic system, speak to a deep-seated anxiety about America’s international competitiveness.

The High Costs of the New US Tariffs on Chinese EVs
By: Pinelopi Koujianou Goldberg – Yale University