The Lose/Lose of Trade Wars

China could come out the winner as the US launches tariffs. Global political and economic stability could be the loser.

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U.S. President Donald Trump (R) and Chinese President Xi Jinping attending a welcome ceremony in Beijing. Trump announced tariffs on $60 billion of imports from China on March 22, 2018, in response to what he sees as China's unfair trade and investment practices.
Photo by Kyodo News via Getty Images

Timing could not have been more prescient. As students convened the 11th China Business Conference at Columbia University on the last day of March, the United States had just launched a trade war, primarily targeting China. US President Donald Trump slammed tariffs on some of China’s most frequently exported goods, and China retaliated with its own set of duties on American-made imports.

Although panelists at the event, which was co-sponsored by the Jerome A. Chazen Institute for Global Business, expressed the expected outrage, a consensus maintained that the aggression would backfire on the United States. “Higher Chinese prices will equate to a tax on American consumers,” warned Chen Xu, chairman of the China General Chamber of Commerce and CEO of Bank of China USA. Citing a report from the National Bureau of Economic Research, he noted that US inflation has been held in check in part by lower-priced Chinese goods.

In contrast, participants at the event mostly shrugged off the impact of trade wars on China itself. With policies such as the One Belt, One Road Initiative, the country is already blazing other market trails, and is fast moving from commodity exports to sales of products further down the value chain. 

What’s more, multinational exporters can pretty easily circumvent country-specific tariffs. One approach is to set up shop in the United States. “One of our clients knew tariffs were coming as early as 2007 and made moves to invest in a factory in Corpus Christi,” said Lili Zheng, a partner in the international tax department at Deloitte.

Further, most large Chinese exporters have already entered countries with lower labor costs, which may be exempt from tariffs. “With factories in South Korea, Vietnam and other places, SOEs can maneuver to alternate markets if the US proves too difficult,” said Anthony Mak, director of the Hong Kong Trade Development Council in New York.

“A trade war will cause China to accelerate its move to relocate cheap labor jobs to other ASEAN [Association of Southeast Asian Nations] countries,” predicted Zhanpeng Frederick Jiang, managing partner of Coalescence Partners Investment Management.

The participants also busted some myths, beginning with the size and makeup of the trade deficit. Accepted practices assign the entire cost of merchandise to its place of export, regardless of how many countries participated in the product’s global supply chain. As indicated in a 2008 paper from Columbia Business School Professor Shang-Jin Wei, Chinese exports contain about 50 percent foreign content, or about twice as much as that of other exporters. The research also said: “those sectors that are likely labeled as relatively sophisticated such as electronic devices have particularly high foreign content (about 80 percent).”

Xu also traced roughly half of China’s surplus to American brands that manufacture or assemble in China. An example: Apple’s iPod, assembled in China with parts from numerous countries. “Less than 3 percent of the iPod’s total cost occurs in China,” he said.

Another overstatement involves employment. Although jobs are certainly lost to overseas production, Xu said, trade with China supports 2.6 million US workers.

Creating a Win/Win Scenario

The admittedly partisan crowd agreed that US attitudes must change. Xu said that, in addition to accelerating negotiations on bilateral trade, Americans should promote local-level cooperation, encourage the use of the RMB and welcome Chinese construction expertise.

But a number of panelists also agreed that China could do better, beginning with deepening supply side reforms, such as cutting excess capacity and deleveraging its State Owned Companies, moves meant to encourage profitability and quality of workmanship over the previously stressed volume. On the regulatory front, the government should relax capital controls to allow corporations to more easily channel money overseas.

On the broader stage, if the United States continues down the protectionist road, a global leadership vacuum could emerge. Beyond political tensions, issues such as pollution, climate change and income inequality, and opportunities such as precision medicine and renewable energy, don’t respect borders, and will require cooperation from the global community. “China may need to make a massive effort toward global leadership,” said Jeffrey Sachs, director of Columbia University’s Earth Institute.

Given China’s history of isolation, Sachs is wary. But, he said, the country’s leaders recognize what’s at stake and are taking “actual steps to plan growth,” including the targeting of important tech industries. “If the United States has one weakness,” he continued, “it is a lack of planning.”

Sachs is also concerned that Chinese decisions could backfire if the government shortchanges development of social justice and sustainable growth. “As China becomes more powerful, it could be the best hope for global safety. If it builds power plants, roads, rails, ports, and fiber with oil and gas, the future could be a disaster. If it builds with renewables, China will make a gift for the world.”

About the researcher

Shang-Jin Wei

Dr. Shang-Jin Wei is N.T. Wang Professor of Chinese Business and Economy and Professor of Finance and Economics at Columbia University’s...

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