7 Keys to the U.S. & China trade war: Uncle Sam vs. the Dragon

As the trade war between the United States and China continues to cast a shadow over their diplomatic relations, its impact on their trading partnership remains a key point of discussion.

Recent data, despite being affected by the trade war, shows that trade levels between the two nations in 2022 were reported to be “record high”, raising questions about the extent of “economic decoupling” that many had anticipated.

However, delving deeper into the nuances of this trade relationship reveals a more complex picture, shaped significantly by the trade war’s ongoing ramifications.

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US Exports to China: A Slow Recovery from the Trade War

The trade war of 2018–19 had a profound effect on US exports to China. The imposition of retaliatory tariffs by China in response to the US’s trade war measures, coupled with increased costs due to tariffs, especially on essential components, hit the American export industry hard.

The “phase one” trade agreement, signed in January 2020 by then-President Trump, offered a glimmer of hope, aiming to resolve some issues created by the trade war.

However, this agreement left most of the tariffs intact while setting ambitious targets for China to purchase an additional $200 billion worth of US goods and services by 2021. Notably, China failed to meet these commitments.

In 2022, US exports to China showed signs of improvement but remained far from pre-trade war levels. The nominal value of exports reached new highs, but this was influenced by inflation, making the statistics somewhat misleading.

A Comparative Perspective: China-US Trade Beyond the Trade War

To understand the true nature of the trade war’s impact on the US-China trade relationship, it is crucial to compare US exports to China against a projection based on China’s imports from the rest of the world.

This approach accounts for external factors, including the effects of the COVID-19 pandemic on the global economy.

In 2022, US exports to China were 23% below this projection, signaling a growing divergence in the trade relationship over time.

This phenomenon becomes even more apparent when looking at previous years. In 2021, the underperformance was 22%, and it was 16% in 2020.

US Exports of Manufactured Goods: Looming Consequences of the Trade War

The trade war had a devastating impact on US exports of manufactured goods to China, particularly in sectors such as automobiles and aircraft.

Semiconductor exports, which had shown promise under the “phase one” agreement, also witnessed a decline in 2022 due to stringent new export control policies.

In the case of COVID-19-related medical supplies, US exports declined significantly in 2022, despite previous strong performance linked to the pandemic.

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Energy Exports: Shifting Dynamics Amid the Trade War

US energy exports to China fell by 13% in 2022, primarily due to adjustments in trade routes influenced by the Russia-Ukraine trade war situation.

Western European countries faced shortages stemming from Russia’s energy supply restrictions, while the US shifted its energy exports towards Europe instead of China.

Services Exports: Slow Recovery in the Wake of the Trade War

U.S. exports of services to China suffered considerable setbacks in 2020–21, primarily due to the pandemic. This decline persisted in 2022, with the travel sector, which represented a significant portion of U.S. services exports to China, being particularly hard-hit.

Agricultural Exports: A Glimpse of Hope Amid the Trade War’s Shadow

Agricultural exports stood out as a positive aspect of US exports to China in 2022. Driven by higher global commodity prices, US farm exports to China increased by 16%.

US exports of soybeans and cotton registered significant growth in 2022.

However, the trade war’s influence on the US-China agricultural trade relationship is complex. While US farmers have become increasingly dependent on the Chinese market, Chinese buyers are showing signs of reduced reliance on the United States.

Annual changes in prices, volumes, and values of US exports to China in 2022, by commodity

Interpreting the Evidence Amid the Ongoing Trade War

The evolving dynamics of the US-China trade relationship, shaped by the persistent trade war, present a multifaceted challenge for policymakers.

Caution should be exercised when interpreting the evidence as there are both benefits and costs associated with diversification in response to the trade war.

While diversifying sources and markets can reduce dependence and risk in some cases, it also entails expenses and can limit the ability to respond to global shocks.

Additionally, for commodities, reducing bilateral interdependence may not provide full insulation from the ripple effects of shocks in a globally interconnected economy.

In summary, the trade war continues to impact the US-China trade relationship, influencing its transformation. Policymakers face the task of managing these changes to ensure that the shift ultimately results in a more favorable outcome for both countries, even in the shadow of the trade war.

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