WASHINGTON -- President Donald Trump tweeted that "trade wars were good, and easy to win" in 2018 as he began to impose tariffs on about $360 billion of imports from China.
But even before the coronavirus infected millions of Americans and sparked the steepest economic downturn since the Great Depression, China was withstanding Trump's tariff salvos, according to the very metrics he used to justify them. Once China got the virus under control, demand for medical equipment and work-from-home gear expanded its trade surplus with the U.S. despite the levies.
While trade tensions between the world's two biggest economic powers didn't start under Trump, he broadened the fight with tariffs and sanctions on technology companies. The tougher approach didn't go as he hoped. But he's leaving his successor Joe Biden a blueprint of what worked and what didn't.
"China is too big and too important to the world economy to think that you can cut it out like a paper doll" said Mary Lovely, an economics professor at Syracuse University. "The Trump administration had a wake-up call."
Trump vowed in his 2016 election year to very quickly "start reversing" the U.S. goods trade deficit with China, ignoring mainstream economists who downplay the importance of bilateral deficits. However, the deficit with China increased since then, hitting $287 billion in the 11 months to November last year, according to Chinese data.
The deficit did fall year-on-year in 2019, as U.S. companies switched to imports from countries like Vietnam, but it remained higher than the $254 billion gap in 2016. That was partly because Beijing's imposition of retaliatory tariffs on about $110 billion in goods reduced its imports of American products, and these only started recovering in the past few months of 2020.
As part of the phase-one trade deal signed a year ago, Beijing made an ambitious vow to import $172 billion worth of U.S. goods in specific categories in 2020, but through the end of November it had bought just 51% of that goal. The slump in energy prices during the pandemic and the problems with Boeing Co.'s planes played a part in that failure.
The persistent deficit demonstrated how reliant companies are on China's vast manufacturing capacity, which was highlighted again by the pandemic. China was the only country capable of increasing output on a big enough scale to meet surging demand for goods such as work-from-home computers and medical equipment.
Trump repeatedly said that China's accession to the World Trade Organization in 2001 caused its economy to take off like a "rocket ship," a result he viewed as unfair. As it turned out, Trump's trade war with China coincided with another expansion in Chinese exports. After shrinking for two straight years in 2015 and 2016, China's total shipments grew each year after Trump took office, including in 2019 when exports to the U.S. fell.
U.S. FACTORIES OVERSEAS
Trump said tariffs would encourage U.S. manufacturers to move production back home, but there is little evidence of any such shift taking place.
U.S. direct investment into China increased slightly from $12.9 billion in 2016 to $13.3 billion in 2019, according to Rhodium Group data.
More than three-quarters of 200-plus U.S. manufacturers in and around Shanghai surveyed in September said they didn't intend to move production out of China. U.S. companies regularly cite the rapid growth of China's consumer market combined with its strong manufacturing capabilities as reasons for expanding there. "No matter how high the Trump administration raised any tariffs, it was going to be very difficult to dissuade U.S. companies from investing," said Ker Gibbs, president of the American Chamber of Commerce in Shanghai.
Trump repeatedly claimed that China was paying for the tariffs. Economists who crunched the numbers were surprised to find that Chinese exporters generally didn't lower prices to keep their goods competitive after the tariffs were imposed. That meant U.S. duties were mostly paid by its own companies and consumers.
Tariffs on imports from China tended to reduce U.S. exports. That was because globalized supply chains mean manufacturing is shared between countries, and the U.S. raised the costs of its own goods by levying duties on imports of Chinese components.
Companies that together account for 80% of U.S. exports had to pay higher prices for Chinese imports, according to analysis of confidential company data by researchers at the National Bureau of Economic Research, the U.S. Census Bureau and the Federal Reserve, reducing export growth.
U.S. MANUFACTURING
Trump campaigned hard in 2016 on pledges to revive the Rust Belt by taking on China and bringing the jobs back home. It didn't happen.
Growth in U.S. manufacturing jobs flat-lined in 2019, partly because of falling exports. Even regions home to industries such as steel, which received explicit protection from Trump's tariffs, saw declines in employment, according to research by New York University Stern School of Business economist Michael Waugh.
"That stuff is just naturally going to move offshore. The protection maybe delays it a little bit," Waugh said. "There's no evidence that the tariffs benefited workers."