Dear Clients and Friends,
On March 2nd, 2018, Donald Trump famously tweeted: “When a country is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win”. (Unfortunately, you are no longer able to find this tweet online - the 45th President’s Twitter account has been permanently deactivated.) One of Donald Trump’s many “America First” campaign promises was to start reversing the trade deficit with China. For today’s weekend reading, we thought that we would look back at the trade war with China and try to use data and facts to determine the winners and losers.
For starters: a quick primer on international trade. Consider Florida’s warm climate, where oranges are cheap and easy to grow. Let us pretend it costs $1 to grow an orange. Conversely, it is extremely hard for Floridians to grow ice because it melts in warm weather. So, let us pretend a Floridian block of ice costs $10 to produce. Now, let’s go to Canada, where the situation is exactly the opposite- $1 to produce a block of ice and $10 to grow an orange. If both places need one of each, it will cost $11 to manufacture both - or, Florida could produce two oranges for $2, Canada could produce 2 blocks of ice for $2, and even after the expense of shipping, a total production cost of $4 is far less than $11.
This is obviously a dramatic oversimplification, but it is effective in illustrating that the world benefits when economies come together to produce what they specialize in and agree on how to share and exchange the products of their labor.
Of course, there is more to the equation than just math. Take, for example, the human element. Many countries are able to produce goods at a much lower cost because they do not impose the same requirements for a safe work environment that others do, nor do they adhere to the same environmental guidelines. Because it was never an objective of Trump’s trade war to improve the working conditions of foreign workers, we will ignore this facet of the conversation for the purpose of this article (despite MORWM’s public advocacy for human rights and environmental stewardship). So, what were Trump’s goals in initiating the trade war with China?
The main goals were:
To reduce the annual trade deficit with China
To bring manufacturing and jobs back to the U.S.
To stop China’s unfair practices of subsidizing certain industries to make U.S. producers less competitive, and
To reduce the theft of U.S. companies’ intellectual property.
First: the annual trade deficit. Trump imposed most of the tariffs in September of 2018 and the rest in May of 2019. On May 9th, 2019, Trump stated that the tariffs are paid for by China. That being said, let’s take a look at the numbers…
This chart tracks the American deficit to China. Keeping in mind that we are looking at negative numbers, we can see clearly that the deficit did, in fact, decrease. But did China really pay this difference? Most economists agree that the answer is no. Importers of Chinese goods simply raised prices to account for the tariffs. Thus, American consumers and producers paid this cost, which is estimated to be around $45 billion. Furthermore, retaliatory tariffs caused a 25% surge in American farmer bankruptcies, leading to a $28 billion bailout paid by American taxpayers. In addition, American exporters in general saw business drop by roughly 23%. In summary, the cost of the tariffs fell squarely on the shoulders of American businesses, consumers, and taxpayers.
Looking at this chart of Chinese exports since the tariffs were imposed, we can also see that while Chinese trade with the U.S. fell, their numbers remained strong, which suggests that they simply found other countries to do business with. Our conclusion: yes, Trump was successful in reducing the deficit to China, but American consumers and exporters paid dearly for this.
Second: bring manufacturing back to the U.S. Trump stated that the tariffs would incentivize American companies to bring their business operations back to American soil. For this, let us look at a chart of the United States’ direct investment in China…
The chart clearly shows that the tariffs did nothing to stop the direct investment of American companies in China. Furthermore, we can see from the following chart that Trump’s actions did nothing to spark manufacturing employment.
The conclusion here is clear: Trump’s actions did not stop American companies from doing business in China and did not bring manufacturing jobs back to American soil. The fact of the matter is that the Chinese market is the most lucrative in the world right now, and American companies are not keen to miss out on that opportunity.
Third: stop China’s unfair subsidies. Historically, one of the biggest complaints about China is that they use subsidies to artificially keep costs down, which makes foreign companies less competitive. In fact, in 2018, China spent $22 billion doing just that. In 2019, this amount grew 15%. Furthermore, curbing subsidies was also not included in the Phase One Trade Deal, with the administration choosing to swing for easier victories. Conclusion here: accepted defeat.
Fourth: stop the theft of American companies’ intellectual property. To be fair, this is a major issue that has been affecting American companies for a long time; many administrations have tried to address this issue with little result. To do business with Chinese consumers, American companies will often be forced to transfer proprietary technology. Clearly, this is a decision that many have deemed to be worth it; however, property is being forcefully taken every year. In a 2016 survey by the American Chamber of Commerce, the survey showed that 49% of U.S. companies polled were asked to transfer intellectual property. That same survey in 2020 showed 55% of companies were asked to do the same. A separate survey of the U.S.-China Business Council in 2020 showed that in 2019, 5% of American companies were asked to transfer technology, while that number grew to 13% in 2020. On the flip side, Chinese payments for intellectual property grew to a record $7.9 billion in 2019 – however, the chart below clearly shows that this was merely the continuation of a trend that was already in place.
The same U.S.-China Council member survey referenced above showed the following data regarding China’s intellectual property protection:
Our conclusion: Trump’s hardline approach to trade negotiations clearly prompted China to do something about the intellectual property theft that has been plaguing U.S. companies. Payments to U.S. companies continue to go up, and companies surveyed feel that the situation is getting slightly better. Whether this was a temporary show of good faith by China remains to be seen. Early indications are that this is the case, due to the sharp rise in requests to transfer property from American companies.
Finally, we must talk about the Phase One trade deal. After years of lobbing tariffs back and forth and failed negotiations, a trade deal was finally agreed upon. Let us look at some of the agreements, and how they have played out.
First, China agreed to increase purchases of U.S. goods by $200 billion over the next 2 years. Trump boasted that this figure could be closer to $300 billion by the end of negotiations. A year later, China is on track to meet roughly half of its obligations. Trump clearly over-promised and under-delivered here.
Second, the deal required stricter protections for American companies’ intellectual property. As we saw above, the data shows that conditions have improved slightly, but it remains to be seen whether this was a temporary show of good faith or if it will lead to lasting improvements.
Third, the agreement contains pledges by China to refrain from devaluing their currency in order to make Chinese goods more attractive to foreign buyers. While early indications show that this was successfully carried out, the Yuan has since fallen again. It is too early to draw any conclusions here, as currency moves typically take much longer to materialize, and the data that we have is greatly affected by the COVID-19 pandemic. Early indications are that this clause has been effective, so far.
While there were other facets to the deal, like opening China’s financial sector to U.S. companies, there is not enough data yet to analyze their success, so we will not include them in our article today. Let us look at the key takeaways…
While the trade deficit with China did shrink, the overall trade deficit continued to expand, suggesting that we simply went to other countries for our goods
China continued to grow exports and American consumers paid the price of the tariffs.
China did not come close to meeting the purchase obligations agreed upon in the Phase One Trade Deal.
Manufacturing employment surveys showed that the tariffs did not bring jobs back to the U.S. If anything, the decrease in global trade because of the tariffs hurt the industry more than anything.
China has continued to increase subsidies to keep costs down.
A slight improvement in intellectual property conditions was shown, but this trend appears to be reversing.
The conclusion: it is hard to look at the data and see the trade war as anything other than a failure. The tariffs came at great cost to American consumers and businesses, and China did not meet its agreed upon obligations. The biggest success would be in intellectual property protections, but only time will tell if the changes are lasting or temporary.
With unprecedented amounts of misinformation flooding social media, we hope that you found this article informative and insightful, and we wish you all a wonderful weekend.
Daniel Levinson, CFP®
Financial Planning Associate
MOR Wealth Management, LLC
1801 Market Street, Suite 2435
Philadelphia, PA 19103
P: 267.930.8303 | c: 856-906-4888 | f: 267.284.4847 |
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