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The effects of the US-China trade war on US Exports

January 27, 2020

It has been nearly eighteen months since the US-China Trade War began in July 2018, largely due to two main factors: the United States’ perception that trade between the United States and China is unequal, and that China has been participating in unfair intellectual property practices. As the trade war persists, United States exports have suffered, affecting both businesses and consumers, albeit in different ways.

Beginning in 2009, President Obama’s administration brought eleven trade enforcement actions against China as the United States struggled to control Chinese commodities dumping and economic espionage [1, 2, 3, 4]. A comparison of President Obama’s and President Trump’s press releases indicate that President Trump shares some of President Obama’s views, as President Trump often claims that the United States’ trade relationship with China is not reciprocal [5]. President Trump’s claim that China participates in unfair intellectual property practices is the most prominent issue that led to the trade war. According to the U.S. Trade Representative Peter Navarro, the annual loss to the United States, as a result of intellectual property theft, amounts to between $225 billion and $600 billion, a noticeable loss to the US economy [6].

The trade war began long before President Trump began implementing tariffs affecting China, under the pretext of a trade war, in July 2018. In January 2018, the US implemented import tariffs on washing machines and solar panels from all around the world [7]. Only three months later, President Donald Trump implemented new 25% tariffs on $50 billion of Chinese imports. The White House instituted new 25% duties on steel imports and 10% levies on aluminium imports from anywhere in the world [8]. The same month, China imposed retaliatory tariffs that affected over 100 American products worth approximately $50 billion [9].

The Trade War has an immense negative impact on American exports because tariffs increase the prices for specific exported goods, making them undesirable or difficult to sell in foreign nations [10]. As prices for American goods increase, companies’ profits begin to decrease. The conflict has continued to escalate since April 2018, as negotiations between the two nations have been unsuccessful.

General Effects on Exports

United States exports are steadily decreasing as a result of the US-China Trade War. Soybean exports decreased by $1.035 billion from August 2019 to September 2019, while automotive vehicles, parts, and engine exports declined by about $1 billion from August to September 2019 [11]. From August to September 2019, US exports of goods decreased by $1.8 billion, from $207.8 billion to $206.0 billion [12]. According to the Institute for Supply Management, American exports are on the decline, as the index of new export orders “plunged 4.8 points to the lowest level since April 2009” [13].

The American agricultural industry has slowed down immensely since the beginning of the Trade War, most notably due to the $10.4 billion decrease in agricultural product demand from China from 2017 to 2018 [14]. The nation’s 300,000 soybean farmers have been hit the hardest in the agricultural industry [15]. From 2014 to 2018, the top five producers of soybeans were Illinois, Iowa, Minnesota, Indiana, and Nebraska, [16].

Effects on Businesses

The decline in US exports has negatively affected businesses across the United States. According to a survey conducted by online business-for-sale marketplace, BizBuySell, Chinese tariffs have “increased the cost of doing business for more than one third… of small businesses across the U.S.” Trend Nation, a Las Vegas firm that manufactures thousands of products in China, has seen its tariff bill double from $800,000 to $1.6 million as a result of the trade war [17]. Recent tariffs caused Spartan Armor Systems, an Arizona-based body armor company, to raise its prices by ten percent overnight [18]. The US-China Trade War has resulted in decreased profits for companies in a diverse array of industries across the United States.

For businesses across the United States, options are limited. Brooklyn Bicycle, a handmade bicycle company based in New York City, is running out of options. Ryan Zagata, the firm’s owner, could raise the price of his bicycles by $50, which he believes is risky in such a competitive market. Zagata could also absorb the cost of the tariffs, source components from other nations, or adopt a new pricing strategy that allows the firm to incrementally increase prices and absorb a smaller percentage of the fare. However, each option would incur significant costs to the company and its customers, which Zagata is hoping to avoid [19]. Brooklyn Bicycle’s problems are not unique; companies across the United States will continue to struggle as the US-China Trade War progresses.

Companies with supply chains heavily based in China are beginning to move production out of the country as the trade war continues. While firms were, according to Ben Casselman, “initially reluctant to abandon long standing supplier relationships in China… choosing instead to absorb the tariffs or find ways to share the costs with suppliers and customers,” major corporations are now looking for alternatives [20]. In a recent survey of 200 corporate executives conducted by Bain & Company, 42% of the firms expect to source materials from a different region than China in the next year, and 25% indicated that they are redirecting investments out of China [21]. Small businesses are often more fragile than large businesses, especially during financial crises or turmoil, due to inexperience [22]. ControlTek, a small electronics manufacturing company based in Vancouver, Washington, “is shifting supply chains out of China where possible, and redesigning products to avoid Chinese components” to mitigate the effects of the trade war [23]. Such changes represent drastic changes in the way American firms view their revenue and supply chain.

Effects on Consumers

Consumers are negatively impacted by an increase in price levels, as indicated by the Consumer Price Index (CPI), which measures price levels in the economy. This growth indicates an increase in consumer price levels [25]. Kathy Bostjancic, Chief U.S. Financial Economist for Oxford Economics, confirms the rise in US prices, estimating that tariffs could cost the average American household an additional $650 per year [26]. This increased cost disproportionately harms low-income households and families living paycheck-to-paycheck, as such households will struggle to afford such a substantial cost of living increase.

While prices increase, companies are beginning to pass on the losses incurred from tariffs onto consumers. ControlTek is rewriting contracts to make it easier to impose the cost of tariffs from the US-China Trade War on its customers [27]. As the trade war looms on, larger corporations will begin to follow suit, and price increases for consumers will begin to pile up.

Since the trade war began, the United States stock market has become more volatile, especially as new tariffs and policies related to the Trade War are announced [28, 29]. According to Investopedia, volatility in the securities market “is often associated with big swings… by more than one percent over a sustained period of time… in either direction.” Volatility is often associated with higher levels of risk [30].

On December 13th, the United States and China solidified the first phase of a trade deal that aims to end the US-China Trade War. The agreement halted substantial tariffs from both nations that were set to begin on December 15th, implemented additional intellectual property regulations, and increased the purchase of American agricultural products [31]. However, critics of the deal claim that the terms of the agreement remain unclear and unsubstantial [32].

For small businesses in the United States, the future remains unclear. While the Trump administration lauds the agreement as an important milestone, it also claims that it will use remaining tariffs, including $250 billion in Chinese goods as leverage in subsequent negotiations [33].

The future remains complicated and confusing for small businesses. Small companies will suffer as the cost of business continues to swell and as negotiators use American supply chains that are heavily reliant on Chinese manufacturers and suppliers as bargaining chips in future negotiations. Negotiators in upcoming talks between the US and China should keep in mind how new policy will affect small companies across the United States.

  [1] According to Investopedia, commodities dumping occurs “when a country or a company exports a product at a price that is lower in the foreign importing market than the price in the exporter’s domestic market”.

  [2] Economic espionage is “the unlawful targeting and theft of critical economic intelligence, such as trade secrets and intellectual property” [4].

 

Sources

  1.   https://ustr.gov/about-us/policy-offices/press-office/fact-sheets/2015/january/fact-sheet-obama-administration%E2%80%99s
  2. Ibid.
  3.   https://www.investopedia.com/terms/d/dumping.asp
  4.   https://www.investopedia.com/terms/e/economic-espionage.asp
  5.   https://www.whitehouse.gov/briefings-statements/president-donald-j-trump-confronting-chinas-unfair-trade-policies/
  6.   https://fortune.com/2019/03/01/china-ip-theft/
  7. Ibid.
  8.   https://economics.rabobank.com/globalassets/2018/11-november/sp-tradewar/rabobank2018-trade-war-infographic-en.pdf
  9. Ibid.
  10.   https://ru.reuters.com/article/ousivMolt/idUSKCN1VO1RH
  11.   https://markets.businessinsider.com/news/stocks/trump-us-china-trade-war-timeline-of-everything-thats-happened-2019-8-1028474486#10
  12. Ibid.
  13.   https://www.latimes.com/business/story/2019-09-03/hiltzik-trump-is-killing-us-manufacturing
  14.   https://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf
  15.   https://www.bls.gov/news.release/pdf/cpi.pdf p. 2.
  16.   https://soygrowers.com/
  17.   https://www.cnbc.com/2019/10/05/us-china-trade-war-causing-small-biz-to-reinvent-customer-retention.html
  18.   https://www.inc.com/cameron-albert-deitch/trump-tariffs-small-business-us-china-trade-war.html
  19.   https://www.inc.com/magazine/201811/norm-brodsky/trump-tariff-war-china-harm-business.html
  20.   https://www.nytimes.com/2019/05/30/business/economy/trump-tariff-manufacturer.html
  21.   https://www-sciencedirect-com.proxy.library.upenn.edu/science/article/pii/S0883902615000658
  22. Ibid.
  23.   https://www-sciencedirect-com.proxy.library.upenn.edu/science/article/pii/S0883902615000658
  24.   https://www.investopedia.com/terms/c/consumerpriceindex.asp
  25.   https://www.bls.gov/news.release/pdf/cpi.pdf p. 2.
  26. Ibid.
  27.   https://www.washingtonpost.com/business/2019/08/06/us-china-trade-war-drags-heres-what-it-means-you/
  28. Ibid.
  29.   https://www.bloomberg.com/markets/stocks
  30.   https://www.investopedia.com/terms/v/volatility.asp
  31.   https://www.reuters.com/article/us-usa-trade-china-details-factbox/whats-in-the-u-s-china-phase-one-trade-deal-idUSKBN1YH2IL
  32.   https://www.wsj.com/articles/us-china-confirm-reaching-phase-one-trade-deal-11576234325
  33.   Ibid.

PENN WHARTON PPI
RESOURCE SPOTLIGHT:

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