Opinion | What China can do to make the best of an escalating US trade war

President-elect Donald Trump has vowed to intensify the US trade war with China, calling for additional tariffs on Chinese imports. This is despite the current tariff regime, which began in 2018, failing to achieve its stated purpose of reducing America’s trade deficit and stifling China’s economic growth. In fact, it has hurt American consumers who have borne most, if not all, of the pain by paying higher prices for Chinese goods.

It has merely shifted the global trade pattern. Direct imports from China as a percentage of America’s total imports have declined from about 20 per cent to less than 15 per cent. Some production has shifted from China to Southeast Asia, India and elsewhere. Some of these countries have substantially increased their exports to the United States, but their imports of intermediate products from China now far exceed their exports to America.

Consequently, China’s exports as a percentage of the global total have increased, from about 13 per cent in 2019 to 15 per cent by 2021, and its share in global manufacturing value-added also rose, from about 27 per cent to 30 per cent. The US trade deficit has widened from about US$590 billion in 2018 to US$970 billion in 2022, or from 2.9 per cent to 3.8 per cent of gross domestic product.

The first round of the trade war has not worked because without good substitutes for imports at comparable prices, consumers inevitably pay the duties. To be effective, tariffs need to target imports for which America can find alternatives at comparable prices, either internally or from elsewhere.

That, by the way, is exactly what China has done in retaliating against American tariffs with levies of its own. According to studies by the Peterson Institute for International Economics, China only raised tariffs on American goods that can be easily replaced by other sources – basically, commodity-type products such as grain and lobsters – but not on the likes of US-made pharmaceuticals and aircraft. Consequently, Chinese consumers have not paid higher prices for imports despite increased duties on some American products.

However the US wages a trade war, though, it will not reduce its trade deficit, which is the mirror image of its savings shortage. As long as the country outspends its aggregate income, as it has done for decades, its trade deficit will persist.