Unforeseen consequences of US-China trade war

Four years ago, when the US-China trade war resulted in tariffs on roughly $450 billion worth of goods, it was hailed as a game changer in international trade and geopolitics.

Although Sino-US trade figures dipped afterwards, the situation was exacerbated by chip shortage during Covid-19, making the case for prioritising US self-reliance in hi-tech manufacturing.

Additionally, Beijing began to exercise quotas in the global supply of rare-earth metals – crucial for many strategic projects, including the manufacturing of F-35 jets.

All these developments foresaw a resurgence of manufacturing and mining in the US, aimed at keeping the US-China trade deficit in check. But the question remains: Did it work? Has manufacturing returned to the US? And have the soaring trade deficits been contained?

It appears that progress has been made on the manufacturing front. Thanks to Biden’s Chips and Science Act of 2022, hundreds of billions of dollars are being committed to research and domestic production of semiconductor devices.

Intel is constructing a new plant in Ohio, while Micron is advancing with its factory in Idaho. Foreign investments are pouring in to establish billion-dollar computer chip factories in Phoenix, Arizona. The demand for engineers has surged so much that Arizona State University expanded its engineering programme by nearly 33%.

Read: US-China thaw to facilitate talks on WTO reform

As of today, the Chips Act has led to $157 billion worth of projects, creating over 25,000 jobs in advanced manufacturing facilities.

Taiwanese semiconductor giant Taiwan Semiconductor Manufacturing Company Limited (TSMC) has allocated over $40 billion for operations in Arizona. However, many investors planned expansions in the US semiconductor market during the Covid-19 chip shortage when they were inundated with orders.

But now companies like Microchip are burdened with large inventories of unsold components and are dependent on defence department subsidies and Chips Act grants.

It now remains to be seen whether such mega investments in new fads can be sustained without federal government subsidies. If not, it seems that Washington has taken a page out of Beijing’s playbook by embracing state-sponsored development in computer chips and injecting targeted subsidies.

Now, addressing the second question regarding the Sino-US trade deal: Did trade deficits decrease?
For the US, both exports and imports essentially plateaued within a few months, and the trade deficit with China did not widen any further since the imposition of an average tariff of 18%. However, the decline in the trade deficit with China was offset by increases in deficits with Mexico, Taiwan and Vietnam.

Additionally, China reports significantly more exports to the US than the official figures for Chinese imports quoted by US officials. In fact, since the trade war, China’s total exports have increased by about $1 trillion globally.

This is due to the extensive use of the de minimis exception by Chinese firms, allowing packages of less than $800 to enter the US without paying customs duty or tariffs. Such cases are not formally counted in the US trade data.

Moreover, we see more Chinese manufacturers relocating their assembly plants to Vietnam and Thailand. For example, Chinese solar panels are now being produced in Vietnam to avoid high US tariffs.

Beijing seems to be redirecting a significant portion of its exports to the US by exporting to “proxy” nations that are rising in the ranks of US trade partners. For instance, China’s exports to Mexico in 2023 were about 80% higher than in the pre-Covid year of 2019, while Mexico’s share of exports to the US reached a record high of 15.5%.

In summary, the US tariffs on Chinese goods have benefited China’s rivals in emerging markets, who are apparently benefiting from friend-shoring. Instead of China running large surpluses with the US, trade proxies like Mexico, Vietnam, Singapore and the Philippines are all experiencing significant surpluses in trade with the US.

THE WRITER IS A CAMBRIDGE GRADUATE AND IS WORKING AS A STRATEGY CONSULTANT

Published in The Express Tribune, March 18th, 2024
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