In 2018, U.S. President Donald J. Trump initiated a trade war with China. The trade war, which has never officially ended, continues to this day. Neither side appears to be winning and many bystander countries are benefiting as a result of this international dispute.
In some cases, these countries are seeing a number of positive impacts, including an increase in trade exports. This article will take a look at where the U.S.-China trade war currently stands and what outcomes have occurred as a result.
An end to globalization?
One of the main concerns springing from the U.S.-China trade war was that it would damage the international economy and bring an end to globalization. Specifically, because the United States and China are the two largest global economies. However, even a global pandemic could not totally destroy the integrated economies of the world.
Recent research demonstrates that U.S. tariffs on Chinese goods resulted in higher import prices in the U.S. and the Chinese retaliatory measures ended up harming Chinese importers. In the end, two-way trade between the U.S. and China dried up. However, contrary to speculators’ fears, globalization has not disappeared and many bystander countries benefited from the trade war through increased exports.
Explaining Bystander Country Growth
It seems unsurprising that global participants would fill the void after China was axed from the U.S. trade pipeline. Countries like Mexico, Malaysia, and Vietnam benefited the most. However, more surprisingly is that global trade, in products affected by the trade war, increased 3% relative to products not impacted by tariffs. So, not only did imports from other countries increase, but overall global trade increased.
One possible theory is that countries saw the trade war as a chance to expand their global market presence. China, which utilized a zero-COVID policy over the past few years, saw lags in its trade activity as a result. These gaps in global trade gave countries the opportunity to invest in additional trade opportunities or the chance to mobilize larger portions of their workforce. These changes enabled countries to increase exports without increasing prices.
Another theory explaining the growth is how third countries were able to export more to the U.S. and China. This change shrank their per-unit costs of production and economies of scale thus allowing them to offer more products for lower prices. Countries, where global export prices are declining, are also those where the largest increases in global exports are occurring.
Country Trade Growth Factors
One might wonder, what more could be done to take advantage of these types of trade wars in the future? Some countries increased exports overall. Others reallocated their trade by shifting their exports from other countries to the U.S. Finally, in some cases countries saw an overall decrease because they sold less overall. Two primary factors emerged to explain these patterns.
Deep Trade Agreements
Deep trade agreements (agreements that go beyond just tariff regulation, but include other behind-the-border protections) were significant. In a “deep” trade agreement fundamental economic integration provisions, like tariff preferences, export taxes, investments, and intellectual property rights are combined with other provisions. The first layer of these provisions usually supports economic integration like rules of origin and anti-dumping and countervailing duties. Then, other provisions that promote social welfare, like environmental laws or labor market regulations are added in, on top.
Trade agreements beyond just tariff preferences and other fundamental provisions help minimize fixed costs of expanding into foreign markets. Countries with these types of agreements had the necessary security to expand trade as the U.S. and China vie for economic supremacy.
Accumulated Foreign Direct Investment
Deep trade agreements weren’t the only important factor though. Accumulated foreign direct investment was also significant. Foreign direct investment is different from other types of investment because FDI occurs when an investor based in a home country acquires an asset in a foreign nation with the intent to manage that asset. Many areas that are undergoing increased social, political, and economic connections to global markets also see increased direct foreign investment.
Foreign direct investment is significant because it helps manage the utilization of scarce global resources. Poor countries often lack the necessary capital to build the necessary economic infrastructure. By receiving these foreign funds, which are managed from abroad, countries can better develop their economies.
Supply chains interacted like dominoes
Analysts at the Peterson Institute for International Economics predicted as far back as 2016 that U.S. tariffs would cause widespread production shifts in a “daisy chain.” In essence, when U.S. tariffs hit China, companies moved production to a third country. This move then caused other activities in third countries to be shuffled.
Analysts have noted that the complexity of modern supply chains makes predicting these outcomes difficult to predict. However, countries that were more integrated into the global economy seemed more likely to land firm relocations.
No Reshoring of U.S. Jobs
Unfortunately, relocations did not occur in the United States. Supporters of the trade war often hoped that it would result in the reshoring of U.S. jobs. Others were supportive because it demonstrated a way to hold China accountable for its deleterious authoritarianism.
In any case, the trade war did not result in massive amounts of jobs returning to the United States as many had hoped – although admittedly this is something that’s difficult to measure. Overall, third countries were the main winners as they replaced Chinese imports with their own.
Bystander countries benefited the most, especially those with a high degree of trade integration. A good business plan can help a business navigate trying times. In the same sense, countries that adopted a strategy for global trade shakeups came out on top. Despite worries of an end to globalization, the trade war seems to have actually diversified trade and spread opportunities to other countries. In reality, the trade war has helped push us towards a world where trade is not monopolized by the U.S. and China.
Initially, we asked who was winning the U.S.-China trade war? The answer is clear: third countries with deep connections to international partners. This means countries that were able to take advantage of supply-chain shakeups and countries that already had existing trade agreements and large amounts of foreign investment.
For the United States, and China, it appears that the trade war did not result in any major gains. Some analysts believe that it does more harm than good. The U.S. did not see any increased reshoring of jobs and economic activities. Really, the U.S. replaced Chinese imports with imports from alternative countries