This weekend will see the 50th anniversary of a milestone in China-U.S. relations. The Shanghai Communiqué was signed by the two nations on Feb. 27, 1972. It was the fruit of then-President Richard Nixon’s efforts to thaw the icy relations between the U.S. and the communist nation. The accord specifically identified normalization of trade links as one of its goals. Since then, trade between the U.S. and China has expanded rapidly, but the U.S. buys far more from China than the other way around.
Many economists like Chad Bown, senior fellow at the Peterson Institute for International Economics in Washington, D.C., do not view this imbalance as a problem. But it troubled President Donald Trump when he was in office, so he imposed a set of tariffs and other restrictions on Chinese exports to the U.S.
Trump “basically looked at any country with which the United States ran a bilateral trade deficit, meaning we imported more than we exported to them, and China was No. 1 on that list,” Bown said. “That was something that [Trump] wanted his trade war, ultimately, to fix.”
After nearly four years of trade tensions, the scorecard for each side seems mixed.
To understand how China became a manufacturing powerhouse since Nixon’s historic 1972 visit, the unlikely lingerie capital of Guanyun County in China’s eastern province of Jiangsu may offer a clue.
I visited the Midnight Charm factory in the spring of 2018, just before the trade tensions began.
Dozens of women in front of sewing machines were churning out huge numbers of Playboy Bunny outfits, catsuits and lace dresses. Almost half were destined for the U.S. market.
Unbeknown to the workers, they were partly fueling the U.S.-China trade dispute.
Seamstress Chen Xinwei, for example, called an eight-hour shift a “short” workday, since her colleagues usually did 10.
The starting salary for a seamstress in the area was $5,500 annually.
Chinese people work longer hours than Americans, and for lower wages. This is partly why lingerie and other products made in China are so cheap for U.S. consumers. A massive labor pool, efficient industrial clusters and Chinese government support are some of the other factors that built China’s unrivaled manufacturing prowess.
While Trump’s trade war started with his dislike of the deficit, the legal justification was a Section 301 investigation that found American companies were subject to unfair Chinese trade practices, intellectual property theft and forced technology transfer.
Chinese officials deny these allegations. If such incidents did happen, China has said, it was not at a systemic level.
As punishment, Trump imposed rounds of tariffs on Chinese products, including nuts and bolts made by Jinan Star Fastener.
“For the additional 25% tariff on our products, our big American clients swallow most of the extra cost, while we pay the rest,” sales director Zhang Yuhua said.
In the end, it is Americans who pay for most of the Trump tariffs.
At the height of the dispute, the U.S. imposed extra tariffs on two-thirds, or over $300 billion worth, of Chinese imports.
China retaliated by placing tariffs on nearly 60% of U.S. products.
“China sort of saw that this was actually a costly exercise for it, [that] tariffs are shooting yourself in the foot and imposing costs on yourself,” Bown said. The country imposed tariffs “very selectively.”
China never slapped tariffs on products it needs for economic development, such as aircraft and semiconductors.
The tit for tat finally stopped in January 2020, when both sides signed what is known as the Phase One trade deal. In it, the Trump administration said China committed to buy an additional $200 billion worth of American exports in 2020 and 2021.
This was a “problematic” and perhaps “unrealistic” provision, according to Chad Bown, who had been tracking the progress of the trade deal. He said it required China to first resume trade with the U.S. at the same level as before the trade tensions, which would have required time to rebuild business ties severed during 18 months of tariffs before China could buy more American exports.
In the end, Bown found, China did not fulfill its purchasing commitment.
“China actually bought none of those additional $200 billion worth of American exports,” he said.
Chinese officials said they tried but were hampered by the COVID-19 pandemic.
“I think it really wasn’t that bad. At least on the agricultural side, China has purchased a record number of agricultural products,” said Henry Wang, president of the Center for China and Globalization, a Beijing think tank.
Exports of American corn, wheat and pork went up, though Bown said it wasn’t entirely because of the Phase One trade deal.
In addition to its purchasing commitments, the Chinese government pledged certain structural reforms, and there has been progress in some areas.
According to Matthew Margulies, senior vice president of China operations for the U.S.-China Business Council in Beijing, China has improved market access for meat, dairy and pet food.
He said China has also removed equity limits and issued licenses for majority shareholding or wholly foreign-owned companies in a number of subsectors within financial services.
However, one area Margulies said China has not eased restrictions on is the Type A lead underwriting license.
“[It] is a technical license for banks or financial institutions that want to partake in China’s interbank bond market and underwrite those bonds individually as a wholly foreign-owned business instead of doing that through a joint venture,” Margulies said.
China could do more, but it has been discouraged, according to Wang.
“China didn’t get much encouraging signs to make further efforts to [fulfill its obligations under Phase One] because we keep seeing [the] U.S. sanction China,” Wang said, referring to the American government putting Chinese entities on lists that block them from buying certain U.S. technologies.
The action also hurts companies that are not directly targeted.
“Whether or not a company is genuinely at risk of being put on that list, many Chinese companies have a perception that working with an American company is a political risk,” Margulies said. “Just by virtue of that perception, [it] has had a competitive impact on American companies [in China].”
No further trade talks appear to be scheduled between the world’s two biggest economies.
“It’s probably going take five to 10 years’ time for a new equilibrium to be reached, for new acceptance of each other,” Wang said.
Today, most of the tariffs, whether from China or the U.S., remain in place.
“There’s no sense in which we’re at a stage with the U.S.-China relationship, where the U.S. economy is better off today than it was before the trade war,” Bown said.
Back at the lingerie factory, founder Lei Congrui said the pandemic has made his business more reliant on the U.S. because American e-commerce is more developed.
“Ninety percent of our products are exported. The U.S. is our biggest market, at 70% of exports,” he said.
That figure is much higher than in 2018, when the trade war started.
Additional research by Charles Zhang.
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