Implications Increase of Protectionism Between

USA and China for International Business

ZDZISŁAW W. PUŚLECKI

Adam Mickiewicz University, Poznań

ul. Uniwersytetu Poznańskiego 5

61-614 Poznań

POLAND

Abstract - The main aim of this paper is presentation the implications increase of protectionism between the

United States and China on international business. The main objective of the research task is to give a

comprehensive analysis of current trends in foreign trade theory and policy and in particularly the models of

foreign trade policy, trade interests indicated by export orientation and import sensitivity, protectionist pressures

in different political system, the level of protectionist pressures, new tendencies in international business, reasons

for the USA to implement tariff sanctions. China will be significantly hurt by tariff trade war in all indicators,

including welfare, gross domestic product (GDP), manufacturing employment and trade. However, it is pointed

out that although there will be definite impacts on China, the costs should be maintainable and will not severely

damage the Chinese economy. In regard to the United States, the simulation produced results that described, the

US will gain on welfare, GDP and non-manufacturing production, but hurt employment and trade.

Key-Words:- USA, China, protectionism, international business, supply chains, trade war.

Received: December 11, 2022. Revised: August 28, 2023. Accepted: September 22, 2023. Published: November 7, 2023.

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1 Introduction

Both structural and micro-political economy

analyses of foreign trade policy have missed the

impact of changing ideas about protectionism and

relatively unchanging institutions designed to handle

domestic producer complaints. The political

consensus on the supply of the trade policy and

protectionism has changed over the time. During

economic depression protectionism played

important roles in the politics of political parties and

increased the importance of bilateral agreements and

regional agreements. This point of view is very

important for the theory and practice of the

contemporary international business also between

USA and China.

The necessity for companies to organize their

supply chains across different countries has led to a

demand for the regional agreements that cover more

than preferential tariffs. The harmonization of

standards and rules on investment, intellectual

property and services has become a standard part of

new trade agreements. The differences among

companies which are involved in trade are also

important for the future development. The concept

that arises from the trade is that even if many

companies are indirectly involved into the trade-

related activities, only relatively few of them are

exporting or importing. Accordingly, these

companies tend to be larger and more productive

than others. Such companies also have a role in

technology advancement and the diffusion of know-

how through supply chains. It should be emphasised

also that free trade in itself is not responsible for

economic growth, but more significant are the

determining macroeconomic stability and increasing

investment.

The international trade in the XXI century has

been strongly affected by the force of the domestic

interests like in the USA under President Donald

Trump’s administration with the principle America

First. The changes are visible in the growing

importance of international trade to national

economies and domestic groups within those

economies, in the closer linkages between trade and

other international issues. Realistic point of view is

the essential trends in the global trade regime during

this time. The growing interdependence has led to

increased competitiveness and greater inclinations

to resort to strategic trade policy.

2 Research and Methodology

The primary research objective of this paper is to

conduct a comprehensive analysis of the potential

implications of the United States and China

increasing their trade barriers. China will be

significantly hurt by a tariff trade war in all

indicators, including welfare, GDP, manufacturing

employment, and trade. However, it has been

pointed out that, although China will be significantly

affected, the costs should be sustainable and not

severely damage the Chinese economy. As for the

United States, the simulation results indicate that

there will be welfare, GDP and non-manufacturing

production gains, but employment and trade losses.

Both quantitative and qualitative research

methods were used for analytical purposes. The

main research method applied in this analysis was a

method of scientific study that breaks down a whole

(of individual items, their sets, and various

phenomena) by means of logical abstraction. The

analogy (comparative) method, which consists in

finding similarities and differences between the

items under study, the documentation method, and

various statistical methods were also applied, as

were other descriptive statistics and forecasting

methods. Finally, deductive and inductive

forecasting were employed.

3 Results and Discussion

The importance and innovativeness of this research

lies in the fact that it reveals the potential

implications of the increasing protectionism

between the United States and China. First, it

emphasizes the importance of “factor specificity” (a

new theoretical term) in the demand for trade policy.

Some factors have retained their existing uses.

Factor returns are therefore not equalized throughout

a region’s economy, but are industry specific. Trade

policy coalitions should be formed along the lines of

exporting versus import-competing industries.

Understanding the choice between liberal and

protectionist trade policies is therefore crucial at the

theoretical level.

What is at issue is how to recognize the type of

power or rule at play. First, the level of resources

that can be achieved by a given government has to

be investigated. How much more income an

authoritarian government can generate through

protectionism depends on how corrupt it is

compared to its democratic trading partner(s). It will

also appropriate some part of that income. Secondly,

any government, whatever its political system or

power structure, is susceptible to pressure from

special interest groups, including regulated labor.

No government, no matter how authoritarian, can

subordinate these groups unless it transfers some of

the income generated by its protectionist policies to

them.

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The close relationship between democracy and

economic growth is worth noting. Examples of open

societies stimulating economic growth are not hard

to find. This is especially true in the case of highly

developed and urbanized countries. Pressure groups

potentially have more influence over the

government in a developed democracy. Research

shows that trade unions help accelerate economic

reforms. The benefits of liberalizing international

trade are greater when the protected sectors of the

economy are unionized. The growth of import

abilities leads to a decrease in wage pressures. If the

trade unions accept this, then labor can be more

efficiently allocated. This is true in the case of both

active and passive trade unions, although active

trade unions obviously achieve better results.

Increasing interdependence has led to greater

competitiveness and more inducements to resort to

strategic trade policy. Trade policy assumes further

significance in the economic battle of valiant liberal

reformers in their fight against self-dealing rent

seekers profiting from inconsistencies in the

transition economy. Many of the client policies that

shelter rent seekers are impossible to maintain in the

face of international competition. On the other hand,

high tariff walls, export licensing, and artificial

exchange rates provide numerous sources of rents

for businesspeople out to promote their own

loyalties.

The reduction or elimination of trade

restrictions significantly stimulates world trade and

conversely, foreign trade is an important factor

driving the economic growth of individual countries.

However, it should be stressed that free trade is not

the sole contributing factor to economic growth;

macroeconomic stability and investment are more

significant.

It has to be stressed that if unemployment is

increasing and/or inequality widening while global

supply chains are expanding and multiplying, and if

most voters attribute the former to the latter, then

governments may well refrain from pursuing further

international trade liberalization and might even find

protectionism alluring. Another possibility would be

for governments to use more intensively public

policies for protectionist purposes. As for trade

negotiations, focusing exclusively on the increased

efficiency resulting from opening up trade is no

longer possible. Distribution and labor-market

effects also need to be considered and various

measures proposed in order to win the electorate

over to open trade by bilateral agreement, especially

at times when global supply chains are expanding

and multiplying.

As global supply chains have expanded and

multiplied, the formulation of new theoretical

models of the firm have made it possible to explore

the effects that differences in firms have had on the

political economy of trade. It has to be stressed that

opening up trade has had two opposing effects on

domestic firms in the same industry. First, the cost

of exporting decreases, which obviously allows

more firms to export and increases the sales of

established exporters. Secondly, competition

increases, which harms domestic firms. Which of

these opposing tendencies prevails for an individual

firm depends on such characteristics as size. As a

result, lobbying competition arises not only between

sectors but also within sectors with the inevitable

result that there are winners and losers. This might

especially be the case when costs are fixed, because

barriers to entry are raised, thereby shielding

existing producers and exporters from competition.

Current trends in international business and

global politics provide evidence that emerging

markets have finally made their presence felt on the

world economy, bringing new patterns of uneven

development, inequality and injustice in their wake.

Their newly confident elites, now active on global

circuits of trade, investment and finance, and in

global governance, appear to have shed their

previous roles. It is clear that emerging economies

have suffered less severely and recovered more

quickly. Moreover, it now seems that the political

impact is not so much immediate crisis measures,

but significant, long-term and unexpected policy

shifts.

3. 1 Political Economy Model of Foreign Trade

Policy

Traditionally, political economy models of trade

policy have tended to focus on demands for

protection, with factor endowments driving political

reactions to exposure to international trade. These

models simply assumed that adversely affected

economic agents would organize and lobby their

elected political representatives for protection. The

supply side for trade policy was either ignored or

underspecified in most models [50].

Some of the reviews of the new model of

foreign trade policy theory are interesting insofar as

they concern the demand for trade policy in terms of

the theoretical importance of factor specificity [2]

[26]. Factor specificity refers to the ease with which

factors (land, labor, and capital) can move from one

sector to another in an economy. The two dominant

approaches to explaining the demand side of trade

policy used radically different assumptions about the

specificity of factors. The Heckscher-Ohlin model,

used by Rogowski (1989) in his seminal

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contribution Commerce and Coalitions, assumes

very low-factor specificity [46]. Low factor

specificity means that factor returns are equalized

throughout a region’s economy. Producers should

export goods that intensively use their abundant

factors and import goods that intensively use their

scarce factors, with the result that owners of

abundant factors will favor free trade and owners of

scarce factors will favor protectionism. Trade policy

coalitions will therefore be organized along factor or

class lines. The Ricardo-Viner model, per contra,

assumes that some factors are stuck in their present

uses and that factor returns are therefore not

equalized throughout a region’s economy, but are

industry specific. Trade policy coalitions should

form along the lines of exporting versus import-

competing industries.

Neither of these models explains how

preferences over trade policies are actually

translated into political action [2]. In a discussion of

the endogenous tariff literature, Nelson (1988) notes

that the mobility costs of the specific-factors model

may be a result of productivity differentials, labor

union activity, or individual preferences for

membership in a given geographical area, industry,

or firm (i.e. some form of solidarity) [26]. In all of

these cases, a link to tariff policy preferences can be

derived, “but without additional information on why

the specific-factor model is chosen, it does not tell

us much about political organization”.

Alt et al. (1996) suggest that we can begin to

understand this process by assuming that rational

individuals make cost/benefit calculations [2]. The

Heckscher-Ohlin and Ricardo-Viner models

enumerate the benefits that individuals hope to

receive, but the costs of collective action also

intervene as they organize to achieve those benefits

in the political system. Olson (1985) argued that

small special-interest groups are easier to organize

and more effective in securing economic rents than

large groups with diffuse interests [27]. Small

groups are better able to control free riders than large

groups, and groups with specific or homogenous

interests can more easily coordinate and target their

activities than groups with diffuse or heterogenous

interests [35]. This approach is thought to explain

the success of agricultural producer groups in

developed countries in organizing for protection

[35] as well as the inability of agricultural producer

group to organize in developing countries [3] [7]

[27][28][49].

However, Nelson (1988) points out that

organized interests should not be assumed to be

equally responsive to all issues [26].

Institutionalized interaction among actors may help

to explain systematic patterns of action, especially

as institutions created for specific historical

purposes may outlive those purposes. Alt et al.

(1996) suggest that if a particular group has paid the

fixed costs of establishing collective action and

developed well-worn channels of access to public

officials, it may defend its trade policy preferences

even when the stakes are low because the marginal

costs of action are low [2]. It may be the case that “a

much more affected but inchoate group does nothing

because the start-up costs of organization are too

daunting [35]. Past strength of an organization

should therefore be an important intervening

variable predicting group action on trade policy.

Further, as Nelson (1988) argues, once these

institutions exist, supply-side interventions may also

affect their usefulness as some are deemed

legitimate or illegitimate aggregators of interest

[26]. The ways in which economic institutions and

political institutions interact must therefore be

examined. Most economic models simply assume

that a model of the economy is a model of the

demand side for trade policy, but Nelson (1988)

suggests that we have to elaborate the mechanism by

which demand is articulated to the suppliers of trade

policy [26]. For a good overview of this argument,

especially as it pertains to agriculture [50].

If the political system rewards small sectoral

groups, then individuals will decline to incur the

costs of organizing large intersectoral coalitions. If

the political system rewards large mass movements

(i.e. majoritarianism), then individuals will have to

incur the costs of organizing large intersectoral

coalitions in order to achieve any benefits. The costs

of collective action and the nature of political

institutions interact with factor specificity. This

suggests that Rogowski’s (1989) Heckscher-Ohlin

framework requires low factor specificity, low

collective action costs, and domestic political

institutions that favor mass movements [46]. The

Ricardo-Viner framework used by the endogenous

tariff literature requires specific factors, high

collective action costs, and non-majoritarian

institutions. The nature and extent of these three

variables affects the type of coalitions that form.

In the state as rational dictator model, the state

may be seen as either pursuing “good government”

goals along a social welfare function or intervening

in the economy for its own interests. This model

views politicians as offering preferential trade policy

to economic actors in exchange for political support

[24] [13]. On the other hand, pluralist theory

typically views the state as a neutral aggregator of

demands from groups in society. The supply side of

trade policy is then determined by the balance of

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power on any given issue. This is still in the early

stages of theoretical development, but is vitally

important. Various characteristics of the political

system are posited to affect the supply of trade

protectionism, such as incentives for politicians to

cultivate personal votes, the size of electoral

districts, party fragmentation, federal versus unitary

structures, presidential versus parliamentary

systems, etc. [45] [47] [48].

Understanding the trade policies adopted by

different countries is crucial at the theoretical level.

A 1984 survey of economists found that one of the

few things they agreed on was that, under most

conditions, tariffs, and quotas reduce general

welfare [10]. The persistence of protectionism in the

face of international and academic resistance has led

economists to seek explanations. These explanations

range from simple ignorance on the part of

politicians to the (questionable) rationality of having

to protect “infant industries” and the need for

developing states to impose “optimal tariff levels”.

Scholars have increasingly turned to politics in order

to explain apparently irrational policy decisions out

of sheer frustration [10]; [25]; [26].

3. 2 Protectionist Pressures in Different Political

Systems

It is important to note that trade unions can play very

different roles in different political systems. As a

rule, their role is smaller in authoritarian systems

than it is in democratic systems. The prospects for

economic growth are obviously more promising

when the trade unions are unable to exert undue

protectionist pressure. This line of reasoning

justifies the conclusion that authoritarian systems

are more conducive to labor market efficiency, and

the examples of Chile, South Korea, Singapore and

Turkey during the 1970s and early 1980s could be

said to bear this out. Many authoritarian regimes

persecuted trade unions and restricted basic labor

rights during those two decades. However, South

Korea, Singapore and Turkey experienced

spectacular growth in their processing industries and

in the demand for labor throughout that oppressive

period. Greater profitability and the increasing

demand for labor in the processing industry made

the workforce more prosperous. Although similar

results were not noted immediately during the

authoritarian development phase in Chile, a number

of observers are of the opinion that the reforms

introduced at that time contributed to the

reorganization of the Chilean economy in the 1990s.

The application of democratic norms, by contrast,

can lead to lower labor productivity. During the

period in question, several democratic countries

were obliged to employ trade union members at

considerable extra cost.

An alternative viewpoint has it that labor

legislation can be applied more effectively in an

authoritarian system than it can in a democratic one.

Authoritarian regimes often exploit the specific

interests of various groups. Few democratic

countries have a broad enough consensus to win the

support of pressure groups (the urbanized labor

market elite included) by means of labor market

policy. The major difference between authoritarian

and democratic regimes lies in the level of influence

that can be exerted on the government and by whom.

In a well-functioning democracy, various, often

conflicting, viewpoints have to be accommodated

and special interest groups constrained. In a

dictatorship, by contrast, the government is only

concerned to see that these groups do not become too

powerful [35].

There are, however, several democracies

among both the industrialized and developing

countries that have an effective labor market.

Moreover, an effective labor market is often a

priority in countries moving away from

authoritarianism towards democracy.

It is worth considering which of the two

viewpoints presented above should be adopted. The

Grossman and Helpman model [13] may be of

assistance here. This model describes economic

development in terms of the urbanized, regulated

processing sector, and the rural, unregulated

agricultural sector. Labor protection legislation,

especially minimum wage laws, is obviously

designed to benefit the regulated sector.

Not surprisingly, the regulated labor force, and

employers, demand that the government formulate

economic policies favorable to them. Workers

demand high minimum wages and their employers

demand high profits. Both groups demand that

restrictions be placed on the openness of the

economy. In a closed economy, higher minimum

wages and profits are usually correlated with higher

prices for domestic consumers, as imported

substitutes are not readily available. Protection can

therefore generate income, which can then be

divided among workers and their employers in the

regulated sector, although the government

sometimes appropriates part of it [5].

Governments have to consider several

factors when implementing economic policy.

Firstly, they have to determine their share of the

anticipated benefits. This explains the importance of

investment and economic growth, and of assessing

the likelihood of maintaining power. Secondly, the

level of support that can be expected from each of

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the pressure groups capable of influencing the

situation needs to be specified. The position and

importance of each group for the development of

political processes has to be carefully weighed [60].

For example, if the regulated labor market is divided

and politically weak, then only employers might

have any real say in the political process. The

opposite can also occur; a well organized labor force

can play a major role in mobilizing voters.

How can we recognize the type of power?

Firstly, the benefits the government has set out to

deliver need to be identified. Whether an

authoritarian government can generate more income

than a democratic one through protectionism largely

depends on how corrupt it is. The government can

also be counted on to appropriate part of that

income. Secondly, the government may be

influenced by various pressure groups. When an

authoritarian government attempts to subordinate

special-interest pressure groups, including the

regulated labor sector, it inevitably transfers some of

the income generated through protection to them.

3. 3 Level of Protectionist Pressures

The above arguments show that policy is shaped by

political factors (including the type of government

and its obligations towards employers and

employees), and by economic factors (wages, prices,

the structure of production and consumption). In

light of the present discussion, we can present two

equations: one pertaining to the level of protection,

and the other to the national economy and

deformation of wages.

(1)  = f (e, l, k, R)

(2)  = f1 (, e, l, k, R).

The level of protection () is a function of

the economic parameters (e), the relative political

importance of the urbanized labor force and its

employers (l and k, respectively), and on the type of

government (R). Wage distortions are a function of

 and of e, l, k and R. In the case of a small economy,

economic parameters that can influence  and 

include the flexibility of consumer and producer

prices and demand, wages, the demand for labor, and

the price of goods on the international market.

By definition, the growth of  is dependent on l

and k. When interest groups become stronger, there

is greater pressure to raise income through

protectionism. The influence of R (the degree of

authoritarianism) on  (the level of protectionism)

depends on whether  depends on the nature and

extent of democratization. It is also thought that

wage distortion increases with  and l, and decreases

with k. So long as the extra income is obtained from

trade protection, it can be distributed among the

urbanized labor force. However, one major problem

facing the urbanized labor force, as a special interest

group gaining in strength, is that any potential gains

in the division of income may be offset by the

political clout of its employers with the result that it

will actually receive a smaller share in regulated

sectors of the economy [9].

It is obviously easier for wealthy societies to

choose democracy than it is for poor ones.

Moreover, as wealthy societies also tend to be more

open, the direction of causation may run from a

society’s level of openness to its political system,

and not vice versa, as suggested earlier. Research

also shows that educational level plays an important

role in this respect. Countries with higher

educational levels tend to be more open.

The above considerations warrant the

conclusion that authoritarian systems tend to apply

protectionism more broadly than democratic

systems, and that trade restrictions are correlated

with significant wage distortions. This can be

justified on the basis of the observable situation in a

number of countries.

Freedom of association is a sign of good

management and a precondition for development.

Authoritarian governments, however, do not respect

freedom of association. To do so would run counter

to their policies of restricting trade and distorting the

labor market. That is not to say, however, that

improper or ineffective labor market policies are the

preserve of authoritarian regimes or that

authoritarianism automatically generates this kind of

policy. There are any number of examples of

authoritarian countries which do not pursue such

policies. The works of such authors as Fields or

Freeman show that it is not necessary to keep

workers down to achieve the desired level of

economic growth.

Finally, it should be noted that there is a close

relationship between democracy and economic

growth, Indeed, there are well-documented cases of

open societies stimulating economic growth. This is

especially true in the case of highly developed and

urbanized countries. Pressure groups have greater

scope for action in countries with a developed

democracy. Research shows that trade unions can

accelerate economic reform. The benefits of

liberalizing international trade are greater when the

protected sectors of the economy are unionized.

Increased import opportunities reduce wage

pressures. If the trade unions accept this, then labor

can be more efficiency allocated. This is true both in

the case of active and passive trade unions, although

the former obviously achieve better results.

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Trade unions active on urbanized labor

markets significantly influenced government

decision-making during the WTO multilateral trade

negotiations. This was especially evident during the

negotiations on lowering customs duties and non-

tariff protection measures in the steel, shipbuilding,

textile and clothing industries, and in coal mining.

The trade unions were particularly strong in

“sensitive” industries, which were under special

trade protection.

3. 4 New Tendencies in International Business

Countries and producers increasingly specialize in

certain stages of production depending on

comparative advantage [20][25]. This is an

important development for foreign trade policy. It

should also be emphasized that transport and energy

costs partly explain why supply chains are still

mostly regional. Krugman (1991) incorporates

increasing returns, together with capital and labor

migration and transport costs, into a single

model. Krugman’s (1991) model has become a

workhorse of economic geography and international

trade. It is too complex to explain here, but the

reasons for that complexity are clear – when

everything becomes "endogenous", small variations

in a single factor can have huge knock-on

effects. For example, in order to minimize transport

costs, firms want to be near actual and potential

customers, consumers want to be close to goods and

services providers, and workers want to be close to

where they can find work. There are therefore

multiple equilibria, and there can be a tipping point

where the location decisions of a single firm,

customer and/or worker can snowball. A related

trend is a new form of regionalism that is sometimes

referred as integration process development [4].

It needs to be emphasized that openness to trade

with China is associated with higher incomes and

growth and that there need to be new approaches to

trade in light of the forces that are currently re-

shaping international business. A major factor in this

has been the remarkable transformation of China, as

market reforms have opened up its economy to

foreign trade and investment, and unleashed

unprecedented economic growth. This is ongoing

and has only witnessed minor slowdowns. Under the

conditions in which the global economy and global

trade are developing, the People’s Republic of China

appears to be a production superpower that can

change world trade and influence the rise of global

supply chains. The country has a comparative

advantage in many areas and is moving to specialize

in electronics and increasingly in services.

The major trend in international trade is the

rise of several emerging economies and the

associated increase in their shares in world trade

[25]. This applies especially to China, but India and

Brazil have also altered the balance of power in the

multilateral trading system [25]. Between 1980 and

2011, for example, China’s share in world

merchandise exports and imports increased tenfold,

making the country the largest exporter of the world

[25] [22].

The industrialization and spectacular growth of

emerging economies, together with the rapid

expansion of trade in services and of FDI, are

inextricably linked to the next intensive phase of

production growth. The focus here will be on how

the rise of global supply chains can impact the

political economy of trade and on how to induce

countries to work together on bilateral trade policies

[16]. That participation in global supply chains tends

to strengthen anti-protectionist forces has both

theoretical and empirical support [16]. The main

impact has been unilateral tariff reductions (mostly

among developing countries), and the proliferation

of preferential trade agreements (PTAs) and bilateral

investment treaties [20][16]. A considerable amount

of trade opening has thus taken place outside the

WTO.

The internationalization of supply chains has

proven vital for the rapid economic development and

industrialization of developing countries. Before the

emergence of supply chains – and the information

and communications technology (ICT) revolution

that underpinned them – industrialization involved

building a strong industrial base, often behind a wall

of tariffs and other protective measures (NTMs)[17].

The unbundling of global production has enabled

countries to industrialize by joining international

supply chains [16]. This process has also changed

the political economy of trade policy, and created a

strong incentive to undertake unilateral tariff

reductions in many developing countries.

3. 5 The Structure of Political System

The US claims that Chinese state-owned enterprises

are typical by-products of a communist planned

economy, and that crony capitalist princelings

derive the greatest benefits from most of their

initiatives, including the Belt and Road Initiative

[29][40][44][39] and Made in China 2025. The US,

Japan, Canada, Mexico, and the EU do not recognize

China as a market economy, alleging market

distortions. Economist Irwin Stelzer states that

China's centrally directed economy, designed to

preserve communist party control of the nation’s

politics and its economy, is relevant to US trade

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policy. Aaron Friedberg, a political scientist and

former White House national security officer, has

also said the communist Chinese regime has

considerably expanded its use of state-directed,

market-distorting, mercantilist policies since 2008

[33]. The 2018 Congressional hearing “U.S. Tools

to Address Chinese Market Distortions” discussed

how “the Party leads everything” doctrine makes it

difficult to apply trading rules to the Chinese

economy and results in many US businesses bowing

to pressure, even though their decisions risk

jeopardizing the future of their companies and the

US economy as a whole. The Chinese Communist

Party is fundamentally opposed to free-market

capitalism and fair competition. The US cites this as

the root cause of US–China economic tensions [29].

China is a totalitarian mercantilist regime in a

state of an economic war with the West. Trade war

by China against the United States has been going

on for years” (Fig. 1). China declared trade war on

the US 18 years ago in control and command

economies like China, a telephone call in the middle

of the night from a monopoly commissar is all that

it takes to get a business to do something (Fig. 1).

China is totalitarian regime and states China's unfair

trade

Fig. 1: The rapidly increasing US trade imbalance

with China.

policies are kind of economic aggression and a direct

result of its autocracy. The economic security is the

national security and discusses trade in a broader

geopolitical arena.

China counterclaims that the US government

has long practiced unilateralism, protectionism and

economic hegemony, made false accusations against

many countries and regions, particularly China,

intimidated other countries through economic

sanctions such as tariffs, and attempted to impose its

own interests on China through duress.

China has stolen US intellectual property and

bullied its way into acquiring critical US advances

in technology. Tariffs are an important tool to put an

end to trade practices that are destroying American

jobs and driving down American wages.

Many countries and companies have accused

Chines spies and hackers of stealing technological

and scientific secrets by installing malware and

infiltrating industries, institutions, and universities.

China has also been accused of stealing foreign

designs, flouting product copyrights and

implementing a two-tier patent system that

discriminates against foreign companies with

unreasonably longer times. The Chinese intelligence

service was accused of assisting Chinese companies

by stealing company secrets.

Chinese hackers have consistently stolen

trade secrets from US defense contractors. Chinese

cybertheft of intellectual property is the greatest

transfer of wealth in history. Chinese spies have

gone after private defense contractors and

subcontractors, national laboratories, public

research universities, think tanks, and even the US

government. Chinese agents have gone after crucial

US defense assets, such as the F-35 Lightning,

the Aegis Combat System, and the Patriot Missile

System. They have illegally appropriated unmanned

underwater vehicles and thermal imaging cameras,

and have stolen documents related to the B52

Bomber, the Delta IV Rocket, the F15 Fighter, and

even the Space Shuttle. The US opened a formal

investigation into attacks on the intellectual property

of the US and its allies, which was costing the US

alone an estimated $225–600 billion a year.

3. 6 Reasons for the USA to Impose Tariff

Sanctions

China and the United States are engaged in a trade

war, with each disputing the tariffs the other

imposes on its goods. These economic disputes

began before China joined the World Trade

Organization (WTO). In April 2018, the United

States filed a request for consultation to the WTO in

regard to concerns that China was

violating intellectual property rights.

By adding various tariffs, the US

administration is partly relying on Section 301 of the

Trade Act of 1974 to prevent what it calls unfair

trade practices and theft of intellectual

property. This gives the president the authority to

unilaterally impose fines or other penalties on a

trading partner if it is deemed to be unfairly harming

US business interests, especially if it is deemed to

have violated international trade agreements. In

August 2017, the US opened a formal investigation

into attacks on the intellectual property of the US

and its allies.

The result is that the US believes Chinese

laws undermine intellectual property rights by

forcing foreign companies to engage in joint

ventures with Chinese companies, which then gives

these companies access to foreign technologies and

permission to appropriate, copy and use them. The

US has also raised concerns that China refuses to

recognize legitimate patents and copyrights,

discriminates against foreign imported

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technology, and has instituted numerous non-tariff

barriers to effectively insulate sectors of the Chinese

economy from international competition. Thus, the

trade war is seen as largely focused on intellectual

property, especially in the area of science and

technology.

China’s technological progress is coming

from businesspeople who are benefitting from the

vast sums their government invests in basic science.

The Chinese education system privileges excellence

and focuses on science and technology. That’s

where their leadership in some technologies is

coming from, not from taking a stake in some US

company. China declared that its attitude toward the

protection of intellectual property rights is clear and

firm, and it has continuously strengthened protection

at the legislative, law enforcement, and judicial

levels, with remarkable results.

The US claims that China requires technology

transfer through a Foreign Direct

Investment (FDI) regime and often requires joint

ventures: in many cases, technology transfers are

effectively required by China's FDI regime, which

closes off important sectors of the economy to

foreign firms. In order to gain access to these sectors,

China forces foreign companies to enter into joint

ventures with Chinese entities with which they have

no connection.

A number of experts have focused on what they

claim is China's “theft” of intellectual property,

saying that China forces any US company wanting

to do business there to transfer confidential

technology and trade secrets before it will grant

access to its market. Although that kind of transfer

is in breach of WTO rules, the negotiations are

usually conducted in secret to avoid penalties. The

Commission on the Theft of American Intellectual

Property states claims that agreeing to manufacture

in China is tantamount to agreeing to transfer

technology or have it stolen. The Commission

recommended a response based on “strength and

leverage”.

In 2018, the American Chamber of

Commerce in China learned that over half its

members cited “leakage of intellectual property” as

an important concern when doing business there.

Similarly, the EU Chamber of Commerce has also

complained that European companies wanting

access to the Chinese market often have to agree to

transfer vital technology. China claims that

technical, economic, and trade cooperation between

Chinese and foreign enterprises is completely based

on contracts voluntarily entered into, that both

companies obtain practical benefits, and that over

the years, US companies in China have not only

benefitted enormously through technology transfer

and licensing, but are the biggest beneficiaries of

technical cooperation.

In June 2016, as presidential candidate,

Donald Trump vowed to cancel international trade

deals and go on an offensive against Chinese

economic practices, describing his promise as a

reaction against "a leadership class that worships

globalism". Less than a year after he took office, the

United States, European Union and Japan, agreed to

work within the World Trade Organization (WTO)

and other multilateral groups to eliminate unfair

subsidies by countries, which create noncompetitive

conditions through state-owned enterprises,

“forced” technology transfers and local content

requirements.

In April 2018, President Donald Trump

denied that the dispute was actually a trade war,

saying that war was lost many years ago by the

foolish, or incompetent, people who represented the

US. He added also that in the 2018 year USA have

a trade deficit of $500 billion a year, with

intellectual property (IP) theft of another $300

billion (Fig. 2) and that US cannot let this continue.

Fig. 2: US Trade Representative.

In January 2018, President Donald Trump

underlined he wanted the United States to have a

good relationship with China, but insisted that it treat

the United States fairly. In his State of the Union

Address a few weeks later, mentioned that America

has also finally turned the page on decades of unfair

trade deals that sacrificed prosperity and shipped

away companies, jobs, and Nation’s wealth. The era

of economic surrender is over. From this time

America expect trading relationships to be fair and

to be reciprocal. United States will work to fix bad

trade deals and negotiate new ones and US

government will protect American workers and

American intellectual property, through strong

enforcement of US trade rules.

A number of government and industry experts

have offered their own rationales as to why tariffs

are, or are not, appropriate. John Ferriola, the CEO

and President of Nucor, America's largest steel

producer and metal recycler, argued that tariffs were

not unfair, but were “simply leveling the playing

field”. Ferriola went on to explain that most

countries, including EU member states, levy VAT

rates of at least 25% on US imports. If the US

imposed a 25% tariff, it would therefore be doing no

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more than treating these countries exactly as they

treat the US.

It is claimed that China has instituted an array

of non-tariff barriers and that this has shielded

critical sectors of the Chinese economy from

international competition. China has controlled

imports by having different standards for private,

foreign companies than for Chinese State Owned

companies. Lee G. Branstetter, a professor of

economics and public policy at Carnegie Mellon

University, has listed some of the ways that China

has misappropriated foreign technology. In a report

dated March 22, 2018, the US cited numerous

instances of forced technology transfer and the

failure of companies and the government to protect

US intellectual property from infringement or theft.

Soon after the report came out, the US announced

plans to impose tariffs on up to $60 billion worth of

Chinese exports to the United States and to tighten

the rules governing Chinese investment in the

United States.

Despite doubts being raised over US strength

and leverage, security implications, and China's

appalling human rights record, the Clinton

administration approved WTO membership for

China in 2000. However, the US claims that China

has failed to fulfill its promise to implement reforms

and meet the requirements of WTO membership,

and that flaws in the rules of the current trading

system allow China to limit imports with high tariffs

and discriminatory regulations, to subsidize exports

with an inexpensive currency and readily available

credit on easy terms (courtesy of state controlled

banks), bully foreign investors, and pirate western

intellectual property. The US claims that the WTO

has declined to take action against China’s

“cheating”.

China had agreed to purchase “a very substantial”

amount of soy beans and other agricultural, energy,

industrial, and other products from the US. China

had agreed to reduce the 40% tariff on cars imported

from the US, although Beijing had yet to confirm

this as at December 4, 2018. The Chinese

government was considering a reduction in the auto

tariff but provided no specifics. China and the US

had agreed to immediately begin negotiations on

structural changes with respect to forced technology

transfer, intellectual property protection, non-tariff

barriers, cyber intrusions and cyber theft, services,

and agriculture. The two countries agreed to halt the

mutual increase of new tariffs and China undertook

to increase its purchases from the US so as to

“gradually ease the imbalance in two-way

trade”. The official announcement from Beijing was

silent about such purchases, but stated that both

leaders were striving to reach a mutually beneficial

agreement.

On October 17, 2018, the United States

announced its withdrawal from the Universal Postal

Union, in order to renegotiate international shipping

rates for mail and small packages. China had been

paying lower rates because it was considered a

developing nation; the United States intends to

charge the same rates for all countries.

3. 7 Influence of USA-China Trade War on

International Business

3.7. 1 US Executive Branch

The planned Chinese tariffs only amounted to 0.3%

of US GDP. These moves would have “short-term

pain” but “long-term success”. It could be argued

that tariffs are self-defeating and that renegotiating

China's WTO membership [64] would be a more

effective measure. The US economy remained

strong in 2019. Interest rate increases were

necessary to contain inflation. Given this outlook of

strong growth, a strong labor market, and inflation

close to the US goal, and taking account of all the

various risks surrounding this outlook, further

gradual increases are probably the best means of

sustaining economic expansion.

A self-appointed group of billionaires with links

to Goldman Sachs and Wall Street pressed on the

White House, claiming that this was part of a

Chinese government operation that was

undermining the US negotiating position. They

called for foreign agents to be deregistered if found

to be interfering with negotiations or violating the

Foreign Agents Registration Act, urged investment

in factory towns, e.g. Dayton, Ohio, that need a

rebirth of their manufacturing base.

3.7.2 Strong Bipartisan Pushes to Broaden and

Strengthen Sanctions Against China

Democrats, Republicans, Americans of every

political ideology, and every region in the country

should support higher tariffs on China in retaliation

for their country being taken advantage of. Most

Democratic senators, including Committee ranking

members Bob Menendez (Foreign

Relations), Sherrod Brown (Banking), and Ron

Wyden (Finance), called for Americans to confront

the rampant theft of US intellectual property, forced

data storage localization policies, agricultural

policies that disadvantage American farmers, the

dumping shoddy of goods, restricted market access

for US service providers and manufacturers, and

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mercantilist industrial policies that have cost US

workers their jobs. They called for sanctions on

Chinese companies, such as ZTE, which has

allegedly sold sensitive US technologies to Iran and

North Korea and repeatedly made false statements.

The Democrats have further called for putting

American workers, farmers, businesses, innovation

and national security ahead of China and have

remained steadfast in enforcing US laws against

predatory and abusive behaviors. The Senators have

requested that the administration push harder for

genuine structural reforms in China.

China is a greater threat to American

manufacturing and high-tech industries, and is

heavily involved in industrial espionage. China is

thought to be responsible for 50-80% of cross-border

intellectual property theft worldwide, and over 90%

of cyber-enabled economic espionage in the US.

The US definitely needs to take strong,

intelligently thought out, and strategically effective

action against China’s brazenly unfair trade

practices. However, it needs to do a lot more to

support US workers and products than simply

confront China over its bad behavior. Beijing’s

regulatory barriers, localization requirements, labor

abuses, anti-competitive policies, and many other

unfair trade practices require a full and

comprehensive response. The US has to show moral

courage and be prepared to use its economic

leverage to not only guarantee free trade for

American products in Chinese markets, but also to

advance human rights in China and Tibet.

A brief reduction in the trade deficit did nothing

to solve the main challenges of the trade

relationship. These are going to require “targeted

sanctions” on Chinese companies, non-tariff

restrictions, and upgraded protection for US

intellectual property innovation. US public opinion

remains in favor of revoking China’s most favored

nation status and for waging trade war against that

country.

3.7.3 Markets and Industries

The tariffs had brought about positive and negative

results as early as July 2018. A number of industries

were evincing employment growth while others

were planning layoffs. Stock prices in the US and

China fell significantly four to six weeks prior to the

tariffs going into effect. Trade war fears had led to

a bear market in China. By late June, the country’s

stock market has lost 20% of the value it had the

beginning of 2018 when it reached record levels. The

Japanese Nikkei 225 also suffered a “three-

week pullback”. When the tariffs went into effect

(on July 6, 2018), the markets rebounded and rallied

due to a positive jobs report in the US. Asian markets

similarly rebounded, ending the day on a high note.

According to the Associated Press, this positive

response to the tariffs in the US and Asian markets

was due to the end of uncertainty, and according

to Investor’s Business Daily, because the “markets

had largely priced in the impact”.

Announcements of US and Chinese tariff

increases have prompted concerns from several

major US industries. Organizations critical of the

intensifying trade war included the National Pork

Producers Council, the American Soybean

Association, and the Retail Industry Leaders

Association. Several mayors representing towns

with a heavy reliance on manufacturing have also

expressed their concerns. In September, a business

coalition announced a lobbying campaign under the

name of "Tariffs Hurt the Heartland" to protest the

proposed tariffs. Proponents of the increased the US

tariffs included Scott Paul, president of the Alliance

for American Manufacturing.

3.7.4 Increase Protectionism Between the USA

and China

The need to stay afloat on both global and national

markets means that corporations will always look for

ways to protect their profit margins. This obviously

includes avoiding hefty tariffs. The costly price of

building manufacturing infrastructure in the US has

led corporations to turn their eyes toward countries

eager to entice US manufacturing and jobs. Many

companies are already looking to relocate their

manufacturing facilities to China’s neighbor,

Vietnam. The global news magazine, Foreign

Policy, reports that Goertek, a Chinese company that

supplies Apple Air Pods, has already begun

relocating its machines to Vietnam.

This is a decision that many companies will

be forced to make. Coi Rubber President, David

Chao, has stated that he had been

considering offshoring manufacturing to countries

in the proximity of China prior to the trade war talks.

The passage of recent tariff laws only solidified Mr.

Chao’s decision to relocate the company’s China

factory to another competitive country in order to

avoid unreasonable tariff costs and maintain the

company’s global expansion trajectory. Coi Rubber

will continue to operate their three factories in China

but will locate their primary factory in Vietnam.

Although the tariffs may impact many

manufacturers initially, Mr. Chao sees this as an

opportunity to invest in Coi Rubber’s future by

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building their 4th factory in Vietnam, thereby

allowing them to not only avoid high tariff costs but

to reduce labor costs as well.

The decision of the US administration to

impose a new round of tariff increases on imports

from China has taken the US-China trade dispute to

a new level. Import tariffs were increased 10 p.p.,

and steadily raised to 25 p.p. by the end of 2018. The

new list considerably expanded the range of Chinese

products included in the first two tranches of US

import tariff hikes. These were implemented on July

6 and August 23, 2018. The policy triggered

immediate retaliation. China raised tariffs by 25 p.p.

on similar amounts of imports from the US on the

same dates that the US tariffs came into force.

This sort of protectionist tit-for-tat can have

consequences for the economies of the warring

parties, as the experience of the Great Depression

illustrates [8] [34] [43]. Moreover, it can also affect

third countries, especially those with close economic

ties to the US and China. This paper provides novel

partial equilibrium estimates of the potential trade

and investment impacts of the US-China trade

dispute, focusing on East Asia [14]. Countries in this

region are the most exposed to the dispute by virtue

of their integration with Chinese-led supply chains

and the similarity of their export baskets with that of

China.

We estimate the expected import response to

the tariff increase. To do so we combine HS-8 digit

US import data for 2017 from the US Census Bureau

of Statistics, HS-6 digit product-level price elasticity

of US imports [18][32][37][42][31][35] and the

published lists of Chinese products subject to the

three tranches of US tariffs. We assume the price of

import to increase proportionately with the tariff,

which is then multiplied by the relevant elasticity

and the import value to obtain the expected

reduction in US import from China.

Our calculations suggest that the total US

imports from China in the affected products

amounted to $234.8 billion in 2017, of which $188.9

billion have been targeted in the last tranche of

tariffs (Table 1). Based on the data we use, the

tariffs would reduce US imports from

Table 1: Value of US imports from China targeted

by the tariff measures.

China by $68.6 billion, equivalent to 13.6% of total

US imports from China and 3% of global Chinese

merchandise exports. This expected drop in Chinese

exports would translate into a reduction in domestic

value added by $41.4 billion, a relatively modest

0.3% of Chinese GDP. This is an upper bound of the

direct impact on Chinese exports, as it does not

consider the possible re-direction of these exports

towards third markets.

The bulk of the affected imports is

concentrated in electronic equipment and machinery

and their components (Fig. 3). Electronic and

optical equipment (including TV and sound

Fig. 3: Expected drop in US imports from China due

to US tariffs hike, by HS-2 digit sector ($ million).

recording devices) and their components,

machinery, boilers and mechanical appliances

account for almost half of the expected drop in US

imports from China. A significant amount of the

import drop is also expected in consumer products,

such as furniture, vehicles, leather articles and fish

and crustaceans, which may have some direct impact

on parts of the typical US household consumption

basket.

The upside of the reduction in Chinese

exports to the US is the potential diversion of US

imports towards non-Chinese suppliers, particularly

in East Asia, where export structures are similar to

the Chinese ones. The present study identifies

Chinese products (at the HS-8 digit level) that are

subject to higher tariffs in the US, and which other

East Asian countries exported to the US in 2017 in

order to give a sense of these potential export

opportunities. It seems probable that a country that

is exporting a non-negligible amount of a certain

product to a certain market would be more likely to

replace an existing exporter in that product-market

pair [38].

According to this metric, the replacement

potential of Chinese exports in the US by East Asian

countries – especially emerging economies – is quite

significant. Vietnam, the Philippines, and Cambodia

are the East Asian countries with the largest

replacement potential relative to the size of their

economy (Fig. 4). The estimated drop in Chinese

exports to the US

Fig. 4: Potential replacement of Chinese exports to

the US, by countries (% of GDP).

(at values of at least 10 mln USD) is equivalent to

10.9% of Vietnam’s GDP. This falls to 4.4% when

the associated domestic value added of these exports

is considered. The greatest opportunities lie in those

products for which the expected drop in Chinese

exports to the US (and which Vietnam already

exports there) are large, e.g. chairs, insulated

ignition, shrimp and prawns, travel bags, seat parts,

television cameras, wooden furniture, and handbags

(Fig. 5).

Fig. 5: Main potential products where Vietnam

could replace Chinese exports in the US.

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Cambodia exports a much smaller set of products

with these characteristics, e.g. plywood sheets,

handbags, travel and sports bags, lighting sets for

Christmas trees, dog and cat food, seat parts, and

bicycles. Taiwan [51], Singapore, Malaysia, and

Thailand also have non-negligible export

replacement potential. The potential replacement is

more limited for Indonesia. The drop of Chinese

gross exports to the US in products that Indonesia

also exports there is equivalent to 1.3% of GDP, with

an associated domestic value added of 1.0% of GDP

[38].

By raising the cost of serving the US market

from China, the trade war could also divert

investment to third countries [14]. This diversion is

most likely to affect investment seeking to by-pass

US import tariff hikes. The extent to which

investment intended to serve the US market can

relocate to other countries partly depends on each

country’s ability to produce the same set of affected

products and partly on perceptions about the

duration of the trade war. The present study

measures this ability through the correlation index

between the expected drop in US imports from

China and US imports from each East Asian country

in those HS 8-digit products subject to the tariffs

[38]. The value of the index is highest for Taiwan,

followed by Thailand, Malaysia, Vietnam, and the

Philippines, and lowest for Indonesia and Myanmar

(Fig. 6).

Fig. 6: Degree of similarities of export baskets to the

US with China for affected products (index of

correlation at HS-8 digit).

While this ranking tries to capture only one of the

several criteria used for investment choices, it is

suggestive of the variation in relative attractiveness

across potential destinations for investments based

on an export basket similar to that of China [38].

While China has progressively absorbed large

chunks of the value chain in various sectors [19][29],

it still relies on imports of foreign intermediates and

final inputs for some of its production. East Asian

countries are key suppliers of such intermediates and

inputs to China [14]. Hence, the expected drop in

Chinese exports to the US may have knock-on

effects on these countries via backward linkages.

The extent of this impact would depend on which

parts of the value chain each country contributes to.

This in turn determines the intermediates and raw

materials that other countries provide to China in the

production of the products affected by the tariff hike

[38].

In order to gauge the importance of this

channel, the estimated drop in Chinese exports at the

HS-8 digit level is matched with the country-specific

shares of domestic value added in Chinese gross

exports to the US in those products (available from

OECD TiVA data). Taiwan and Malaysia are the

East Asian countries [51] that appear most vulnerable

to the drop in Chinese exports via the supply chain

with an estimated GDP loss of 0.24% and 0.20%

respectively [38] (Fig. 7).

Fig. 7: Estimated effects of US-China trade war on

GDP via supply linkages.

This is mainly due to the fact that they provide inputs

for Chinese exports to the US in electronic and

optical equipment, as well as electrical machinery,

which accounts for two third of this loss. Singapore,

South Korea, and Thailand are all expected to lose

more than 0.1% of their GDP via this channel, while

the results for Cambodia, Indonesia and Vietnam are

relatively muted due to the low participation in

Chinese-led global value chains [14].

While these negative effects are smaller than

the estimated (positive) export replacement

potential, the two figures are not necessarily

comparable. The latter are upper bound estimates of

the potential for replacement. The true dimension of

the replacement effect is likely to be considerably

smaller for two reasons: first, each country would be

competing for the same potential market; second,

any such replacement would hinge on the supply

response in each country-product pair, which could

be relatively small (and even zero) in many cases.

By contrast, the effects via the supply chain are

likely to provide a more precise order of magnitude

of the actual losses [38][36].

This type of analysis could help policymakers

in East Asia (and beyond) identify the potential

winners and losers among domestic producers from

the US-China trade war [14]. Governments could

help the former replace Chinese exports to the US

through measures such as facilitating access to

imported inputs, which are heavily used by East

Asian exporters, and ensuring the availability of the

finance, including trade finance, that will be required

for the additional production and exports [38]; [36].

At the same time, assistance to potential losers to

reallocate their production and/or their labor could

help minimize the domestic costs of the trade war

[6].

3.7.5 China in a Trade War with the USA and

its other Trading Partners

The US Administration deserves credit for taking a

harder line towards Beijing, both at home and

abroad. Attacking Chinese protectionism [29][30]

now has bipartisan support in Washington and

Berlin, and in 2018, the United Kingdom joined the

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United States in imposing tighter restrictions on

Chinese investment. But their critics claim that they

have not done enough to capitalize on those shared

grievances. If anything, they have achieved the

reverse. For example, in 2018, they alienated

European and Japanese officials by imposing tariffs

on their steel and aluminum to the US.

China has tried to defuse the global irritation

over its mercantilist stance by signaling a

willingness to revise its “Made in China 2025”

program of state subsidies and market share targets.

This recent flexibility comes as Chinese industrial

production figures at the end 2018 year fell short of

economists’ expectations and retail sales were

growing at their slowest rate in 15 years. Analysts in

China and the United States say China is modifying

the “Made in China” program because of pressure

from all its major trading partners.

The US Trade Representative Robert E.

Lighthizer has claimed that this subsidy program,

which sets market share goals for Chinese industry,

imperils US technological hegemony. China wants

its semiconductor manufacturers to provide 70% of

domestic needs, up from less than 20% today. At

stake are 6 bln USD in annual US exports.

But roughly a dozen other countries are even more

dependent on high-tech manufacturing and exports

of advanced factory gear, and are more exposed to

China’s desire to replace purchases of foreign

products with domestic alternatives, according to the

Mercator Institute for China Studies in Berlin.

The pushback from other trading partners is

a crucial factor in the dynamic development of

China. That’s because the Made in China 2025

program is more of a threat to Germany, South

Korea and Japan than it is to the United States.

External pressure drove China to open markets for

financial services and automobiles, according to

economist Andrew Polk, a partner in Trivium China,

a Beijing-based consultancy.

At the end of 2018, the EU agreed to establish

a new foreign investment screening mechanism.

This initiative was largely motivated by a sharp

increase in Chinese activity on the continent

[30][39]. However, it leaves final decisions to

national governments. As such, it is less effective

than the Committee on Foreign Investment in the

United States. The German government blocked two

potential acquisitions by Chinese investors in July

2018. This came on the heels of similar action by

Canada two months earlier. Germany also lowered

the level of foreign ownership that requires

government review from 25% to 15%.

With the United States and China locked in a

geopolitical competition, it is easier for revision-

minded officials to advocate changes in programs

like Made in China 2025 by citing shared concerns

among the country’s major trading partners. The

Chinese authorities have changed course under

pressure before. In 2015, they scrapped plans to

require foreign financial institutions to install

Chinese software after complaints from US,

European and Japanese diplomats and business

groups. Some administration officials scoff at the

proposed changes as being cosmetic and designed to

sap US negotiating resolve. Michael Wessel, a

member of the US-China Economic and Security

Review Commission, described the plans to allow

foreign companies a greater role in the Chinese

technology program were “an influence operation at

its best”. He also questioned whether Chinese laws

would mean much so long as the courts remained

under the control of the Communist Party. “What the

Chinese are talking about are really just baby steps”,

he said [23].

On June 1, 2018, following similar action by

the US, the EU initiated legal proceedings against

China in the WTO, alleging that by compelling

foreign firms to grant ownership and usage rights of

their technology to Chinese entities, China was

discriminating against foreign firms and

undermining the intellectual property rights of EU

companies [30][39]. EU firms were allegedly forced

to establish joint ventures as a precondition for

gaining access to the Chinese market. The European

Commissioner for Trade, Cecilia Malmström, said

“We cannot let any country force our companies to

surrender this hard-earned knowledge at its border”.

This is against international rules that we have all

agreed upon in the WTO. American, European and

Japanese officials have discussed joint strategy and

taken actions against unfair competition by China

[30]. The 2018 G20 Summit in Buenos Aires

concluded the multilateral trading system “is

currently falling short of its objectives ... necessary

reform of the WTO to improve its functioning” [44]

[30].

4 Conclusions

Foreign trade policy plays a key role in the

maintenance of both economic and political

liberalization. Rent seeking can have far-reaching

implications for a country’s economic development.

This is especially true in underdeveloped and

transitional countries, where it can take scarce

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resources from productive areas and use them to

promote and/or perpetuate rents.

Structural and micro-political economy

analyses of foreign trade policy in the context of

sustainable development invariably fail to factor in

the impact of the recent reappraisals of

protectionism and the relatively fixed nature of the

institutions designed to handle domestic producer

complaints. The political consensus on foreign trade

policy and protectionism has changed over time.

Tariffs and other forms of protectionism assume

greater prominence in the policies of political parties

during a recession. However, even during a

recession, there is usually a modicum of support for

a liberal foreign trade policy in a market economy.

No foreign trade policy is purely liberal or purely

protectionist. Foreign trade policy tends towards

liberalism during periods of rapid economic growth

and protectionism during downturns.

A tariff trade war will inflict considerable

harm on China in all indicators, including welfare,

GDP, manufacturing employment, and trade.

However, China should nevertheless be able to

sustain the costs, and its economy should not be

severely damaged. As for the United States, the

simulation predicts it will gain on welfare, GDP and

non-manufacturing production, but lose on

employment and trade (both export and import). As

these are by far the two largest economies on the

planet, their actions inevitably affect the entire

world. The simulation therefore predicts that the rest

of the world will feel the impact of any trade war

between them.

Most large and developed nations will benefit

from a US-China trade war. As trade decreases

between the United States and China, it will

presumably increase between other nations. For

example, Chinese and international rubber

producers are preparing to restructure their supply

chains by relocating their manufacturing facilities

from China to Vietnam and Malaysia. However,

smaller nations will see significant negative impacts.

For example, the world’s total welfare, GDP,

manufacturing production and employment, export,

import, and total trade are expected to decrease since

many of these nations are highly trade dependent.

China is not merely romanticizing its historical

legacies; there are painstaking economic and

geopolitical calculations underpinning its strategies

for the 21st century. It is important to pay heed to

changing trends in the international trade regime.

Commercial relations are too important to be held

hostage to political grandstanding or airy rhetoric

from politicians performing for domestic galleries.

Disturbing these relations would have ramifications

for sales, growth, and employment – especially in

this day and age of COVID-19 [36]. Commercial

imperatives can pose political dilemmas for

autocratic regimes such as China. Again, this applies

a fortiori with respect to the COVID -19 pandemic

[36].

The Global Financial Crisis of 2007–2008

(GFC) was a total shock to the comparison in cost

savings. Global supply chains became more costly

when the risk of a non-delivery of an input good

increased substantially after the Global Crisis. Firms

may have also expected higher tariff rates after the

Global Crisis, which shrinks advantage of GVCs as

input goods pass the border several times. At the

same time, the Global Crisis made robot adoption

less costly, with the sharp decline in interest rates

relative to wages when central banks started to fight

the adverse effect of the crisis. As a result, many

firms in rich countries like USA started to re-shore

production back to their home country and invested

in robots instead.

In the wake of the Global Crisis, uncertainty in

the world economy led many firms to reassess their

business models. Rather than relying on global

supply chains, an increasing number of firms

invested in robots, which prompted a renaissance of

manufacturing in industrialized countries like USA.

Changes in the world economy due to COVID-19

make a V-shaped recovery from the coming

recession unlikely, more likely is U and in services

L. Instead, COVID-19 will accelerate the process

begun after the Global Crisis by encouraging firms

to re-shore activity back to rich countries like USA

[36].

A great deal has depended on the attitude of the

US and its allies during the conflict between Russia

and Ukraine. Unless they agree to a compromise,

paid for by Ukraine, this will be a long-drawn-out

guerrilla war. The conflict with the West, which has

already moved into the military phase in Ukraine,

and which will continue to be played out in parallel

in the political, diplomatic, media, economic and

virtual worlds (hacking attacks have been ongoing

for a long time and show no sign of letting up), could

eventually exhaust Russia’s forces and deplete its

resources. If this scenario came to pass, Russia

might well be plunged into an economic crisis

comparable that which afflicted the USSR during its

final days.

In this context, the world economy has entered

a phase of geopolitical turbulence that will have

enormous economic and financial consequences far

beyond Ukraine. A hot war between the major

powers sometime in the next ten years is on the

cards. Price shocks will have a negative impact

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worldwide, especially on poorer households, as food

and fuel account for a higher percentage of their

expenditure. If the conflict escalates, the damage to

the world economy will be even more devastating.

The sanctions imposed on Russia will have a

significant impact on the global economy and

financial markets, and significantly poison other

countries. The monetary authorities will need to

carefully monitor the spillover of rising international

prices onto local inflation in order to prepare the

right responses. State fiscal policies will have to

support the most vulnerable households to

counterbalance the rising cost of living.

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Contribution of Individual Authors to the

Creation of a Scientific Article (Ghostwriting

Policy)

The author equally contributed in the present

research, at all stages from the formulation of the

problem to the final findings and solution.

Sources of Funding for Research Presented in a

Scientific Article or Scientific Article Itself

No funding was received for conducting this study.

Conflict of Interest

The author have no conflicts of interest to declare

that are relevant to the content of this article.

Creative Commons Attribution License 4.0

(Attribution 4.0 International, CC BY 4.0)

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Creative Commons Attribution License 4.0

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n US

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Figures and Table

Fig. 1: The rapidly increasing US trade imbalance with China.

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Fig. 2: US Trade Representative.

Table 1: Value of US imports from China targeted by the tariff measures.

Source: M. Calì, The impact of the US-China trade war on East Asia, 16 October 2018,

https://voxeu.org/article/impact-us-china-trade-war-east-asia, 4.01.2019.

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Fig. 3: Expected drop in US imports from China due to US tariffs hike, by HS-2 digit sector ($ million).

Fig. 4: Potential replacement of Chinese exports to the US, by countries (% of GDP).

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Fig. 5: Main potential products where Vietnam could replace Chinese exports in the US.

Fig. 6: Degree of similarities of export baskets to the US with China for affected products (index of correlation

at HS-8 digit).

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Fig. 7: Estimated effects of US-China trade war on GDP via supply linkages.

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