Leibowitz on Trade: Trends in U.S.-China Relations—Ships Passing in the Night?

The Carnegie Endowment for International Peace (CEIP), a long-standing Washington think tank (founded in 1910 by a well-known figure in the United States steel industry), recently published an analysis of China’s trade patterns in 2019 and how they have changed from previous years. The results provide food for thought.

The figures cited by the CEIP show that China’s trade balance in 2019 actually improved, while the U.S. trade balance did not get much better. Of course, these numbers do not include figures for 2020, which saw large declines as a result of the coronavirus pandemic.

Total U.S. imports from all countries declined $44.3 billion in 2019 compared to 2018. Imports from China fell by about $87 billion in the same period. Imports from Vietnam, Mexico, Europe and Taiwan increased by $68 billion in total.

U.S. exports in 2019 declined by about $23 billion from 2018 levels, reflecting retaliatory tariffs over the China Section 301 actions and the steel and aluminum levies. Exports to China declined by nearly $14 billion and $6.6 billion to Hong Kong. Exports to Europe increased by about $8 billion.

The U.S. trade deficit probably would have increased in 2019 if energy production, particularly in oil and gas, had not increased. Instead, the U.S. trade deficit narrowed somewhat.

CEIP estimates that the higher tariffs caused a “welfare loss” in the United States, due to supply chain disruptions and increased industrial production costs resulting from the tariffs. While claiming that China and steel and aluminum exporters “pay” the tariffs is an often-used political device, there is near-zero intellectual support for such a claim. In 2019 (and this was before the pandemic) U.S. industrial production declined for the first time in five years. The tariffs and the resulting competitive damage in the U.S. and in export markets contributed substantially to this decline.

These statistics seem to tell a story that largely squares with economic theory. Tariffs cause more pain for Americans than pleasure. The question is whether this short-term pain will cause long-term gain. And the answer to that question depends on whether China and other “bad actors” will be forced to change their behavior in order to maintain their economies.

The record for 2019 suggests that this approach is not working. In 2019, China’s imports from the world declined by more than $66 billion, but exports declined only by $2.78 billion. Imports fell sharply from the U.S., Korea, Japan and Taiwan, while exports surged to Europe, Southeast Asia and Sub-Saharan Africa. Exports to the U.S. and Hong Kong, a significant middle destination of Chinese exports to the United States, also declined sharply. However, the overall picture for China based on 2019 performance is not disastrous. If continued pressure through tariffs were likely to be successful in convincing China to change its ways, the first full year of the policy does not appear to point to a positive answer.

The record on steel and aluminum tariffs is similarly gloomy. As I wrote last week, the tariffs and quotas on steel and aluminum are hurting U.S. companies that use these raw materials, without transferring profits and capital to steel and aluminum producers. Thus, there is a net “welfare loss” in the U.S.

Left with no option but seeking tariffs, steel producers are continuing to file antidumping and countervailing duty actions. This past week, new petitions were filed on seamless carbon and alloy pipes and tubes, steel wire mesh, copper pipe and tube and silicon metal from several countries. Of note, Bosnia and Herzegovina was named in the silicon metal petition, not a country often named. It may be a sign of enhanced economic status for that small country with an unpleasant past.

Clearly, petitions signal an effort on the part of U.S. companies to shift costs away from themselves. Often, the shift results in harm to other Americans, not just foreign producers.

There is a need to discuss what approaches might work better to solve our ills than to keep damaging our own economy as much or more than any other. If, as we are told, tariffs will cause China and other countries to change their behavior toward the United States, it makes sense to continually evaluate whether it’s working well.

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