The truce in the U.S.-China trade war is in tatters.
China said on May 13 that it will impose new tariffs on a range of American goods in retaliation for President Donald Trump’s decision to raise duties on US$200 billion in Chinese imports.
Although trade talks may continue, for now the trade war that Trump began in January 2018 is back on, which will mean more economic pain for companies and consumers in both the U.S. and China.
As an economist who focuses on international trade, I believe there are three reasons the conflict could continue for a long time.
1. Mastering the fundamentals
All evidence suggests that negotiators have made little headway resolving the fundamental disagreements between China and the U.S.
The most pressing issues involve deep structural features of the Chinese economy that China has little incentive – or in some cases, ability – to change. In short, the U.S. believes that the Chinese government has been both too involved and not involved enough in how its economy functions.
The most important and long-standing issue is that the Chinese economy owes part of its rapid development in recent decades to heavy subsidization of targeted companies and industries. The U.S. wants China to be much more transparent about this support and to reduce subsidies overall.
At the same time, the Chinese government has not been doing enough when it comes to protecting foreign intellectual property in China. Copyright enforcement is still weak, and U.S. companies are forced to transfer technologies to Chinese counterparts as a condition of doing business in the country. This is estimated to cost American businesses hundreds of billions of dollars a year.
But China is unlikely to end industrial subsidies or increase enforcement of intellectual property laws in any meaningful way in the short run. In part this is because the Chinese economy is growing more slowly than at any other time in the last two decades, and any significant change in policy would be risky.
China might be persuaded to transition away from this economic model in the long run if the proper incentives are put in place. But it remains to be seen whether the Trump administration has the patience to compromise on its short-run objectives in order to create a long-run path toward a more level playing field.
2 Carrots and sticks
The U.S. negotiating position has been heavy on “stick” and light on “carrot.”