The threats to Chinese and US commercial interests aren’t that different

Simon Evenett, Johannes Fritz 14 December 2018

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Over dinner after the G20 Summit in Buenos Aires, Presidents Trump and Xi effectively declared a truce in their trade war. They have given their trade negotiators three months to settle their differences otherwise US tariffs on $200 billion of Chinese exports will be ratcheted up (Bown and Keynes 2018, Donnan 2018, Kennedy 2018, Politi 2018). Our detailed analysis of the Sino-US tariff war revealed, among other findings, strong parallels in the types of trade distortions harming these behemoths’ commercial interests around the world and in their export exposure to such beggar-thy-neighbour policy (Evenett and Fritz 2018).

Covert protectionist build up resulted in similar US and Chinese export exposure to harmful policy

Focusing on the Brazen Unilateralism of the United States’ trade policy in 2018 overlooks the scale of the covert protectionist build up over the past ten years. By November 2018 a total of 2,809 still in effect foreign trade distortions1 confronted US exporters. The comparable total for China is even higher at 4,026. Using fine-grained product-level data on trade flows, we estimate that by November 2018 just under 80% of US exports faced one or more trade distortions imposed since G20 leaders vowed to eschew protectionism (see Figure 1). Such findings may fuel American grievances. But what’s interesting is that the comparable percentage for China is only a little lower at 75.6%.

Differences arose at the start of the crisis era. In the 12 months following the first G20 Leaders’ Summit over 44% of American exports faced one or more new trade distortions when competing in foreign markets. For China the comparable percentage was 21%. From 2009 to 2013 the percentage of Chinese exports facing crisis-era trade distortions in foreign markets more than trebled to almost 73% in 2013. Since 2013 the percentages of US and Chinese exports facing foreign trade distortions have been similar and have grown slowly. This does not imply that matters haven’t worsened since 2013 – our research shows that the average number of foreign trade distortions faced by US and Chinese exporters has risen. 

Similar trade distortions bedevil Chinese and US exporters. The country annexes to our latest report also reveal that just under of quarter of US and Chinese exporters compete in foreign markets against subsidised local rivals. A sixth of US exports face tariff increases imposed since November 2008 that are still in force; for China nearly 32% of their exports are exposed to higher border taxes. American exports are more exposed to competition against rivals receiving state-provided export incentives – 67.9% versus 61% for China. If Beijing and Washington looked for common ground on a new agenda for global trade reform, they would find it. 

Figure 1 The build-up of protectionism over the past ten years means that 75-80% of Chinese and American exports now face trade distortions in foreign markets

Misplaced criticism from Trump of G20 partners

Table 1 sheds light on how much the obstacles put in place over the past decade by G20 members currently limits access to their markets by US and Chinese exporters. These obstacles include not just import restrictions but also subsidies to import-competing firms that enable them to maintain their market share, thereby putting a crimp in foreign sales. The table reports for each G20 member the share of bilateral exports to their markets from China and from the US that face discrimination which was still in force in November 2018.

Table 1 Over the past ten years only Australia, Japan, Korea, and Mexico have put in place market access distortions that cover less than a third of both China and US bilateral exports

In the ten years since the first G20 Leaders’ Summit, such is the accumulation of protectionist silt into the world trading system that only four G20 members (Australia Japan, Korea, and Mexico) have erected obstacles covering less than a third of bilateral exports from China and the US. In contrast, over 80% of China’s bilateral exports to the EU members of the G20, India, and Indonesia face one or more trade distortions that are still in effect. For the US, over 80% of bilateral exports to India and Indonesia now face one or more trade distortions.

Curiously, the G20 members subject to more withering criticism from the Trump administration have tended to erode US market access by less. At most one half of US exports to the four EU members of the G20 currently face trade distortions, each at or well below the average for other G20 members. Another frequent target of US criticism – Japan – has imposed trade distortions covering the smallest percentage of US exports among G20 members. Moreover, the three G20 members that the US has renegotiated free trade agreements with (Canada, Korea, and Mexico) pulled down the average for the G20 for the share of bilateral trade exports affected. To what extent is evidence on the scale of trade distortions driving US trade policy priorities and rhetoric?

Limited upside to Brazen Unilateralism

A feature of current US trade policy is to apply bilateral pressure on trading partners, with the goal of getting that partner to reduce or eliminate trade distortions. In the limit how far can public bilateral threats of unilateral action reduce the overall exposure of US exports to foreign trade distortions, bearing in mind that a given shipment from the US may face trade distortions implemented by more than one government? The latter clause is important. For example, a US firm exporting tractors to Brazil may encounter higher import tariffs in Brazil and compete against a Japanese rival that has received state-provided trade finance. If the US were able to persuade Brazil to eliminate the import tariff, then this particular bilateral export flow from the US to Brazil would still be distorted by Japan’s export incentive. 

This observation has two implications. First, the share of US exports to a particular trading partner’s market facing locally imposed trade distortions will overstate the maximum freeing up of US exports that would result if Brazen Unilateralism were completely successful in removing those distortions. Second, for those trading partners of the US that use tax incentives and the like to bolster their exports, the size of their home markets understates their potential threat to US export sales. 

To explore this matter, we calculated how much lower the share of US exports facing foreign trade distortions around the world would be if, in turn, every other G20 member eliminated all of their discrimination against foreign commercial interests. We repeated the same analysis for China. In Figure 2 we identify those G20 members where eliminating their discriminatory trade practices would reduce overall Chinese or US export exposure by more than one basis point (0.01).  

Figure 2 At most successful bilateral pressure from the United States would reduce its export exposure to trade distortion by less than 12 basis points

If US bilateral pressure on China were ‘successful’ (taken to mean China eliminated all of its policies harming foreign commercial interests) then the share of US exports facing trade distortions would fall by 11.1 basis points. Successful bilateral pressure on the EU would reduce overall US export exposure to foreign trade distortions by 5.2 basis points. While these are not trivial amounts, they imply that over two-thirds of US exports would still face one or more trade distortions in foreign markets. 

Since bilateral pressure is unlikely in practice to result in all trade distortions being eliminated by a US trading partner, the estimates in Figure 2 overstate the likely upside from the current confrontational approach of the US. Given years of covert protectionism has resulted in a patchwork of overlapping trade distortions, bilateral approaches to lifting them can only deliver limited expansions of the share of unimpeded trade. Brazen Unilateralism is not the antidote to a decade of covert protectionism. 

For China the elimination of discriminatory trade practices by the EU and India would reduce Chinese exporter exposure to trade distortions the most. Even so, the gains are a fraction of the total Chinese exposure to such distortions worldwide that has accumulated over the past ten years. Remarkably, if the US were to eliminate all trade distortions harming Chinese exports, then the share of Chinese exports facing no trade distortions would rise by less than 2 basis points. A Chinese variant of Brazen Unilateralism wouldn’t work either.

Making the most of the truce

These findings have important implications for the fragile trade truce between China and the US. For sure, an accommodation between these trading powers must be found that addresses some of their bilateral grievances. However, a bigger opportunity presents itself: to define a constructive new agenda for global trade reform. No one should be under any illusion about this coming to pass, not least given the personalities and other geopolitical factors at work. Indeed, the coincidence of interests presented here makes the descent into bilateral trade war all the more exasperating.  

References

Bown, C and S Keynes (2018), “What Would a Trump-China Deal Look Like?”, PIIE Trade Talks Episode 65.

Donnan, S (2018), “Trump and Xi's Truce Risks Extending, Not Ending Trade War”, Bloomberg, 3 December.

Evenett, S and J Fritz (2018), Brazen Unilateralism: The US-China Tariff War in Perspective, The 23rd Global Trade Alert Report.

Kennedy, S (2018), “In the U.S.-China Dinner Episode, Trump Wins by a Hair”, CSIS Commentary, 3 December.

Politi, J (2018), “Trump and Xi face hurdles in trade talks after fragile tariffs truce”, Financial Times, 2 December.

Endnotes

[1] The Global Trade Alert database, upon which this analysis is based, tracks the implementation of 61 types of public policy. The imposition of health, safety, or performance standards on imported agricultural and manufactured products as well as the coming into force of new regional trade agreements do not count towards the statistics reported here, even though some trade policy analysts view the implementation of such policies as discriminatory. 

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Topics:  International trade

Tags:  China-US trade war, unilateralism, Trump

Professor of International Trade, University of St. Gallen; Research Fellow, CEPR

Max Schmidheiny Foundation Research Fellow, University of St Gallen

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CEPR Policy Research