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China Trade War

Professor Alberto Cavallo and Research Associates Mariana Cal (Latin America Research Center) and Anne Laski prepared this case with the assistance of Fernanda Miguel and Florencia Hnilo. This case was developed from published sources. Funding for the development of this case was provided by Harvard Business School and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2019 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

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A N N E L A S K I

The U.S. – China Trade War

When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore – we win big. It’s easy! 1

— Donald Trump @realDonaldTrump, 5:50 am – March 2, 2018.

On December 1, 2018, U.S. President Donald Trump and China’s Leader Xi Jinping faced each other

across a dinner table during a G20 meeting in Buenos Aires, Argentina (see Exhibit 1). After what Trump called an “amazing and productive meeting,” the two leaders announced a truce in the ongoing trade war between their countries, following months of accusations, tariffs, and mounting retaliation. The U.S. agreed to postpone for 90 days an increase from 10% to 25% in tariffs applied to a large number of Chinese goods, which had been initially scheduled for January 1, 2019. In exchange, the White House announced that China would purchase a “very substantial” amount of agricultural and other products from the United States, adding that it expected the two nations “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.” 2 The Chinese government simply stated that it was “willing to expand imports according to the needs of the domestic market” and that it hoped to “reach a concrete agreement on mutual benefit and win-win as soon as possible.” 3

Despite Trump’s assurances that China was sending “very strong signals” after the meeting, 4 the outcome of the negotiations was highly uncertain. Would China provide enough concessions to satisfy the demands of the U.S.? Would the U.S. back down? Or would the trade war escalate, causing unprecedented disruptions -and opportunities- in global trade patterns?

An Overview of Modern U.S.-China Trade (1978-2016) It doesn’t matter whether the cat is black or white, as long as it catches mice.5

— Deng Xiaoping – Chinese Leader, 1962

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In February 1972 China’s Premier Zhou Enlai and Chairman Mao Zedong met with U.S. President Richard Nixon in Beijing. The trip, which Nixon called “a journey of peace”, was a surprising attempt to rebuild the ties between the two nations after over twenty years of severed diplomatic and economic relations.6 A few months earlier, the U.S. government had ended the long-standing trade embargo, enabling U.S. firms to export a small number of goods to China –including farming, manufacturing, and office machinery, as well as primary products, fertilizers, coal, and some chemicals. 7 Yet for most of the 1970s, trade between the countries remained severely limited. Things started to change after Mao’s death in 1976 and Deng Xiaoping’s rise to power in 1978, when China embarked on a path of economic liberalization and unprecedented economic growth (see Exhibit 3). Formal diplomatic relations between the U.S. and China were restored in 1978, and trade volumes between the two countries grew from $1.1 billion U.S. dollars in 1978 to $4.8 billion in 1980.8

In the early 1980s, China accelerated its trade reforms to emulate the successful export-led growth experiences of other Asian countries such as Hong Kong, Japan, Singapore, and Taiwan. In particular, China created Special Economic Zones in coastal areas, which were exempt from central plans, labor regulations and some taxes, and immediately became profitable export hubs.9 More Chinese companies were allowed to export and import directly in the mid-1980s, taking advantage of relaxed regulations and tax benefits. China also allowed U.S. companies to invest in joint-ventures with Chinese firms, as Deng publicly declared that China “needs to give up portions of the domestic market in exchange for advanced technologies we need.”10 At the same time, a bilateral trade agreement signed in 1980 granted China “Most Favored Nation” treatment, effectively reducing tariffs on Chinese imports into the U.S. (although this status was conditional on a congressional report on human rights abuses, which in practice introduced some uncertainty). At first, Chinese exports focused on textiles and garments, but over time exports became more complex, particularly after the U.S. relaxed controls on American exports of advanced technology, such as jet engines and computers for both commercial and military use. 11 (See Exhibit 4.) China’s exports were also aided during this time by a dramatic depreciation of the Chinese currency, which went from 1.5 yuans per dollar in 1980, to 8.4 yuans per dollar in 1995 (see Exhibit 5).

U.S. imports from China exceeded exports for the first time in 1985, and the U.S. trade deficit with China continued to grow consistently over the years (see Exhibit 6). In 1986, China applied to join the General Agreement on Tariffs and Trade (GATT), the World Trade Organization’s (WTO) predecessor, but its membership was rejected.12 The U.S. and other trading partners were skeptical of China’s willingness to reduce its import tariffs and licensing requirements, as well as its reluctance to allow foreign banks and investors to hold controlling stakes in Chinese companies.a U.S.-China relations were further strained after the Tiananmen Square protests in 1989.b The U.S. government chose to show its disapproval by suspending weapon exports as well as military leaders’ visits from both countries.13

During the 1990s, China increased its efforts to modernize its economy with more policy changes, including new regulatory and administrative frameworks for its banking industry, taxes, and corporate governance systems. China’s leaders also decided to expand the country’s involvement in global trade by doubling-down on their attempt to join the WTO. 14 A major hurdle was China’s request for developing country status for some of its economic sectors -so that they would have more time to meet WTO standards- which some large WTO members, including the European Union, Japan, and the a For a more detailed account of Chinese reforms during 80s and 90s, see:Vietor, Richard, and Julia Galef. “China: ‘To Get Rich Is Glorious’.” Harvard Business School Case 707-022, November 2006. (Revised October 2017.)

b Following popular demonstrations for a number of weeks, China’s Army stormed onto Tiananmen Square, killing an undisclosed number of civilians (estimates range from hundreds to thousands). The protests also led to 10,000 arrests. https://edition.cnn.com/2013/09/15/world/asia/tiananmen-square-fast-facts/index.html, accessed in February 2019.

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United States, initially refused to accept.15 Finally, in December 2001 China managed to join the WTO after signing an agreement with the U.S. that reduced Chinese tariffs on farming commodities, eliminated tariffs on IT products, and promised to do away with foreign equity restrictions for banking, insurance, distribution, telecom, securities, professional, audiovisual, and travel services.16

China’s WTO membership led to a boom of its exports all over the world, including those to the U.S. (see Exhibit 7). As one observer remarked, “American imports from China rose by 92% in the three years following China’s WTO entry, having risen by just 46% in the three previous years.” 17 By the time President Barack Obama was elected in 2008, the U.S. current account deficit with China had reached $296 billion, about half of its total current account deficit with all countries (see Exhibits 7 and 8). The Global Financial Crisis in 2008-2009 resulted in a temporary reduction of the current account deficit of the U.S. with China, but the Chinese economy recovered quickly and exports to the U.S. continued to grow. Over time, economists increasingly fretted about the problem of “Global Imbalances,” with the U.S. experiencing a persistent current account deficit financed by Asian countries with unusually high savings rates and large currency account surpluses. 18 China, in particular, had accumulated a massive amount of U.S. Treasury securities (see Exhibit 9), and many observers worried about the potential instability that sudden changes could have on the value of the dollar and the U.S. economy.19

The Obama Administration pursued dozens of trade cases against China at the WTO, with little success. By 2016, Chinese share of global exports reached 13.8%, the highest level experienced by any country since the U.S in 1968.20 That same year, the U.S. tried to prevent China from setting trade rules in the Asia-Pacific region by signing a multi-lateral trade agreement called the Trans-Pacific Partnership (TPP), which included 11 other countries and accounted for nearly 40% of global economic production. China had its own trade agreement for the region– called the Regional Comprehensive Economic Partnership (RCEP) – which included Indonesia, Malaysia, the Philippines, Singapore, Thailand, Japan, Korea, Australia, New Zealand, and India, and represented almost 27% of the world’s GDP. Like the TPP, the RCEP focused on trade in goods and services, investments, and dispute settlement mechanisms, but excluded regulations on labor, food safety, and environmental standards. 21

By the end of Obama’s presidency, the level of U.S. skepticism toward China’s policies and their impact on the U.S. economy was on the rise, so in the 2016 presidential election, Donald Trump’s complaints about China fell on sympathetic ears.22

The U.S.-China Trade War We can’t continue to allow China to rape our country, and that’s what they’re doing. It’s the greatest theft in

the history of the world.

— Donald Trump, campaign rally, May 2, 2016.23

Trump’s Accusations

As early as in 2011, Donald Trump shared his unforgiving views on China via his Twitter account: “China is neither an ally nor a friend –they want to beat us and own our country.”24 Over time, his language and tone became increasingly hostile, often placing the blame on prior U.S. administrations for being too soft on China. In 2012, he tweeted “China is robbing us blind in trade deficits and stealing our jobs, yet our leaders are claiming ‘progress’ SAD!” 25 While some of the accusations seemed outrageous, such as when he tweeted in 2012 that “The concept of global warming was created by and

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for the Chinese in order to make U.S. manufacturing non-competitive” 26, the bulk of his arguments were echoing complaints that resonated with a large share of the U.S. population.

Currency Manipulation One of the earliest accusations leveled by Trump on China was that it devalued its currency to gain an “unfair” trade advantage. The claim was not new, dating back to at least the early 2000s. In 2009, Obama’s Treasury Secretary had openly accused China of resorting to “currency manipulation” by fixing the exchange rate. After a G20 summit, Obama stated that China’s currency was purposefully “undervalued” to foster exports, a practice that, he claimed, annoyed other Chinese trade partners as well as the United States. However, the Treasury Department chose to maintain the formal assertion that China was not a “currency manipulator,” a charge that would have forced the U.S. Congress to take trade measures against China. 27

As a candidate, Trump fully embraced the accusation. During a campaign rally on June 2016, he stated, “The single biggest weapon used against us and to destroy our companies is devaluation of currencies, and the greatest ever at that is China. Very smart, they are like grand chess masters. And we are like checkers players. But bad ones.” 28 Trump later promised that, if elected, he would formally label China as a “currency manipulator.” 29 Once elected, he broke this promise. In the first few months of his presidency, Trump prioritized China’s support in negotiating a deal with North Korea on their nuclear weapon development program. In April 2017 he tweeted “Why would I call China a currency manipulator when they are working with us on the North Korean problem? We will see what happens!” 30

China repeatedly argued that the currency manipulation accusation was groundless. Those supporting this view could point out to the fact that the Renminbi was allowed to appreciate approximately 25% between 2005 and 201531. But critics argued that the Chinese currency was still “undervalued” relative to its worth in a free-floating market. Indeed, the Chinese government intervened extensively in the foreign exchange market during this time, buying foreign exchange reserves and implementing strict capital controls.32 Under pressure, in 2015 China attempted to liberalize its foreign exchange market –and contrary to what many in the U.S. expected- the currency’s value immediately plummeted. To some observers, this was an indication that the Renminbi was not really undervalued, otherwise “it would have risen instead.”33 Consistent with this view, in subsequent years the IMF often concluded that China’s currency was “broadly in line with fundamentals.”34 In 2018, Premier Li Keqiang publicly stated: “Persistent depreciation of the RMB will do more harm than good to China. Therefore, we will not engage in competitive devaluation” 35, echoing similar statements made by other Chinese leaders in the past.

IP Theft and Forced Technology Transfers Trump forcefully accused China of copyright infringements, cyberespionage, and forced technology transfers, 36 amplifying similar claims raised by previous administrations. Copyright infringements and pirated goods were an old complaint about China, which some estimated to cost over $255 billion to the U.S. each year.37 Chinese officials acknowledged that there was “a lot of room for improvement” and frequently promised more crackdowns on pirated goods and exports.38

Cyber-espionage had already raised tensions between the two countries in 2015 when the FBI accused China’s government of “playing a significant role” in a 53% surge in economic espionage cases. The U.S. threated China with sanctions, but after a short negotiation, Obama and Xi signed an agreement to stop government-sponsored cyberattacks “that steal corporate records for economic benefit.”39 Hackers were not the only issue. Often the Chinese government was accused of supporting firms blamed for stealing intellectual property, such as in the case of technology giant Huawei. For years, the U.S. labeled the company a national security threat, accusing it of selling equipment to tap

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or disable U.S. communication networks. 40 The company repeatedly denied the accusations, as well as any connections to the Chinese government. 41

Trump was particularly adamant on denouncing China’s “forced technology transfers”: the implicit requirement that U.S. companies share technology with Chinese firms in order to secure market access. The practice was old and many firms took it as a normal cost of operating in China, but complaints increased as China became a strong rival in sectors such as chemicals, computer chips, and electric vehicles. The Chinese government argued that the partnerships are voluntary and “American companies in China have received huge returns […] and are the biggest of technological cooperation.” 42 But critics pointed to the Chinese government’s attempts to pressure “U.S. partners in joint ventures to relinquish technology, using local courts to invalidate American firms’ patents and licensing agreements, dispatching antitrust and other investigators [as a form or retaliation], and filling regulatory panels with experts who may pass trade secrets to Chinese competitors.”43

VP Mike Pence summarized the administration’s position on these issues in November 2018:

To win the commanding heights of the 21st-century economy, Beijing has directed its bureaucrats and businesses to obtain American intellectual property—the foundation of our economic leadership—by any means necessary. Beijing now requires many American businesses to hand over their trade secrets as the cost of doing business in China. It also coordinates and sponsors the acquisition of American firms to gain ownership of their creations. Worst of all, Chinese security agencies have masterminded the wholesale theft of American technology –- including cutting-edge military blueprints. And using that stolen technology, the Chinese Communist Party is turning plowshares into swords on a massive scale.44

At the center of China’s recent push to “take over, economically, the world” (as Trump put it in a news conference) 45, was the “Made in China 2025” initiative, launched in 2015 by Xi Jinping. The official goal was to modernize Chinese manufacturers by providing state support and funding, pushing them to become global technology leaders in areas such as electric vehicles, aerospace, and robotics. According to the WSJ, by late 2017, “the Import-Export Bank of China had supported China 2025-related lending of nearly 700 billion yuan ($102 billion) according to state media. Funding from other government sources adds up to hundreds of billions more.” 46 As trade tensions escalated, Chinese leaders stopped mentioning the plan, and Trump publicly declared, “China got rid of the China ’25 because I found it very insulting’.” 47

Stealing Jobs During his campaign Trump often claimed that “disastrous trade deals” had led to the loss of millions of manufacturing jobs in the U.S. As a president, he continued to accuse China of causing the demise of the U.S. manufacturing sector. The logic was simple: facing competition from inexpensive Chinese products, many American manufacturing firms had shut down or outsourced jobs to China. In January 2018, Trump stated: “We’ve lost, over a fairly short period of time, 60,000 factories in our country — closed, shuttered, gone. Six million jobs, at least, gone.” While the numbers were not precise, there was truth in his statement. U.S. manufacturing jobs dropped 34% in the 1998-2010 period 48, and academics had documented the connection to China’s rise in manufacturing. David Autor, an MIT economist, had argued that “It’s certainly not the case that all of U.S. manufacturing job loss after 2001 is due to China’s WTO accession…but conservatively, 40 percent of the decline between 2001 and 2007 can be attributed to that source.” 49

However, some analysts argued that Trump’s view of China’s labor market and its impact on U.S. jobs was outdated. Wages had risen significantly in China over the years, and according to a Boston Consulting Group report in 2015, “the costs of manufacturing in China’s major export-producing zone

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were [then] almost the same as the United States.”50 Others believed that there was nothing the U.S. could do to reverse the trend. The editor of The Economist, for example, argued that “the goal of rolling back decades of American deindustrialization is a pipe-dream” and that “should America succeed in forcing supply chains back onshore, it will find that many fewer jobs are attached, because of rapid automation.” 51

Lack of Reciprocity Trump’s remarks for more fair trade were often linked to the need for symmetry and reciprocity in the bilateral trade relationship. For example, in August 2018 he tweeted: “When a car is sent to the United States from China, there is a Tariff to be paid of 2 ½%. When a car is sent to China from the United States, there is a Tariff to be paid of 25%. Does that sound like free or fair trade. No, it sounds like STUPID TRADE – going on for years!”52 The average tariff in China (weighted by sectoral trade volumes) was indeed much higher than in the U.S., but it had consistently fallen over time -particularly after China joined the WTO (see Exhibits 2 and 3). In fact, using this metric, China could claim that is was now less protectionist than other large developing countries such as India and Brazil (see Exhibit 10).

Transfer of wealth Trump often argued that “China has been taking out massive amounts of money & wealth from the U.S. in totally one-sided trade…” 53 As its exports to the U.S. grew, China accumulated a massive amount of U.S. Treasury securities. In 2000, it held only 6% of all U.S. Treasury securities outstanding. By 2018, China was effectively the largest foreign creditor to the U.S. government, with 18% of all foreign holdings of U.S. Treasury securities. Trump’s supporters often argued that the same money the U.S. was paying to the Chinese was lent back to the U.S. to purchase even more Chinese goods and perpetuate the debt cycle. Others feared over China’s potential sale of its huge Treasury holdings, which would quickly raise U.S interest rates and affect U.S. monetary and fiscal policies.

Chinese leaders proclaimed that they wanted to ensure “mutually-beneficial and win-win cooperation between China and the U.S. in trade and economy,” as “China benefits remarkably from the strong synergy, while the U.S. also reaps extensive economic benefits from the opportunities and results generated by China’s growth.” 54 China supporters argued that U.S. consumers were enjoying lower prices, an unprecedented amount of variety in consumer goods, and that the real cause of the U.S. trade deficit was the fact that China was able to produce the goods that the U.S. wanted to consume at a much lower cost.

Threat to National Security Despite their different approaches to diplomacy, both Obama and Trump faced Xi Jinping’s ambition for his country’s growing prominence on the global stage. As the world’s second largest economy, China cultivated its international economic influence by spearheading projects such as the Belt and Road Initiative and overtaking the rest of the world in overseas lending to developing countries. 55 The possibility that China could soon become the largest economy in the world raised many concerns in Washington. Indeed, in a controversial speech in November 2018, Vice President Pence labeled China as “the foremost threat to U.S. security” and even accused Beijing of interfering in America’s democratic process.56 Pence said the U.S. had hoped economic liberalization would bring it into an international partnership. One observer noted, “The American establishment believed that a more liberal China would be less likely to challenge the U.S. on the international stage… But political developments in Xi’s China have refuted the expectations of the liberal internationalist worldview that shaped successive American presidencies. China has not become more democratic. Nor is it any longer willing to live quietly within a U.S.-designed and dominated world order.”57

 

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The Trade War Escalates

“As the Chinese saying goes, it is only polite to reciprocate.”

— Statement of the Chinese Embassy in the United States58

Just a few days after taking office in January 2017, Trump announced that the U.S. was pulling out of the TPP and that he was considering the imposition of tariffs on imported aluminum and steel.59 Tensions subsided in the following months, when according to some observers “the more moderate views of his chief economic adviser Gary Cohn and senior adviser Jared Kushner, Trump’s son-in-law, have balanced the harder-line nationalist views of senior adviser Stephen K. Bannon and Peter Navarro, director of the National Trade Council.” 60

An auspicious moment came in April 2017, when President Xi visited the U.S. and met with Trump at his resort in Mar-a-Largo. The two leaders announced a framework for a 100-day plan that could ease economic concerns on both sides. Commerce Secretary Wilbur Ross and Vice-Premier Wang Yang were chosen to lead the talks between the two countries. Central to the discussions was the inexpensive Chinese steel that the U.S. negotiators believed was flooding global markets and putting U.S. steelworkers out of jobs. According to the WSJ, the motto of Mr. Ross’ negotiation team was “no steel, no deal.”61

After several months of negotiations, the Chinese eventually agreed to reduce production at a higher pace than they had previously promised. But in Washington, the proposal was labeled as “little more than a repackaging of past unfulfilled promises.” The negotiations ended, and Robert Lighthizer, a former steel-industry lawyer who, according to media reports, “resented how Chinese imports had battered his industrial clients,” became the new U.S. Trade Representative.62

Trump publicly appeared to be getting impatient. In August, his administration launched investigations under “Section 301 of the Trade Act of 1974” which “gives the U.S. Trade Representative broad authority to respond to a foreign country’s unfair trade practices.”63 Shortly after, the US International Trade Commission announced that imports of solar panels and washing machines had caused “serious injury” to the US, and recommended that President Trump imposed “safeguard” restrictions.64

In November, Trump visited China. The trip had raised expectations that the two countries could find ways to settle some of the trade tensions, but no significant deal was made.65 According to the Wall Street Journal, Lighthizer told Trump “They’re playing you,” and spoke so bluntly in the meetings that some of his Chinese counterparts claimed to be offended.66

On January 22nd 2018, President Trump introduced safeguard tariffs on $8.5 billion of solar panel imports and $1.8 billion in washing machines imports. These tariffs affected imports from all foreign countries, but the bulk of these came from China and South Korea.67 Both countries immediately filed complaints with the WTO. 68 (See Exhibit 11.)

In February, the Commerce Department released a report concluding that imports of steel and aluminum threatened U.S. national security by “weakening our internal economy” and “shrinking [our] ability to meet national security production requirement in a national emergency.” 69

On March 8th, President Trump announced a 25% tariff on steel imports ($10.2 billion in 2017) and a 10% tariffs on aluminum imports ($7.7 billion in 2017). These tariffs were imposed on imports from all countries, with a temporary exception granted to Mexico and Canada.70 The decision raised alarms in many countries, as only 2% of U.S. steel imports came from China at the time.71 Additional

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temporary exceptions were granted to the EU, and permanent exemptions were eventually granted to South Korea, Brazil, Argentina, and Australia. On June 1st, when the new tariffs took effect, Canada retaliated with tariffs on $12.8 billion of U.S. imports72, while the EU and Mexico each retaliated with tariffs on $3 billion of imported U.S. goods. In all cases, the retaliation tariffs affected a wide variety of goods, ranging from Bourbon to Harley-Davidson motorcycles.73

In early April, Trump publicly threatened to impose the first round of major tariffs specifically targeting Chinese goods. Treasury Secretary Steven Mnuchin, often described by the press as “a moderate looking for a deal,” convinced the president to approve a new trade mission to Beijing. The negotiating team included Lighthizer and White House trade advisor Peter Navarro, who in his 2011 book, “Death by China”, claimed that China’s “perverse form of capitalism combines illegal mercantilist and protectionist weapons to pick off American industries, job by job.” According to a media report, “On the first day of talks, Lighthizer presented U.S. demands that called China to reduce its $375 billion trade surplus with the U.S. by $200 billion within two years, to scrap policies and subsidies that supported favored industries, and to pledge not to retaliate.” The negotiations quickly fell apart, with Trump allegedly telling his advisors “Bring me tariffs.” 74

On June 15th, the U.S. formally announced the imposition of 25% tariffs on $50 billion of Chinese imports. On the same day, China announced a retaliation with almost identical trade volumes and implementation schedule. In both countries, the tariffs were introduced in two stages, with the first $34 billion imposed on July 16th and an additional $16 billion on August 23rd. The U.S. initially focused on intermediate goods, in an attempt to limit the impact on consumer prices. The Chinese targeted U.S. soybeans and vehicles but excluded aircraft.75 The soybean tariffs were particularly worrisome for the U.S., given that over 57% of all U.S. soybean exports ($30 billion) were going to China at the time. 76

On September 17th, the U.S. announced plans to impose a third round of tariffs affecting an estimated $200 billion of U.S. imports from China. The tariffs would be introduced at 10% on September 24th but were scheduled to increase to 25% on January 1st, 2019.77 China immediately promised to retaliate, but this time it could not match the volume of trade impacted, given that it only imported a total of $130 billion from the U.S. in 201778 (see Exhibit 4). By the time this new round of tariffs was implemented, approximately 55% of the total value of U.S. imports from China, and 85% of China’s imports from the U.S. were affected.

Chinese officials complained that “In its Section 301 report and other ways, the current U.S. administration stigmatizes China by accusing it of `economic aggression,’ `unfair trade,’ `IPR theft,’ and `national capitalism’. This is a gross distortion of the facts in China-U.S. trade and economic cooperation. This is disrespectful to the Chinese government and people as well as incompatible with the real interests of the American people.” 79 They also claimed that the investment and trade restrictions imposed by the U.S. “distort market competition, hamper fair trade, and lead to breakdowns in global industrial chains [that] are detrimental to the rules-based multilateral trading system and severely affect the normal development of China-U.S. economic and trade relations.” 80

According to China’s leaders, the Trump administration “has taken extreme trade protectionist measures, which have undermined the international economic order, caused damage to China-U.S. trade and trade relations around the world, disrupted the global value chain and the international division of labor, upset market expectations, and led to violent swings in the international financial and commodity markets. It has become the greatest source of uncertainty and risk for the recovery of the global economy.”81 In turn, China claimed to view Sino-American relations as key to “the well- being of the peoples of the two countries, but also world peace, prosperity, and stability. Cooperation

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is the only correct option for China and the U.S., and only a win-win approach will lead to a better future. China’s position is clear, consistent and firm.” 82

Impact on the U.S. Economy

China is targeting our farmers, who they know I love & respect, as a way of getting me to continue allowing them to take advantage of the U.S. They are being vicious in what will be their failed attempt. We were being nice – until now! China made $517 Billion on us last year. 83

— Donald Trump @realDonaldTrump, July 25, 2018.

While the Trump administration may have expected that higher tariffs would lower the country’s trade deficit, the opposite happened in the third quarter of 2018. The U.S. deficit with China rose to $106 billion, compared to $92.9 in the same quarter of 2017 (see Exhibit 6). This increase resulted from a remarkable rise in U.S. imports from China. Some analysts argued that importers were increasing orders and inventories to avoid the anticipated escalation in tariffs in the following quarter. Others believed that Chinese firms were able to find replacements for U.S. agricultural products, but that American importers were having a harder time replacing Chinese goods. Some even argued that, while the U.S. government could not stop U.S. firms from buying Chinese products, “Beijing can simply order its state-controlled companies to switch their trading patterns.”84