It’s Uncertainty About Idiot Politicians, Not Trade Restrictions Themselves, Which Is So Damaging

If someone comes out with a dingbat policy – say, we should all tax ourselves more for our temerity in buying from Johnny Foreigner – then that’s bad. But if we’ve had a series of dingbat policies then the truly damaging part becomes the uncertainty of what he next piece of dingbattery is going to be. Rather the problem with all politically directed policy of course, it’s terribly difficult to gauge how stupid the politicians are actually going to be:

Misdirection and the trade war malediction of 2018: Scaling the US–China bilateral tariff hikes
Simon Evenett, Johannes Fritz 01 July 2019

What is the practical and intellectual significance of the Sino-US tariff hikes of 2018? This column, taken from a recent Vox eBook, argues that the uncertainty engendered by the trade tensions is likely to have had a larger economic impact that the direct restrictive effect on international trade. The intellectual significance, meanwhile, lies in prompting the questions of what actions constitute a trade war and of whether trade policy analysts, in focusing on instances of brazen protectionism, have failed to spot more far-reaching commercial policy developments.

Misdirection is said to be an important element in the magician’s toolkit. Dariel Fitzkee, who made important contributions to the theory of magic, once wrote “The true skill of the magician is in the skill he exhibits in influencing the spectators mind” (Fitzkee 1975). President Trump has sought to persuade US and other interests that unfair Chinese trade practices are the source of American economic malaise and that the remedy is to impose tariff hikes on Chinese exports so as to induce policy change in Beijing.

But has there been another form of misdirection? The overt nature of Trump’s 2018 tariff hikes against Chinese exports have been taken by many trade policy analysts as the most profound challenge to the existing order of trade rules witnessed since the creation of the WTO. These analysts have focused on tariff increase that affect a bilateral trade flow which amounted to just 4.2% of world trade in 2017. To others, President Trump’s behaviour is such an exceptional case that the system cannot be faulted just because it could not deter such extraordinary behaviour.

In this chapter we present evidence that casts doubt on the latter interpretations of recent Sino-US trade tensions.1 We do so by contrasting the magnitude of the trade covered by the US-China tariff increases in 2018 with the amount of cross-border trade affected by other policy distortions (i) between those two countries in 2018, (ii) between those two countries since 2009 (facilitating a comparison between the 2018 tariff increases and the installed base of protectionism affecting US-Chinese bilateral trade), and (iii) compared to the import distortions implemented worldwide since 2009. Doing so, essentially, puts the so-called trade war of 2018 in perspective.

Sino-US bilateral trade impediments implemented in 2018

Using information in the Global Trade Alert database on public policy interventions implemented by the Chinese and US governments during 2018, almost all of which were documented from official sources,1 plus detailed United Nations trade data on goods trade,2 we computed the total value of Chinese exports (using 2017 data) that faced US tariff increases in 2018, that faced other US trade policies that affected only China in 2018, that faced US tariff increases in 2018 that affected multiple countries (including, clearly, China), and that faced other non-tariff US policies that affected multiple countries in 2018. We also computed the same totals for US policies implemented in 2017 (using 2016 trade data) and during the second Obama administration (reporting the average trade affected during the relevant four-year term.)

The amounts of Chinese exports affected is presented in Figure 1. The tariff increases that targeted Chinese exports in 2018 stand out in comparison to other US trade policy interventions affecting China in 2018. Still, such was the scale of the US trade policy interventions against Chinese exports in 2018 that a total of $369 billion of the latter were affected, nearly $100 billion larger than the headline figure of $275 billion reported in many newspapers.

In another sense 2018 stand outs: over four times as much Chinese exports faced new trade distortions implemented by the US in 2018 than in 2017 and during the second Obama administration. On these statistics, then, there appears to be a break in US trade policymaking towards China.

Figure 1 Seen in terms of flows of trade affected, US trade policy actions against China in 2018 were exceptional

Source: Evenett and Fritz (2018).

The parallel computations for Chinese commercial policy actions taken that disadvantage US exports are represented in Figure 2.3 Last year saw a shift in the form of Chinese actions taken against US exporters from policy instruments that affected multiple trade partners towards tariff increases that only target American exports. Comparing Figures 1 and 2 reveals that in 2018 Chinese exports affected by US harmful actions are at least three times US exports at risk by Chinese policies. Of course, the fact US exports to China are a fraction of those in the opposite direction limits the degree of Chinese retaliation on US exports. Still, that retaliation is partial.

Figure 2 Chinese partial retaliation to the US tariff hikes of 2018

Source: Evenett and Fritz (2018).

Seventy percent of US-Chinese bilateral exports faced trade distortions before the tariff hikes of 2018

The 2018 tariff hikes can be benchmarked against the installed base of US discrimination against Chinese exports, and vice versa. Using information on the US policy interventions that disadvantaged Chinese exports in force during the second Obama administration, during 2017, and during 2018,4 it is possible to gauge the extent to which the 2018 actions added to the overall coverage of Chinese exports facing US trade distortions.

Figure 3 By 2017 less than 30% of Chinese exports to the US did not face some policy-related trade distortion

Source: Evenett and Fritz (2018).

Figure 3 reveals that before the US tariff hikes of 2018, over 70% of Chinese exports to the US already faced one or more US trade distortions. Any notion that the ‘trade war’ has disrupted unfettered Chinese exports to the US should be set aside. So too should claims that previous US administrations had not taken extensive measures to limit Chinese commercial opportunities in the US market place. This is not to equate the height of the trade distortions affecting Chinese exports before and after 2018.

The comparable analysis of the stock of trade distortions facing US exports is presented in Figure 4. Coincidentally, only 30% of US exports to China did not face a policy-induced trade distortion before the tariff hikes of 2018. After those hikes the percentage of unfettered US exports fell to 8%, implying that the Sino-US trade tensions have reduced the degree of unfettered US market access to the Chinese markets more than in the opposite direction. Figures 3 and 4 imply there was plenty of scope for both protagonists to reduce obstacles to the other’s exports, should they decide to make the most of the negotiations launched after the last G20 Leaders’ Summit.

Figure 4 After last year’s Chinese tariff hikes, less than 8% of US exports to China competed on a level playing field

Source: Evenett and Fritz (2018).

The Sino-US ‘tariff war’ against the backdrop of creeping covert global protectionism

Further context can be provided by comparing the amount of bilateral goods trade covered by recent US-Chinese tariff increases with those covered by various trade distortions imposed worldwide over the past decade. Given the former trade tensions have not, fortunately, resulted in other countries raising trade barriers on anything like the scale of China or the US, then it is possible to assess the global significance of this spat. Could the US-China tariff hikes be a drop in the bucket in the ongoing resort to trade distortions by governments?

To fix ideas, we created an index of the total value of trade flows affected by different bilateral and global trade policy developments. Throughout we set that index to 100 for the total value of Chinese and US goods exports facing tariff increases imposed by the other in 2018. Figure 5 compares the total amount of bilateral Sino-US goods exports facing tariff increases imposed by the other for the years since 2009. Noting that the vertical axis in Figure 5 uses a logarithmic scale, we confirm that 2018 involved an unusually large amount of goods exports affected by US tariff increases targeting China, and vice versa. This amount is then compared to the value of exports facing tariff hikes from any exporter, not just the US or China, shown by the light blue line. The latter line also spikes in 2014, the year when EU tariff preferences for Chinese exports were withdrawn. Other jurisdictions, then, have targeted Chinese exports on a wide scale but less brazenly.

Figure 5 In 2018 three-quarters of trade facing new import distortions had nothing to do with the Sino-US bilateral tariff hikes

Source: Evenett and Fritz (2018).

The total amount of exports affected by Sino-US tariff hikes (the dark blue line) pales into significance when compared to the amount of global exports affected by tariff increases of all types worldwide (the dark brown line) or the amount of global exports affected by a host of import distortions5 (the light brown line) in the decade since 2009. In 2018 the total amount of exports affected by Sino-US trade tensions amounted to less than 22% of the worldwide goods trade last year that faced some type of trade distortion in the importing jurisdiction. By focusing on the brazen protectionism of the Trump Administration in 2018 and Chinese retaliation, have trade policy analysts fallen for the trap of misdirection, that is, failing to spot more far-reaching commercial policy developments? And this discussion has focused on distortions to imports – over the past ten years, policies to goose exports have covered larger amounts of trade (Evenett and Fritz 2018).

Concluding remarks

In light of the statistics presented in this chapter, what is the practical and intellectual significance of the Sino-US tariff hikes of 2018? As a practical matter, the uncertainty engendered by these trade tensions – in particular, the fear that these tensions may spread and draw in other nations – is likely to have had a larger economic impact that the direct restrictive effect on international trade. For all the US’ and China’s heft, more than 95% of world trade takes place between other nations.

The intellectual significance of scaling the 2018 Sino-US tariff increases is two-fold. First, it begs the question of what actions constitute a trade war. Do bilateral tariff hikes constitute a trade war even if they only affect a small percentage of world trade? What about non-tariff distortions to trade? Clarity about definition is required before modelling can proceed.

Second, to what extent has our understanding of trade wars been skewed by an excessive focus on sharp changes in the more transparent trade policies? Have analysts given too much weight to the brazen protectionism of the Trump administration and overlooked other, larger policy-induced trade distortions? Doing so may skew the assessment of the effectiveness of the current trading rules in reining in protectionism. Or are statements such as that by Wilbur Ross, US Secretary of Commerce, that “trade wars are fought every single day” better characterisations of contemporary trade policy dynamics in an era of profound geopolitical and technological shifts? In which case, the Sino-US tariff hikes of 2018 could be the latest chapter in an increasingly distorted, yet nominally open, world trading system.

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So Mr. Trump’s heavy-handed use of tariffs is not tearing the global economy apart after all.