Since 2018, during the Trump presidency, the trade war initiated an era aimed at readjusting trade imbalances and reducing reliance on Chinese manufacturing. The questions remain whether the U.S. can successfully decouple from China and which markets could benefit the most from this shift. In what may be his final year as president, Joe Biden has given a new turnaround to Sino-American relations.
Post-2018, the trade deficit experienced notable fluctuations, initially declining to $342.63 billion in 2019, likely influenced by the onset of the trade war measures, particularly increase in tariffs of selected imported goods from China. The deficit further decreased to $307.97 billion in 2020, coinciding with the global trade disruptions caused by the COVID-19 pandemic and it sharply dropped to $279.42 billion in 2023. Numbers show that the series of measures to decouple from China have been effective. So now, what’s next for China?
United States goods trade deficit with China from 2013 to 2023 (in billion U.S. dollars):
Statista
The current conjuncture of the Chinese economy, which was severely impacted by the Covid pandemic have also contributed for American companies to reconsider their China strategy and explore other markets. Mexico, and Southeast Asian countries are the ones that can further benefit from this narrative. Vietnam and Thailand are already a major beneficiary of the U.S.-China trade war, attracting significant foreign direct investment as companies seek to relocate their manufacturing operations. Thailand alone, has reached $18.6 billion in foreign direct investment reached last year, a 72% increase in value compared to 2022.
Mexico has also benefited from its proximity with the US. In response to the uncertainties arising from the US-China trade war, Stanley Black & Decker closed a power tool factory in Shenzhen, China, shifting some of its manufacturing operations from China to Mexico.
The newly announced revised tariffs on imports of Chinese goods under Section 301 of the Trade Act of 1974 can have significant impacts on both the U.S. and China. Some tariffs reach as high as 100%, increasing tariffs on $18 billion worth of Chinese imports. Given that China now accounts for over 60% of all global EV sales, the EV industry might suffer the most from these imposed tariffs. This is compounded by the fact that the Chinese EV industry is under scrutiny from the European Union, with the European Commission initiating an investigation into three Chinese EV car manufacturers over state subsidies, which may explain their lower prices compared to European manufacturers. This news comes amid efforts by BYD, China’s most prominent EV company, to invest in a new energy vehicle factory in Hungary in the coming years. Despite losing significant market share and initiating a series of layoffs, and acting on the opposite director of other American companies, Elon Musk visited China in late April to lobby for Tesla’s autonomous driving technology.
The new tariffs on imports of Chinese goods announced by Biden are:
100% on electric vehicles, up from 25%
50% on solar cells, up from 25%
50% on syringes and needles, up from zero
25% on lithium-ion batteries for electric vehicles, and battery parts, up from 7.5%
25% on certain critical minerals, up from zero
25% on steel and aluminum products, up from a range of zero to 7.5%
25% on respirators and face masks, up from zero to 7.5%
25% on cranes used to unload container ships, up from 0%
50% on semiconductors, up from 25%, by 2025
25% on other lithium-ion batteries, by 2026
25% on natural graphite and permanent magnets, up from zero, by 2026
25% on rubber medical and surgical gloves, up from 7.5%, by 2026
As China moves towards becoming an innovation-driven economy, the American government has targeted two of the major industries China is thriving in: microchips and electric vehicles. However, it’s worth mentioning that the current discussions of banning ByteDance’s TikTok in the country are also part of Biden’s containment policy. TikTok is, though, the cherry on the ice cream. The company is at risk of losing its 102.3 million monthly active users in the US due to the argument that the Chinese state, under national security laws, can access their user information. But politics, protectionism over American companies, and, of course, the trade imbalance also play important roles in this decision.
With the option of selling TikTok, ByteDance will most likely give up its business in the US. It is known that American social media and search engines like Google and Meta have long struggled to penetrate the Chinese market. Therefore, TikTok’s case can be seen as a payoff for their years-long struggle.
As in the past, China may soon announce a retaliation to the new tariffs, but a reconfiguration of China’s relations with both the US and Europe is necessary. Regarding the tariff increase, the Chinese foreign ministry Wang Yi has said “This is the most typical form of bullying in the world today. It shows that some people in the United States have reached the point of losing their minds in order to maintain their unipolar hegemony.”
Xi Jinping has recently concluded a five-day tour to France, Serbia, and Hungary, while reportedly Joe Biden’s last call with President Xi happened on April 2.
The tensions between China and the US reflect broader economic shifts under a new definition of strategic partnership. With its emphasis on innovation and technological advancement, China could look towards emerging economies, Africa, Southeast Asia, and the Middle East, to expand its presence and forge new trade alliances, while Latin America may pose challenges due to the natural relations of some countries with the US. The US, on the other hand, will enhance its cooperation with allies, shifting manufacturing efforts to emerging markets, which now have the advantage of being more cost-effective than China.
China is confronted with a daunting challenge, as it faces the risk of diminishing its role as the world’s manufacturing hub. The country needs to redefine its foreign affairs strategy amidst growing animosities with the US, Europe, India, and Australia, if it aims to uphold its significance in the global economy.
