The world’s largest and second-largest economies have been locked in a bitter trade dispute since the Trump Administration has acted upon protectionist policies, with particular impact to the Southern California economy, one of the nerve centers of trade with East Asia. CSUF Mihaylo College Economics Associate Professor Pedro Amaral and Lecturer Aaron Popp examined the trade dispute and where it might go next at a Nov. 28 panel discussion.
At a summit meeting on the sidelines of the G20 conference in Buenos Aries, U.S. President Donald Trump and Chinese President Xi Jinping have agreed to a temporary truce in an escalating trade dispute between the world’s top economies.
As much as $250 billion in Chinese imports and $110 billion of U.S. exports have been tariffed since Trump mandated the first of three rounds of tariffs on Chinese imports on July 6, following an investigation by the U.S. Trade Representative. The East Asian nation has countered with tit-for-tat duties on American exports.
“About 46% of total Chinese imports are being tariffed, but L.A. is serving a smaller percentage of those products [that are being tariffed] – 41%. But any later round of tariffs will have a harder impact on the local economy,” said Aaron Popp, Mihaylo College economics lecturer, of the situation and its Southern California impact at a Nov. 28 symposium, sponsored by the CSUF Economics Association.
Popp has examined the particular impact of the tariffs on the Los Angeles trade region, which includes the physical ports of entry on the Mexican border near San Diego; the seaports of Los Angeles, Long Beach and San Diego; and all airports in the southern part of the Golden State. Due to its economic leadership and favorable West Coast geographic location, this region services about 30% of U.S. imports from China and 20% of American exports to the East Asian giant, leaving the local metropolitan areas heavily exposed to impacts of the trade dispute on both economic activity and employment.
Noting that the first round of tariffs – which covered $34 billion worth of Chinese imports – accounted for 6.4% of nationwide Chinese imports but only 4.2% of those passing through the region, Popp recognizes that the impact on the local area was proportionally smaller, largely due to the focus on intermediate goods or components of goods, rather than complete goods.
Should the Trump Administration eventually follow through on its previously threatened tariffs impacting all Chinese imports, Popp sees a much larger impact on the Southland.
“We are importing many finished manufactured goods and resources, while unfinished products are handled in other ports,” he said. “President Trump has threatened to tariff all of Chinese trade as a fourth round of tariffs if the dispute continues. If this occurs, the last and later round of tariffs would include more final, finished goods, having a larger bite than the first rounds.”
Popp’s research, conducted through the college’s Woods Center for Economic Analysis and Forecasting, examined the particular goods and services categories tariffed and their actual value, comparing it with data for the Southern California region to assess local impact.
The Roots of the Trade Dispute with China
Mihaylo College Associate Professor of Economics Pedro Amaral noted that trade tensions between China and the rest of the world, particularly the U.S., have been rising for some time.
“China has had an incomplete transition into capitalism, which the West still ponders about China,” he said. “We used to think that once they got into free trade, they would become a freer society upon the embrace of the market economy. But they haven’t, which is something my liberal mind struggles with. They continue to be a centralized economy, though a different one than when they were a traditional Communist economy.”
Dubbing this novel approach “state capitalism,” Amaral pointed to the stated Chinese development model, which supports scientific and information technology progress for state-run enterprises, at the expense of private and certainly foreign firms.
“The Chinese want this industrial policy, and this clashes with U.S. interests and Chinese obligations under the [World Trade Organization],” he said. Since China joined the world trade body in 2001, the U.S. has levied 23 disputes against that country. “China has complied with many of the tariff reduction agreements, but the problems have come from other areas, such as intellectual property rights, export subsidies and technology sharing. These are just half the disputes filed against China. The rest of the world filed the other half.”
The status of U.S.-China trade is certainly paramount to the global economy. While the U.S. exports about $130 billion in goods and $60 billion in services to China each year, imports account for more than $500 billion, resulting in a trade deficit of 2% of American GDP.
But fears of a trade imbalance may be overblown, according to Amaral. “Even though we hear about the widening trade imbalance all the time, it hasn’t been widening in the last 10 years, staying at about 2% of GDP. But it is normal to have trade deficits with some countries and trade surpluses with others,” noting that Canada and Mexico are much more significant export markets for the U.S.
Amaral highlighted an underreported but unique aspect of the economic relationship between the U.S. and China, that there is more outbound foreign direct investment (FDI) from China to the U.S., rather than the more typical reverse of a developed nation to a developing economy. However, as U.S. regulators have tightened scrutiny of Chinese activity in American firms, this level of investment has decreased markedly in the last few years.
“A major difference in doing FDI in China is that there needs to be a [Chinese] partner firm for the 100 most sensitive industries, so you can’t just go in to China and start a company,” said Amaral. “American companies want the Chinese market, but the Chinese want American technology. Because of this system, American firms are forced to share more information than they would want to.”
Another significant factor in economic relations between the two countries is the percentage of U.S. debt that China holds. Of all publically held American government debt, 8% is in the hands of the Chinese government or within that country, with the Chinese Central Bank using much of it for reserves.
What Comes Next?
While a cease-fire has been reached in the ongoing trade war, the future of the dispute is questionable. While Amaral and Popp can envision a scenario in which tensions worsen, with tariffs expanding to broader restrictions on immigration or tourism, they agree that a more likely scenario is an easing of tensions as economic or geopolitical forces come in to play.
“It is obvious to me that the next round of tariffs would be very unpopular and Trump does not want to go there. I believe both Trump and Xi Jingping are trying to find a way to save face, because everyone needs to claim victory,” said Amaral.
Still, the current temporary agreement is a far cry from a long-term solution. “I don’t expect anything final to come out of the present talks to resolve all of these tariffs,” said Popp.
The impact of the trade dispute on the U.S. and Chinese economies is unclear, with the World Bank suggesting that the U.S. would lose 1% of GDP and China would lose 3% if the dispute ratchets up, though other estimates vary widely.
While the future of the trade war even within the Trump presidency is in doubt, the picture becomes even murkier when projecting to the next administration, as free trade is a nuanced political issue, with supporters and opponents within both of the two major U.S. political parties.
“It is possible that the next president could reverse many of the current administration’s policies on trade, but it depends on the candidate,” said Popp.
For More Information
Mihaylo College faculty provide regular outlooks and reviews of the Orange County, California, U.S. and global economies. For more information, visit the Woods Center for Economic Analysis and Forecasting online.
More stories on economic forecasting are available at this website.