Sara Hsu on the US-China Trade War

On December 13, the United States and China both issued separate announcements outlining their “phase one” trade deal. It was the latest twist in the so-called “trade war,” which has been underway for over a year-and-a-half following U.S. President Donald Trump’s initial announcement of tariffs on Chinese exports to the United States. Since then, we have seen trade talks start and stop, and deals made and scrapped; the one constant has been the climbing tit-for-tat tariffs imposed by both sides.

With optimism riding high (or at least higher) with the phase one deal set to be signed in January, The Diplomat’s Shannon Tiezzi spoke with Sara Hsu for more perspective on the trade war. Hsu, Associate Professor of Economics at the State University of New York at New Paltz, discusses the trade war’s impact on both economies and the potential for lasting change in China’s economic practices.

How are tariffs impacting the economies of the U.S. and China? In other words, who’s winning the trade war?

No one; both sides are losing from the trade war. Billions of dollars have been lost by consumers and producers. There is a redistribution factor, with tariff proceeds going to the governments, but also reduced spending and realignment of supply chains away from China (for the U.S.) and away from the U.S. (for China).

What sectors of the Chinese economy are seeing the most impact, and what is the Chinese government doing in response?

There is less factory production, and the Chinese government has striven to make up for the loss of growth by stimulating infrastructure investment. This has resulted in a larger debt burden for local governments.

The trade war is being driven by an underlying desire in the United States for China to change longstanding economic and trade practices. Is there any evidence those changes are taking place?

No. China has attempted to implement a law guarding against forced technology transfers, but it is not clear to what extent this law will be enforced, especially since China denies any wrongdoing in the first place. China is unlikely to end subsidies to particular sectors, including those that fall under the Made in China 2025 policy. China is unable to eliminate its trade surplus with the U.S. on its own – it has promised to purchase more agricultural products, but the gap is a result of China's production of many consumer goods for the U.S. and the rest of the world.

Some analysts have suggested that U.S. demands cut too close to China’s core developmental strategy to make a deal possible. Do you see China ever budging on some of the United States’ key issues?

No. This would result in a big loss of face for Xi Jinping. They do not negotiate in this way, and they certainly do not change their policies based on the demands of other countries.

What’s your take on the “Phase One” trade deal? Will it have a real economic impact or is it more a diplomatic move to buy breathing room?

It will have a small economic impact since China has promised to purchase more agricultural products from the United States, but the impact is not large enough to make up for the negative effect of the trade war so far or to come.

What political factors on both sides are pushing toward or preventing a more comprehensive deal?

The Trump administration has gone about this the wrong way – rather than using diplomacy, President Trump relied on aggression. He has upped the ante many times, so much so that China is wary of any promises or threats that Trump continues to make. Xi Jinping is a strong president who will not want to appear weak to the Chinese people. He is highly unlikely to make concessions that are not in line with policies already in the works.

This interview has been edited.