Foreign Economic Policy Amid a Sino-US Trade Dispute

Since March，Sino-US trade disputes have been on the rise. What are the prospects for resolving these disputes and what are the policy choices we face in that effort?

History shows that as long as US economic growth is above 2% and European economies expand by more than 1.5%，China's exports should enjoy relatively high growth. Therefore，there is no need to worry too much about exports，especially to key markets. The trade situation may turn out to be less dangerous than imagined.

It is believed that despite all the bluster，the US does not really want a damaging trade war. Take the ZTE case as an example. ZTE has cooperated with Microsoft，Intel，IBM，and Qualcomm，among other big US companies. Putting ZTE out of business would hurt US interests. Fines and restructuring would undermine ZTE's research and development and its ability to catch up to its rivals. It shows that when trade sanctions really affect the interests of important American companies and its consumers，the US government will come up with remedial measures. For example，the US issued a list of imports with an additional 25% tariff on June 15，but that same action removed 515 items from a list announced on April l. These included televisions，snowmobiles，garbage compressors，chainsaws，hot air balloons，and some pharmaceutical and medical products as well as certain steel and aluminum products.

The 25% tariff is targeted at US$34 billion worth of goods and a 10% tariff applies to US$200 billion. (US President Donald Trump has since threatened to raise the 10% tariff to 25%) This is not really that much，considering the size of the total trade between the two countries. On February 2，2017，the US Department of Commerce issued a final ruling saying that stainless steel plates and steel strips imported from China were subsidized and dumped in the US market at prices below reasonable levels. The anti-dumping duty of these imports was set at between 63.86% and 76.64%，and the countervailing duty for the specific enterprise，Shanxi Taigang Stainless Steel Co.，Ltd.，was 75.60%. This anti-dumping duty will be in place for five years.

Historically，tariffs put in place during times of US trade tension have been high. For example，the Protection of Customs Act passed by the US Congress in 1816 specifically protected cotton，pig iron，paper and glass raw materials and their products. The tariff rate was increased to a range of 7.5% to 30%，and the duties affected 43% of all imports. They reached 47% in 1824 though it was lowered after 1832. But there were generally higher than 20% by 1857. During the Civil War，the average tariff reached 48%，though it fell to 10% in 1872. But in 1875 it was increased once again to the same level imposed during the civil war. On October 1，1890，the US Congress passed the McKinley tariff rate and increased import duties to an average of 38% to 49.5%. Tariffs on some commodities，such as steel，glass，cotton，hemp，and cloth，ranged from 50% to 60%. In August 1894，the tariff reduction bill was passed，and wool，bronze and wood were included in the tax exemption，but average tariff rates were still around 30% to 39%.

High tariffs curbed imports，promoted growth in the US manufacturing sector and even promoted exports. Tariffs in the years since World War Two，however，have generally declined and the recent increases will not have a major impact on China. As a developing country，the unit price of many low and mid-range manufactured products is relatively low. Chinese products are generally only 1/2 to 1/4 of the international price. Moreover，the exchange rate is relatively flexible. But for developed countries，the impact could be huge. As pricing in developed countries is relatively stable and the value added content of their goods is high，market pressure from tariff increases could be considerable.

The yuan's exchange rate against the US dollar rose from 8.27 in 2005 to 6.11 in 2014，an increase of more than 30%. But Chinese companies were able to adapt to the change. Exporters raised their prices，in some cases more than offsetting the effect of the change in the exchange rate. This shows that Chinese companies have strong price elasticity. Most companies should be able to adapt to the tariff rates of 10% and 25% in a year or so. Tariff increases are just a price adjustment rather than a closing of the market door. The price elasticity of China's high-tech products or mechanical and electrical products is better than those of other commodities. In addition，the tariff increase affects all domestic enterprises. After a certain period of time，enterprises will gradually adapt. By adjusting their domestic operations，such as by relocating to less expensive areas，they may be able to cut costs for land，rent，and labor.

In a real trade war，tariffs will be so high that foreign products cannot enter a domestic market. This is not yet the case.

But suppose the tariff increases of 10% and 25% don't work，and China's exports to the US continue to grow，resulting in an even bigger trade surplus. Will the US continue to employ anti-subsidy and anti-dumping tactics，for example，with tariff increases