In 1980, George H.W. Bush’s visit to Beijing ahead of America’s presidential election resulted in a frosty reception due to his running mate, Ronald Reagan’s, comments about wanting an official relationship with Taiwan. This angered China, which claims Taiwan as its territory. China’s foreign minister stated that America should not meddle in its internal affairs, just as China would not interfere in the presidential race. The prospect of a Reagan victory concerned China’s leaders and exporters, who feared that he would revoke the “normal” trading relations established by President Jimmy Carter, which allowed for low tariffs on Chinese goods.
Fast forward to 2021, Donald Trump has threatened to escalate the trade war with China by imposing tariffs of 60% or more on Chinese goods if he wins the presidential election in November. This has raised concerns for Chinese exporters and American firms that buy from and invest in them. A recent paper by George Alessandria of the University of Rochester and his co-authors suggests that the response of exporters to the Reagan threat in 1980 may provide insights for dealing with new trade wars.
Entering a foreign market involves significant upfront costs for firms, making exporting rare and persistent. The threat of trade wars and tariff hikes complicates firms’ calculations regarding the potential rewards of exporting. In the past, exporters from China to America made decisions based on their beliefs about future American tariff policy. The research by Mr. Alessandria and his co-authors reveals that the dynamics of the trade war in 2018, and the resulting entrenchment of tariffs under President Joe Biden, had a more damaging impact on trade than their imposition under Mr. Trump.
Looking ahead, the possibility of a second trade war with China presents a double-edged threat. While a sweeping 60% tariff would be disruptive, its vertiginous height may make it harder to sustain. Chinese exporters did not take Mr. Trump’s trade threats seriously before 2018, and they will be cautious moving forward. Ultimately, the most damaging policies are the ones that outlive a president’s time in office, becoming a permanent feature.
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