Opposing Strategies In The U.S.-China Trade War

In recent years, U.S. exports have typically peaked in the months of October through December because these months coincide with the harvesting of the U.S. soybean crop, which has become the nation's single largest export product to China.

But not in 2018, because of the retaliatory tariffs that China's government has placed upon U.S.-grown soybeans as part of its trade war strategy with the U.S., which have led China's soybean buyers to effectively boycott the 2018 crop. The following chart shows the dramatic plunge in the year-over-year rate of growth in the value of U.S. exports to China that is a direct consequence of China's trade war strategy.

Year Over Year Growth Rate of Exchange Rate Adjusted U.S.-China Trade in Goods and Services, January 1986 - October 2018

In the absence of the trade war, such a plunge into negative growth territory would be a clear indication that China's economy is experiencing deep recessionary conditions. China's economy is indeed decelerating and appears to be facing a growing threat of deflation that would be consistent with some degree of contraction occurring within the country's economy, but we believe the negative impact indicated in the chart is being exaggerated by the impact of China's tariffs on U.S. goods.

Perhaps a better question to ask is why don't we see a similar phenomenon develop in response to the tariffs imposed by the U.S. on the goods that China exports to the United States? The chart above confirms that the rate of growth of value of goods that the U.S. is importing from China is positive, which suggests that U.S. tariffs are having very little impact on U.S. demand for goods produced in China.

The answer to that question has a great deal to do with the strategy the U.S. has pursued in selectively imposing tariffs on Chinese goods. Benedikt Zoller-Rydzek and Gabriel Felbermayr of the European Network for Economic and Fiscal Policy Research (econPOL) have analyzed the U.S. government's tariff strategy and found a strong explanation for the apparent lack of impact (emphasis ours):

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