Learning from History and Modeling: Chinese Trade Retaliation Choices

An interesting symposium in the 2nd Quarter 2018 issue of Choices, published by the Agricultural and Applied Economics Association, deals with the impact of Chinese trade retaliation aimed against US agricultural exports.

Some reading to contemplate this graph by:

Source: Slok, “Global markets: US overheating and Treasury supply pushing US rates up. Trade wars and Turkey pulling US rates down,” Deutsche Bank, September, 2018.

What Have We Learned from China’s Past Trade Retaliation Strategies? (pp. 1-8)
Minghao Li, Wendong Zhang and Chad Hart

Theme Overview: U.S.–China Trade Dispute and Potential

Impacts on Agriculture (pp. 1-3)
Mary A. Marchant and H. Holly Wang

Predicting Potential Impacts of China’s Retaliatory Tariffs on the U.S. Farm Sector (pp. 1-6)
Yuqing Zheng, Dallas Wood, H. Holly Wang and Jason P. H. Jones

Impacts of Possible Chinese 25% Tariff on U.S. Soybeans and Other Agricultural Commodities (pp. 1-7)
Farzad Taheripour and Wallace E. Tyner

Upheaval in China’s Imports of U.S. Sorghum (pp. 1-8)
James Hansen, Mary A. Marchant, Wei Zhang and Jason Grant

Chinese Trade Retaliation May Diminish U.S. Wine Export Potential (pp. 1-7)
Amanda M. Countryman and Andrew Muhammad

China’s Potential Cotton Tariffs and U.S. Cotton Exports: Lessons from History (pp. 1-6)
Yangxuan Liu, John R. C. Robinson and W. Donald Shurley

Some interesting tidbits:

  • The estimated impact on US soybean prices by Zheng et al. (2018) is about 4%, using a conventional partial equilibrium model called GSIM (Francois and Hall, 2003), as does Taheripour and Tyner (2018), using the very well-known GTAP model. Assuming elevated elasticities only increases the price drop for US domestic prices by 5%.

  • Given US soybean prices have dropped by about 20% since the imposition of Chinese tariffs, one might conclude that the remaining 15% of price drop is due to weather and other factors (which include the dollar exchange rate). However, the durability of the 25% spread between US and Brazilian soybean prices suggests that tariffs are the primary driver.

    Taheripour and Tyner (2018) include this caveat in their conclusion:

    However, other factors may attenuate or strengthen our predictions. For example, the Chinese government has implemented policies to increase soybean planting acreage at the cost of corn acreage, a commodity for which China has accumulated a high inventory. Such policy changes may result in exports of this commodity to fall even further, which would make our predictions a conservative estimate.

    And from previous accounts, we know the Chinese have been aggressive in reducing import dependence.

  • Where will we go from here?

    From “What Have We Learned from China’s Past Trade Retaliation Strategies?” by Minghao Li, Wendong Zhang, and Chad Hart:

    This article sheds light on some of China’s agricultural trade retaliation principles by analyzing previous cases. China’s responses follow three principles: (1) responding proportionally with restraint, (2) targeting substitutable products when possible, and (3) inflicting economic and political costs. With a more concrete understanding of China’s motives and potential actions, U.S. policy makers and stakeholders can better evaluate the potential consequences of applying trade measures on China. Furthermore, as the trade dispute continues, any deviation
    from these principles on China’s part may serve as a signal of the Chinese government’s intention to escalate or deescalate the situation.

So, as Mr. Trump escalates the rhetorical war against China (e.g., blaming China for meddling in US elections(!)), watch to see China deviate from those principles to infer the trajectory of the Chinese retaliation. From my reading, the Chinese have not backed down in the past. Perhaps they will this time. If they don’t, where does Mr. Trump’s plan to beat the Chinese into submission lead to?

14 thoughts on “Learning from History and Modeling: Chinese Trade Retaliation Choices

    1. pgl

      “North Korea’s foreign minister said Saturday there was “no way” his country would unilaterally disarm without the lifting of international sanctions and building of trust with the United States.”

      Is anyone surprised that we are back at this? North Korea has never been an honest broker. OK – we lift the sanctions. They will continue to maintain their nuclear ambitions but covertly. Trump is a fool for thinking he has charmed this government. Then again – Trump’s Administration is not exactly honest either.

  1. Zi Zi

    It may be a good idea to do a post about a concise yet exhaustive study of China economic flow (for us), and even (for you) to go and live in China for a period so that to write a more “authentic” post.

    1. Menzie Chinn Post author

      ZiZi: I don’t understand what “Chinese economic flow” is.

      What is “inauthentic” about the post? If you have a narrative of previous US-China trade disputes that you believe is more authentic, I would welcome the citation.

      Or do you believe the modeling in GSIM and/or GTAP is “wrong”. That would be fine if you could isolate what problems you see (Armington assumption?) and how you would improve.

    2. Moses Herzog

      Zi Zi’s comment reminds me of a lot of mainland Chinese I had personal acquaintance with, who after a lifetime of watching government propaganda on CCTV, school textbooks (and really any books published and distributed on the mainland encouraging hatred to Japanese and obfuscating any error by “the Party” post 1949, thought themselves the Henry Kissinger of world affairs, but if you so much as muttered an opinion contrary to the Chinese politburo’s latest editorial said that “foreigners shouldn’t ‘meddle’ in China’s ‘internal affairs’ “.

      Do us all a big favor huh?? Get at least 4 years higher education overseas, (not the European vacation your mandarin parents give many of you “entitled” “little emperors”, like, I mean a REAL damned 4 years of higher learning education) and then please, be so greatly benevolent as to bequeath us all with your unending wisdom. As you spread your benevolent wisdom to all “Laowai”, see if you can add that little touch of resentment in your voice, born of your “cagey” inner knowledge that no one, including Japan, has crapped on you post-1949 as much as your own government has.

  2. Samuel

    For soybeans, I think China will continue to source from other suppliers or develop domestic production or seek alternatives. To ensure their own food security, I would think they will want to be less dependent on an unreliable supplier. After the current nonsense passes, I’m sure they will again purchase U.S. soybeans. But they will purchase fewer preferring to make sure other suppliers develop and maintain their production. For grain trade, it appears this administration’s policies have made Brazilian, Argentinian, Ukrainian, and Russian farmers great again. (https://www.wsj.com/articles/grain-is-our-oil-russia-is-besting-the-u-s-as-a-wheat-powerhouse-1537719747 )

  3. Zi Zi

    In my own opinion, the Trade War should be looked at within a bigger context beyond whatever is about soybeans. Today the USDCNY and China Industrial Production are driving most global markets, quantitatively. US fundamentals matter much less, or at best only drive domestic markets. US policies, in first degree, impact China variables.

    Wait for the day China decides over the Aggregate Liquidity.

    I wished that you take a look at the major variables underlying China’s economy. You may understand better what it is, how it is different, and the origin of the Trade War.

    1. Benlu

      Zizi, do you have any links to articles by experts in China which could provide very accurate understanding of China economy, its major underlying variables and the larger context to the origin of the trade war?

    2. Menzie Chinn Post author

      ZiZi: The argument that Chinese IP is driving the world economy doesn’t show up in the data at all strongly. Nor does the proposition that Chinese financial variables show up. What does “China decides over Aggregate Liquidity” mean?

      I don’t pretend to understand the Chinese economy fully, but I think I have a good grasp of the broad outlines. See the thirteen published papers and one book on this page (this is a partial listing).

  4. Benlu

    Zizi, do you have any links to articles by experts in China which could provide very accurate understanding of China economy, its major underlying variables and the larger context to the origin of the trade war?

  5. Moses Herzog

    Well, for whatever it’s worth coming from a white male American [edited-mdc] I find Trump’s blaming of election meddling on China’s government to be highly offensive (no sarcasm there), out and out rude, a very see-through attempt at deflection, and insulting to our intelligence, as in the type of lie a 5 year old would tell after thieving a candy bar.

    1. baffling

      what would you expect from a 70 year old guy who behaves like a 5 year old? something stunted his maturation as a young child.

  6. Zi Zi

    Benlu, I don’t have complete clues either. It bothers me we cannot find frequent data concerning China. Are you researching about China? Mind sharing some information?

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