December 5, 2022

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A fair trade? | Virginia Business

U.S.-China tensions still impact Va. economy

Elizabeth Cooper


China is historically Virginia’s top trading partner but it raised tariffs on Virginia exports such as soybeans and lumber in response to the trade war begun during the Trump administration. Photo courtesy Port of Virginia
China is historically Virginia’s top trading partner but it raised tariffs on Virginia exports such as
soybeans and lumber in response to the trade war begun during the Trump administration. Photo courtesy Port of Virginia

While President Joe Biden will likely strike a more diplomatic tone with China than his predecessor, economists and other observers believe the United States’ rocky trade relationship with its biggest economic rival will remain contentious — which will impact Virginia’s economy.

Under former President Donald Trump, the U.S. and China were immersed in a grueling trade war marked by sanctions and escalating tariffs and amplified by the COVID-19 pandemic. The trade battles presented significant challenges to the Port of Virginia, which counts China as its top trading partner for imports and exports. In retaliation for the Trump administration’s increased tariffs on Chinese imports, China raised taxes on U.S. exports, many of which were shipped from Virginia, including soybeans and lumber. Tariffs on world trade, coupled with the pandemic, led to a more than 4% drop in the Port of Virginia’s 2020 cargo volumes.

During the 2020 presidential campaign, Biden had suggested that he would scrap the tariffs, setting the stage for a reset in the two nations’ tense relationship. However, recent indications point to Biden staying the course — at least in the short term.

Kugler
Kugler

“It’s not going to be a wholesale reversal of the Trump administration’s trade policies,” says Robert McNab, director of Old Dominion University’s Dragas Center for Economic Analysis and Policy. “The Biden administration has not said it is going to dismantle tariffs and restrictions on Chinese goods imported into the U.S.”

Trump actually did Biden a favor by taxing Chinese imports, adds McNab, who conducts an annual economic forecast for the state. “Tariffs are now something for the new administration to negotiate with. If China doesn’t agree to reforms, the Biden administration will have no choice but to keep those tariffs.”

McNab says that the new administration will pursue closer ties to U.S. allies, including relaxing tariffs on European goods, while reminding competing nations, such as China, that they must follow the norms and traditions of the international trade system. “The hope is that China will democratize and be a force for good government in the world.”

Keeping a firm stance

U.S. Sen. Mark Warner, who has long sounded the alarm on China’s unfair trade practices and serves as chairman of the Senate’s National Security and International Trade and Finance Subcommittee, is looking for certainty in Biden’s international trade policy. “It is evident that the status quo isn’t working for American businesses, but the slapdash strategy of escalating tariffs without clear policy objectives was never the answer,” he says. “I’m hopeful the Biden administration approaches this problem multilaterally in a way that gives industries in the U.S. a clear vision for a path forward.”

However, Maurice Kugler, professor of public policy in George Mason University’s Schar School of Policy and Government, says that the U.S.’s trade relationship with China is one area where Trump and Biden see eye to eye. Instead of appeasements, Kugler believes Biden will enforce Trump’s tough stance on China. “He is in no mood to accept empty promises and is not going to wait months and months for [China] to pussyfoot around,” Kugler says. “He will be patient up to a point. After that, he’s going to be very tough.”

While the Chinese government has aggressively pushed to reduce or eliminate tariffs, McNab predicts the U.S. government will seek other concessions, such as increased protections against technology theft and currency manipulation, as well as improvements in China’s human rights record. “We have to have tools to bring the other party to the table and convince the Chinese government we are willing to inflict some degree of pain to accomplish policy goals.”

In addition, the administration likely will take a much harder look at various Chinese goods arriving in U.S. ports, including the Port of Virginia, with the goal of producing some of those items domestically. For example, questions have arisen about the wisdom of importing large amounts of medical supplies from China. (This issue led the Trump administration in May 2020 to award Richmond-based drug manufacturer Phlow Corp. a $354 million contract to
create an American supply chain for medicines and pharmaceutical ingredients that are now made mostly in China and India.)

“If a large part of the supply chain rests in China, there is increased vulnerability to decisions of the Chinese government,” McNab says. He adds that returning portions of the supply chain to the U.S. would benefit Virginia industries, such as advanced manufacturing.

Impact on Virginia

McNab
McNab

China was the Port of Virginia’s top trading partner in 2019, with approximately $2 billion in imports and $10 billion in exports. Last year, China was the second largest export destination for Virginia goods and the state’s largest source for imports.

“The trade war has had a huge impact on Virginia businesses,” says Warner. “These tariffs affected billions of dollars of goods across essentially every facet of the Virginia economy. In the short term, businesses either have had to pass these costs along to Virginians or eat the cost — meaning less investment, fewer jobs and limited growth.”

Virginia farmers are concerned about losing access to lucrative global markets, Warner adds. “Meanwhile, other countries, including China, have taken advantage of our haphazard trade policy to secure access to new markets and chip away at our influence in other parts of the world. It’s going to be a heavy lift for our producers to fully recover.”

Virginia’s exports to China declined from $1.7 billion in 2017 to $1.2 billion in 2018 and 2019 after tariffs were implemented, notes Stephanie Agee, vice president of international trade for the Virginia Economic Development Partnership. Decreases were especially evident in agricultural and forestry products, which China began seeking from other nations. China, however, remains an important trade partner to the commonwealth. It is routinely Virginia’s No. 1 source for imports, a distinction unchanged during the Trump-era trade war. “I don’t expect that status to change dramatically in the next few years,” she adds.

In January 2020, Trump and Chinese Vice Premier Liu He inked the Phase One trade commitment, which obligated China to purchase $200 billion in additional U.S. exports. Virginia’s exports to China rose to $1.8 billion in 2020, as a direct result of Phase One, Agee says. While the agreement initially curbed the trade war between Washington and Beijing, China quickly fell behind in its commitment, meeting only 58% of its 2020 purchasing targets.

“Phase One was viewed with high skepticism from the moment it was announced,” McNab says. “China was never going to fulfill the terms of the Phase One deal. In international trade negotiations, China has the habit of ignoring provisions of things it doesn’t like.”

American businesses’ underlying concerns were not addressed in Phase One, Warner says. “We need a real framework rather than vague purchasing commitments and an IOU from the Chinese Communist Party. I’m confident that once we have that framework, Virginia industries can get back to work rather than trying to parse when and if tariffs will be lifted.”

Kugler suggests bringing in the World Trade Organization to alleviate tensions and mediate a settlement between the two superpowers. He adds that WTO Director-General Ngozi Okonjo-Iweala, a Nigerian-American economist who joined the organization in March, is an honest and objective broker. “That would be the most conducive way of handling the situation. Otherwise, we will be headed for an economic catastrophe of losses of trillions of dollars for the world economy.”

Multilateral approach

The Biden administration has pledged to partner with U.S. allies to better compete with China while pressuring China to modify unfair economic policies. Warner believes that could be an effective tactic, as does Agee.

Warner
Warner

“It could force China to the negotiating table, but it’s complicated,” she says. Europe relies on China as a trading partner, while the U.S. has been embroiled in an ongoing dispute with its European trading partners regarding aircraft manufacturing subsidies that has also involved dueling tariffs. “That could impact the U.S.’s ability to bring allies to our side on China.”

Forging trade agreements with allies contrasts with Trump’s go-it-alone, America-first approach. “If there was one significant flaw with the Trump administration’s approach to China, it was that it was bilateral instead of multilateral,” says McNab. “The Trump administration was unable to bring the power of the global community to bear upon China.”

However, as tensions escalated with China, the U.S. set its sights on trade relationships with other Asian nations, which has opened new trade possibilities.

“Southeast Asia as a whole has become a market of greater interest for imports and exports,” Agee notes. For example, Vietnam has become an important export market for Virginia’s agricultural and forestry products as multinational companies seek lower-cost alternatives outside China to establish food processing and furniture manufacturing operations.

However, no other trade partner can rival China’s size. “Even if all those countries dramatically increase their imports, there are no possibilities of replacing China as the size of an export destination,” Agee says.

While Virginia has expanded trade relationships in Southeast Asia, China’s status as a major trading partner for Virginia isn’t likely to change soon, says Stephanie Agee, vice president of international trade for the Virginia Economic Development Partnership. Photo by Matthew R.O. Brown
While Virginia has expanded trade relationships in Southeast Asia, China’s status as a major trading partner for Virginia isn’t likely to change soon, says Stephanie Agee, vice president of international trade for the Virginia Economic Development Partnership. Photo by Matthew R.O. Brown

The Biden administration also must determine whether it is in America’s best interests to view China as a collaborator or a competitor. “Obviously, collaboration involves a trust factor on both sides,” says Michael Ligon, vice president of corporate affairs for Richmond-based Universal Corp., a leading global supplier of leaf tobacco.

Ligon chairs VEDP’s advisory committee on international trade, which partnered with other Virginia agencies in 2019 to develop the state’s International Trade Strategic Plan. One of the first international trade initiatives developed by a U.S. state, the plan seeks to increase Virginia exports by 50% by 2035. Achieving that goal could potentially add 150,000 export-driven jobs and almost $18 billion in annual exports to the $36 billion currently generated. During its 2021 session, the General Assembly allocated $1.5 million to further implement the plan.

“Virginia is now 41st in exports per capita,” Ligon notes. “We’re looking to move into the top 20, which would put us ahead of many Southeastern states.”

That could also lead to additional dealings with China. Regardless, American and Chinese economies will remain interdependent. “We can’t ignore China, and China can’t ignore us,” McNab says. “Given the close economic ties between the two countries, it’s in everybody’s interest to talk and resolve differences peacefully.”