US–China Trade Disputes: Studying Long-Term Trade Patterns

US–China economic ties have expanded substantially since China began reforming its economy and liberalizing its trade regime in the late 1970s. Total US–China merchandise trade rose from $2 billion in 1979 (when China’s economic reforms began) to $636 billion in 2017. China is currently the United States’ largest merchandise trading partner, its third-largest export market, and its biggest source of imports. There are multiple areas of disagreement that preceded the trade war. One ground is that China is buying off American assets. It is also alleged that China violates US patent rights. It is also stated by United States that China has restrictions on US companies entering certain areas in production in China. The scale at which US–China trade patterns are changing and ownership patterns of both countries’ MNCs are changing results in a mystification of trade data due to intra-firm trade imports and exports. This may be a major reason why apparent trade patterns do not clearly serve as a guide for commenting on policy wars. This study examines the patterns in the US–China exports, mutual imports, and current account balances over a nearly 25-year period, to form a view about whether the trade war is justified. The general methodology in this paper has been to use a set of semi-log growth equations that enable comparison of various trade-related variables between the United States and China. The method focuses on the long-term patterns before and after global financial crisis (GFC), in the two countries, with the help of a standard dummy variable model. In conclusion, the US claims seem to be unfounded when studied through the lens of long-term trade patterns between the two countries. China’s export performance is much better. The United States’ dependence on imports from China has fallen drastically. Finally, the current balance of payments (BoP) of the United States continues to remain highly negative; whereas, in spite of the setback due to the GFC, China’s BoP position all along continues to be positive.


INTRODUCTION
US-China economic ties have expanded substantially since China began reforming its economy and liberalizing its trade regime in the late 1970s. Total US-China merchandise trade rose from $2 billion in 1979 (when China's economic reforms began) to $636 billion in 2017. China is currently the United States' largest merchandise trading partner, its third-largest export market, and its biggest source of imports. Given this background, this paper investigates the long-term trends in the US-China trade.
There are multiple areas of disagreement that preceded the trade war. One of the allegations was that China is using espionage against the United States. Another is that China is buying off American assets. It is also alleged that China violates US patent rights. It is also stated by the United States that China has restrictions on US companies entering certain areas in production in China. There is great speculation over the US-China trade wars that have emerged in recent years. The US economy is appearing to face the prospect of going downhill in the ensuing phase of its business cycle.
The moot argument, therefore, is that recession is not good either for the two countries or for the world at large. This paper looks into the long-term trade pattern of the United States and China and attempts to Review Special Issue S4: "Global Trade Wars -A Case of Sino-US Trade War" merj.scholasticahq.com study what the long-term trends in China-US trade foretell. In the process, we try to estimate the impact of the global financial crisis (GFC) on the US-China trade pattern as a build-up toward the trade war. Ultimately, the paper tries to study whether long-term trends in trade justified the escalating trade war of the United States.

LITERATURE REVIEW
Before the trade war, in 2014, Chinese foreign reserves were highest, at over US $4 trillion. Moreover, China was the largest holder of US assets in the world that declined thereafter, and raised speculation among analysts (Neely, 2017). Europe and Japan will be the gainers out of US-China trade conflict as their access to the United States and Chinese markets would increase. The United States may witness improvement in terms of trade with nonretaliatory regions due to adoption of optimal tariff policy and substitution of expenditures into home goods (Dong and Whalley, 2011). For China, this substitution of trade will lead to losses, but the results when measured through endogenous trade surplus model show that China and ROW regions have welfare gains whereas the United States and European regions have welfare losses. Higher bilateral tariffs cause European Union and Japan to gain out of trade diversions, due to cheaper imports and improved competitiveness, as prices adhesiveness in export sector for these nations increases (Bolt et al., 2019). Using the EAGLE model for a multiregional study, for analyzing the macroeconomic impact of unilateral tariff adopted by the United States against China, they found that the Lerner symmetry theorem holds as China dampens US exports. Furthermore, some Asian countries benefitted from the US-China "Trade War. " Multilateral flows have a larger quantitative influence than bilateral flows due to exchange rate mechanism and also impact output levels (Cheung et al., 2009). Using the simulation model, IDE-GSM, Satoru et al. (2019) found that if both the countries impose additional 25% tariff on imports for 3 years, the economic impact of "full confrontation" for the United States will be 20.4% and for China it will be 20.6% and the overall impact upon global economy would be 21.7%, if all other countries impose additional tariff. Huang et al. (2018) made a firm level analysis to evaluate market response to US-China trade war and found that the US firms that are more dependent on imports and exports with China in short term had higher default risk, lower stocks, and lesser bond returns near to the announcement date.
Therefore, multilateral trading policies needed to be strengthened, sound global trading system needed to be developed, and rule of law should be strengthened. World Trade Organization (WTO) has directed development of state-owned enterprises, digitalized and subsidized trade, and better access to technology (Meltzer and Shenai, 2019).

US-CHINA WORLD EXPORT PATTERN
In Table 1, the export pattern of the United States and China is depicted. The unit of measurement is US$ (1000s). Furthermore, a relative measure of the ratio of China exports to that of the United States is given, which shall be used in further analysis.
It would be of interest to know how the actual export pattern of both China and United States' exports with the rest of the world has proceeded. Given below is the total export that, respectively, China and United States have had with rest of world.
It is uncanny that the pattern of China's export resembles a "crouching dragon!" The low initial level of exports and the growth rate of China's export are apparent from Figure 1. The initial growth pattern indicates a slow rise in China's exports. However, keen observation shows that for the first decade, although the beginning is slow, the growth rate is exponential. Clearly, the year of the GFC witnesses a breakthrough in the pattern of exports by China. Although United States' exports dip temporarily and so do China's, the latter's exports clearly pick up tempo and far outstrip the United States' growth in exports. These patterns can be captured through a set of semi-log growth equations. The equation is estimated as follows: where EXP 5 Exports (US $ Thousand).
Given below in Table 2 are the regressions results of the Dummy Variable exercise. During 1996-2007, the US exports rose at the annual compound rate of (0.0467) or 4.67%. After crisis, there was a dip of around 1.61%. Hence, after the GFC, US exports continued to rise but at a lower rate Review Special Issue S4: "Global Trade Wars -A Case of Sino-US Trade War" merj.scholasticahq.com  of (0.0299) almost 3%. This is a decline of 1.67% p.a. On the other hand, China's export growth pattern (Table 3) witnessed a significant jump in the overall level of exports from 2368.03 to 2107.44, a jump of 260.60. Before GFC, China's exports rose at (0.21) or 21.37% annually. Later, they began to fall at 20.129722064, yet maintained a growth rate of (0.066) or 6.6 p.a. Despite the fall due to GFC, the growth rate of China's exports out beats that of the United States by 3.6% p.a. This clearly shows that China has been showing a dynamic export pattern despite major setbacks like GFC. Temporary trade restrictions are unlikely to stop this growth pattern. In further analysis, we use a ratio of China's exports to that of the United States'. We then build up a semi-log growth equation in ratio terms. The analysis incorporates two dummies one for the intercept at GFC and one for the growth rate after GFC. The results are given in Table 3. Table 4 shows the relative pattern of exports. The ratio of China's exports to the exports of the United States is mapped with the help of a semi-log growth equation. There are two dummies-one for change in the intercept at GFC and the other for the change in the slope of the growth equation after GFC.
The following equation has been estimated: where EXPR 5 Ratio of China Exports to US exports.
Given below in Table 3 & Table 4 are the regressions results of the Dummy Variable exercise. The estimates clearly show that before crisis the ratio to begin with favored the United States (2297.08). Even at the time of GFC, the ratio was in favor of the United States (269.12). However, the ratio was growing at 16%. But, after GFC, the growth rate of the ratio fell and yet remained in favor of China with a growth rate of 3.5% per annum. When such strong trends are established over a 20-year period, it is quite impossible to reverse the trend. It is even more difficult to estop it with the help of noncompetitive measure. Essentially, the attempt of the United States has been to reverse such long-term trends.

US-CHINA MUTUAL IMPORT PATTERN
The next question is about how China has managed its imports. The following figure shows the pattern of imports. Figure 2 depicts the pattern of imports. Here is a pointer of how the United States has managed its position vis-a-vis China. The pattern of imports clearly shows that the United States has been reducing imports from China.
Although China has also been experiencing a slow decline in imports from the United States, the decline in the United States imports is much more dramatic. We also measure the ratio of Chinese imports to that of the United States in Table 5. The average ratio was 26%, although the range was from 18% to 234%. However, the pattern of the ratio was very consistent with a coefficient of variation (CV) of only 20% (Table  not reported). The ratio has risen in the later years. However, the individual patterns of the United States' import and that of China need to be studied as well.
For studying the import pattern in respect of mutual imports from China to the United States and vice versa, we have used a semi-log equation framework. That accounts for two periods before and after GFC.  Appropriate intercept and time dummies have been constructed for measuring the effect of GFC on both the intercept and growth rate. Similarly, import pattern from the United States to China has also been studied. The equation is estimated as follows: where IMP 5 Exports (US $ Mill.). T 5 Time variable. D2 5 Intercept Dummy (for GFC). D2T 5 Slope Dummy (for GFC). εt 5 Error Term.
The pattern of the United States' imports shows that she had a high level of imports with China to begin with. In fact, GFC leads to a rise in the level from around 150 to 323. However, during the pre-GFC period, the imports of the United States began to fall at a rate of 6.6% p.a. Subsequently, after crisis, they began to fall at the rate of (20.1437) 14.3% p.a. All these estimates show that the trends are highly significant. The bubble that appeared around crisis shows a high degree of uncontrolled rise in the US imports. On the other hand, the precipitate fall in imports of the United States also needs to be explained. Perhaps, the reason is that a lot of imports from China were being camouflaged as "intra-firm" imports. There are some studies that clearly state that "intra-firm trade" among subsidiaries or branches of Multinational Corporation does not Review Special Issue S4: "Global Trade Wars -A Case of Sino-US Trade War" merj.scholasticahq.com find their way to the reported Census data. Ruhl (2013) argues that, "There are two sources of data on US imports and exports of goods between associated parties: The intra-firm trade data collected by the Bureau of Economic Analysis in its surveys of multinational companies, and the related party trade data collected by the US Census Bureau from US customs declarations" (p. 1). The paper indicates inconsistencies in data trends between the two sources. More likely, however, US imports may have fallen precipitately because the former imports from China were substituted by international relocation of industry. In other words, that which was being recorded as import got converted into intra-firm trade within US MNCs. The lack of transparency and inaccuracy in definition as well the actual mass exodus of US firms' manufacturing hubs to China may have confused the long-term trends of US imports (See: Table 6 & Table 7). It must be recognized that import trends are as important in understanding the pattern of trade as the trend in exports. In this section, we compare similar patterns of imports into China from the United States. In the case of China, the initial level of imports was around 260. It fell to 220 at the time of crisis, which in all probability was because China did not experience the bubble like the United States did around crisis. Moreover, China's process of relocation was small and slow. Imports fell at the rate of 11.65 p.a. before crisis and around 10% after crisis. The fall was nowhere as large as in the case of the United States. This clearly shows that the US bogey of China acquiring disproportionate assets in the United States is unfounded. However, before we consider such trends, an important measurement is the trend of the ratio of China's import to that of the United States'.
Given below is the equation for measuring this ratio in log terms: The initial level of China's imports was 108.78. It was positive but such an intercept is not easy to evaluate in the case of a semi-log equation. What needs to be seen is the trend. There was an apparent fall at the time of crisis (2103.684), but once again the exact impact is difficult to interpret. However, a clear indicator is that China's ratio of imports was falling at the rate of 5.35% before crisis and suddenly began to rise at the rate of 5.2% p.a. This was a clear reversal of the trend. Given that this trend is about mutual imports between the United States and China, the unmistakable trend is that China has been the looser! What reason does the United States have to protest? How does it claim that China has been unduly buying out US interests and assets? Of course, this may need a complete study at the ground level of actual patterns of acquisitions among each other's countries but the trade data clearly show that China is the looser.

TRENDS IN BALANCE OF PAYMENTS
What has the net effect of all these trends in export and import patterns between the United States and China needs to be judged in the light of their respective balance of payment (BoP) positions (See : Tables 8,  9 & 10).
The BoP scenario has been quite opposite if we consider a comparison between China and the United States. All along, as is well known, the United States has had a negative balance, while China has had a positive BoP. The image is clearly a mirror image (See: Figure 3)    The coefficient of year (time variable) shows that, before GFC, China's positive BoP had grown at a rate of 0.314406053: 31% ACGR for the 11 years before crisis. For the 11 years after crisis, the rate of growth became 20.042770201 to the tune of 4.2% ACGR. The interpretation is that China's current account balance (CCAB) had risen from (2522.6458827) a very low and negative level to a high and positive level (636.7279035) just before the GFC. China had consolidated its position so much that the ensuing negative growth rate of 24.2% did not make a dent in the growth rate of CCAB.
In the 11 years following the crisis, China's BoP (See : Table 11) still continued to remain positive. Only the rate of growth had fallen due to crisis. The United States on the other hand has had a negative BoP throughout the 22-year period. 1 Before crisis, its CAB was falling at the rate of 263884809091, in absolute terms, per annum. After GFC, it began to rise at the rate of 12756248485 in absolute terms, per annum. In spite of this, during post crisis (11 years), the BoP of the United States continues to remain highly negative. In a comparative sense, China is still a gainer although it had a negative growth rate after crisis and the United States is still a looser although it had a positive growth rate after GFC. This reflects the overall strength of China trade. So it is evident, in this case, that China has lost the battle but won the war.