US-China trade war did not bring American firms home, research finds

Foreign investment into China hit a record US$144.4 billion in 2020, while firms exiting China did not leave because of tariffs, US researchers say
Decoupling has been ‘greater in the minds of politicians and pundits than the reality of firms in China’

US-China trade war

Sarah Zhengin Beijing

Published: 5:00am, 24 Sep 2021

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The trade war between the United States and China failed to prompt American businesses to leave the Chinese market, with costs from tariffs instead passed along to consumers, new research found.

In a paper published on the preprint platform SSRN this month, researchers Samantha Vortherms and Jiakun Jack Zhang argued that US tariffs on billions of dollars’ worth of Chinese products – launched in mid-2018 to bring US companies home – hurt the US economy and did not successfully pressure China to change its economic policies.

Despite tit-for-tat tariffs and intensifying political hostility between the powers, businesses in each of the countries remained “deeply integrated” with the other and foreign investment into China still hit a record US$144.4 billion last year, they said.

Vortherms, from the University of California in Irvine, and Zhang, from the University of Kansas, said 46 per cent more US-funded subsidiaries in China closed in 2018 compared with the year before, but less than 1 per cent of that rise was caused by US tariffs.

“Our findings show that US and allied firms were not more likely to exit China, suggesting that foreign direct investment outflows do not ‘follow the flag’.

“Instead, firm exit is determined by the balance of heightened political risks against the availability of firm-level and institutional resources to mitigate these risks.”

Their report comes at a time when US President Joe Biden is engaging in a broader review of US policy towards China, including of his predecessor Donald Trump’s strategy of using tariffs on China to try to shift supply chains back to the US and strengthen Washington’s hand in trade negotiations with China.

US-China phase one trade deal largely a ‘failure’, new study suggests

US Treasury Secretary Janet Yellen has also said that US tariffs were essentially taxes on consumers, and that the phase one trade deal signed with China in January 2020 had not addressed fundamental problems the US has with the country.

Despite that, US businesses had not lobbied against their government’s tariffs as Beijing had hoped, the research found. Out of 500 large US multinationals with subsidiaries in China, 63 per cent were adversely affected by the trade war, yet only 22 per cent voiced opposition and 7 per cent decided to leave China.

“Our results also show that the degree of decoupling, measured by foreign direct investment, has been greater in the minds of politicians and pundits than the reality of firms in China,” they wrote. “We find little evidence that US [multinationals] are playing their part in the great power rivalry by patriotically abandoning China.”

The collateral damage was borne more by smaller businesses and those newer to China, just as small businesses in the US were hurt by higher tariffs on raw materials imported from China.

Vortherms and Zhang said their findings went against US Trade Representative Katherine Tai’s assertion that tariffs would provide leverage against China, with multinationals still willing to navigate the uncertainties and risks.

In a survey by the American Chamber of Commerce in China published this month, 47 per cent of the more than 120 business respondents said that one of their top priorities was removal of bilateral tariffs by the end of the year. Others included resuming visa issuance for business executives, rebuilding trust between the governments and strengthening intellectual property protection in China.

Tariffs had affected operations in China for 78 per cent of respondents, with the number reporting no impact having halved since late 2020.

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