Trade wars don’t work: The case of export restrictions
I am so tired of hearing how trade wars can bring back jobs and prevent China or other countries from taking advantage of the US. Everyone who has achieved basic economic literacy knows that tariffs don’t work and make both sides worse off. But what about other forms of trade frictions like the export controls the US has enacted against Chinese firms as part of Trump’s policies in his first term and the Chips and Science Act during Biden’s term?
The New York Fed analysed in great detail the impact of export restrictions by the US against specific Chinese companies and targeted at specific technologies like advanced semiconductors.
Chinese firms targeted by US sanctions
Source: Crosignani et al. (2024)
The goal of these sanctions was to slow down the technological advancement of China and the hope was that the Chips and Science Act would put China about a decade behind the US. The result was that Huawei premiered a phone full of the most advanced semiconductors that were subject to sanctions just a year later. I have explained here, how they did it and why these sanctions were completely ineffective in achieving their main goals.
But the sanctions were effective in other ways, mostly in hurting US businesses, shareholders, and workers.
Share prices of US companies that could no longer work with Chinese suppliers and customers on average fell by 2.5% in the days after a sanction package was announced. That translates to an average loss of $857m in market cap or a sum total of $130bn in shareholder value destroyed by these sanctions.
Share price reaction of US companies affected by sanctions against Chinese firms
Source: Crosignani et al. (2024)
But it gets better. Because the affected businesses had to cut ties with part of their customer base or replace cheap Chinese suppliers with more expensive ones, their revenues declined on average by 8.6% while operating profits declined by a large 25% compared to similar firms that weren’t affected by the export controls. The end result? Employment in these firms dropped by 6.6% and tens of thousands of people lost their jobs.
But at least some of these jobs were recovered because US businesses started to move production back to the US? Nope. There is no evidence that these sanctions created any jobs in the US or in other countries because affected US companies neither engaged in friendshoring activities nor backshoring activities.
You’d have a hard time finding a more counterproductive economic policy than export controls. Except for tariffs, maybe.
Agreed. This debate about the trade deficit is nothing new. Warren Buffett already warned the US and they started some legislation but it got stuck like 20 years ago. He also provided the idea of import certificates I think. Would be a better alternative: https://checkyourstocks.com/bufetts-alternative-to-tariffs-import-certificates/
well, the american market seems to be VOTING that tariff net change will be minimal, and trump will lose interest when he realizes no further donations\bribes are forthcoming in 1-on-1 secret chats.
what is most confusing is how the market is WEIGHING the actual damage from the majority of soft indicators.
and this is just the tariffs...there is zero chance that team trump is capable of effecting a longterm positive economic strategy.
in support of the above as distraction, i offer doge theater, a laughable take on the myth of gop fiscal conservatism.
an initial goal of US$2trillion in cuts is now down to a very fuzzy $150b in short term spending.
yet, MAGA propaganda will serve to justify spending much more elsewhere. and not coincidentally via the defense budget where musk will be attempting to grab taxpayer money in no-bid spaceX contracts. and musk will be looking for far more than lost in tesla and twitter.