The Costs of Cheap Goods: America’s China Trade Backlash

For decades, the world economy has been guided by globalization: companies focus on product design and branding, while manufacturing is offshored to wherever is cheapest and most efficient.

No country has gained more from this model than China. Logic says this is a win-win: China’s efficient manufacturing drives economic growth, and consumer markets like the U.S. get affordable prices.

iPhones, solar panels, and other consumer products are cheap and abundant. Businesses can focus more time and capital on designing and improving their offerings.

This view dominated as globalization thrived in the 2000s. However, a new wave of economic protectionism in the U.S. has led to a growing pushback, which is squarely targeting “Made in China.”

China’s Economic Engine: Exports

China’s economy opened to the world when the United States established relations in 1979, paving the way for trade and foreign investment by the West.

But the Chinese manufacturing boom was sparked by China’s admission to the World Trade Organization (“WTO”) in 2001.

The WTO, a trade alliance aiming to grow global trade, gave China increased access and better trade deals with other members, which include all major economies.

China has two major advantages that drive low manufacturing costs:

1. A massive labor force with low wages

2. Strong government support

Outsourcing to China became a no-brainer for U.S. and other foreign companies.

As more businesses followed suit, the Chinese manufacturing industry grew exponentially and developed in expertise and sophistication:

However, China’s rise has been met with widespread criticism by the United States and other countries.

Critics cite unfair government support: tax breaks, cheap loans, and other subsidies for domestic firms. Others have noted regulatory barriers imposed to impede foreign businesses. The most serious issue has been widespread reports of forced technology transfer and intellectual property theft.

Critics accuse China of gaming the WTO, taking advantage of its benefits while ignoring inconvenient rules like illegal subsidies and intellectual property protection.

Ironically, the initial goal of China’s integration was to bring it out of poverty.

The country has far exceeded this. China has grown into the world’s largest manufacturer, second largest economy, and primary geopolitical rival of the United States:

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Growing U.S. Concern

The United States has become increasingly skeptical of its economic relationship with the country.

Donald Trump’s push against China started in 2016, and this view has spread across the U.S. political aisle today.¹

Tariffs on China enacted by Trump in his first term remained under the Biden administration, despite vastly different political views. Early in Trump’s second term, the economic confrontation has only increased.

U.S. politicians on both sides are focused on several issues that have developed since 2001:

Intellectual Property and Trade Theft: China has long been accused by trade partners of stealing trade secrets and IP. Notable cases include chip designs, self-driving cars, and wireless technology.² In 2017, Congress estimated that Chinese IP theft cost the U.S. between $225 and $600 billion annually. Intellectual property and trade theft remains one of the most contentious issues.

National Security and Stability: China’s manufacturing dominance spans critical sectors like technology, pharmaceuticals, and heavy machinery. The U.S. is heavily focused on reducing its reliance on its rival for these important products amid growing tensions between the two countries. Covid-19 also exposed how vulnerable distant, offshore supply chains can be, causing widespread shortages across industries.

Domestic Industry and Job Displacement: The replacement of domestic labor with foreign labor inevitably displaces U.S. jobs. Looking at manufacturing employment in the United States over time, there is a clear correlation between China’s integration and the decline in U.S. manufacturing:

However, other forces at play include technology and automation, which lower the need for workers. Additionally, it is very typical for economies to transition from manufacturing-based to services-based as incomes rise over time.

What is the Ultimate Outcome?

Globalization and trade with China hang on a fragile balance. Lower prices have been deflationary, and U.S. firms have benefited enormously from focusing on high-value R&D and product design.

However, as China has grown, the United States is increasingly sensitive to issues like intellectual property, national security concerns and employment.

U.S. tariffs on China are a telling indicator of today’s shifting trade environment. During Trump’s first term, pushback against China—especially through tariffs—was considered fringe. Yet these tariffs were not only kept by the Biden administration, but slightly increased. In the early months of Trump’s second term, tariffs and other protectionist policies have expanded further.

A full trade decoupling from China is unrealistic. But a slow unwinding of U.S. reliance on Chinese manufacturing is already underway.

Today, U.S. policy focuses on two main goals:

1. Reshoring strategic industries like semiconductors and medicine back to the U.S.

2. Pushing U.S. corporations to relocate supply chains away from China.

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1  _{https://www.pewresearch.org/global/2024/05/01/americans-remain-critical-of-china/}

2  _{https://foreignaffairs.house.gov/wp-content/uploads/2020/02/Egregious-Cases-of-Chinese-Theft-of-American-Intellectual-Property.pdf}