The United States and China are making progress towards a partial trade agreement for the short term. Analysts suggest that China is showing signs of greater willingness to negotiate because China currently needs agricultural imports from the United States. The African Swine Fever outbreak in Asia drove up the price of pork, increasing demand for agricultural imports. Although the United States and China are coming closer to a trade agreement, the uncertainty generated by the recent trade war may have unexpected consequences in the long term.
Relatively few economic studies identify the effects of rising tariff uncertainty on productive investments and labor allocation. However, a forthcoming article by Bilge Erten and Jessica Leight in the Review of Economics and Statistics identifies the effects of reduced tariff uncertainty on labor outcomes, input allocation, and output in China following China’s accession to the World Trade Organization in 2001. Prior to China’s accession, the U.S. Congress had to renew China’s Most Favored Nation (MFN) status ever year. This generated substantial risk to Chinese exporting industries since the United States imposed high tariffs on non-market economies that did not have MFN status. After 2001, Chinese counties that had greater prior exposure to tariff uncertainty reallocated productive resources away from agriculture into manufacturing and ancillary sectors, and agricultural production declined. Chinese workers transitioned out of farm work, manufacturing exports rose, and foreign direct investment rose in response to reduced tariff uncertainty. This demonstrates that trade wars can have unintended consequences from the uncertainty that they generate alone.
Economists generally favor reduced barriers to trade since free trade leads to more efficient allocation of resources. The United States has a comparative advantage over China in the production of many agricultural products, and China has a comparative advantage in the production of many manufactured goods. For example, China has not yet managed to grow corn as efficiently as the United States. Furthermore, concerns about food safety have dramatically reduced consumer demand for certain foods produced in China. Nevertheless, China is making strides to improve consumer confidence in domestically produced food products, and increased uncertainty regarding trade with the United States may lead China to reallocate more resources towards food production.
As China became more open to free trade beginning in the 1980s, it shifted many of its resources away from the production of agricultural goods. The movement of labor out of agriculture reduced agricultural production in rural China, indicating that although China’s population is large, China no longer has excess labor employed in agriculture. One of China’s strategic goals has been to become self-sufficient in agricultural production. Food security in China is expressed as “grain security” and China has provided and steadily increased price supports to domestic agricultural producers ever since the 2008 world food prices. Unexpected shocks like the outbreak of African Swine Fever keep China dependent on agricultural imports, but trade tensions between the United States and China may nevertheless encourage Chinese producers to invest more productive outputs into agriculture to reduce dependence on inputs in the future.
