#xi Beyond Citations | High-tech casualty of Trump's global war on trade
Trump might be overlooking the interests of US’ high-tech industries as he wages a tariff war with China.
Every president of the US likes to declare a war on something. When there’s so much power at the disposal of a person elected by just one twentieth of the world population, war waging seems almost irresistible. It helps that the US has the highest number of military bases beyond its borders and also has the ability to project power to every corner of the globe. But this power is not just about military might. It is as much about being the biggest economy in the world and having a dominance over the information domain.
Unlike US presidents of yore that fought questionable to based-on-lies lethal wars in Vietnam or Iraq, Trump prefers the economic war using his favourite-solution-for-every-problem called tariffs. So when the US electorate resurrected him in 2024 after a loss in 2020, Trump decided to wage a war on the global economy by tariffing friends and foes alike. Such was Trump’s rage about the world's relatively poorer countries taking advantage of the richest that his administration did not even spare the penguins.
Trump declared war on the self-styled “Liberation Day” on 2 April 2025. He announced universal tariffs of 10 per cent on all goods entering the US, reciprocal tariffs on select countries based on the US’ trade deficit with them.
For nearly a week, there was mayhem. Some countries were reaching out to Trump for negotiations, while some like China were imposing retaliatory tariffs. Markets in the US and elsewhere began declining quickly — wiping out trillions of dollars. Even the US bond market, generally considered a safe haven, began emitting signals of distress. Barely a few hours after exhorting people to invest in the market, Trump blinked. On 9 April, he announced a 90-day pause on reciprocal tariffs with one big exception — Trump hiked tariffs on China to 125%.
Even as the rest of the world took a sigh of relief, including India, China planned retaliation. It has now imposed a 125 per cent tariff on the US. But then again the US blinked first with China — the Trump administration has exempted computers, electronics and smartphones from the recent rounds of tariffs.
Amid all this chaos, is Trump overlooking the tech industries even as he focuses on TikTok, automobiles, fentanyl, and overall trade deficit? How do import tariffs impact the tech industries in the US? Do tariffs even help these industries? Did Biden’s strategy of using industrial policies work better for the tech industries?
Four scholars from the Tsinghua University and Hong Kong public universities have co-authored a 2024 paper in the Journal of Monetary Economics to find answers to the above questions.
Ju, J., Ma, H., Wang, Z., & Zhu, X. (2024). Trade wars and industrial policy competitions: Understanding the US-China economic conflicts. Journal of Monetary Economics, 141, 42-58. https://doi.org/10.1016/j.jmoneco.2023.10.012
Ju et al. conduct a quantitative evaluation of US-China trade war and industrial policies. They examine the tariffs instituted by Trump 1.0 in 2018 as a response to China’s Made-in-China 2025 (MIC 2025). Announced in 2015, the MIC 2025 plan aimed to rapidly develop 10 high-tech industries in China using industrial policies such as subsidies. These industries included advanced robotics, AI, new energy vehicles and high-tech shipping among others. The authors also examine a pivot to industrial policies during the Biden presidency, embodied by the CHIPS and Science Act in 2022 that provided domestic semiconductor manufacturers with huge subsidies.
The paper’s primary argument is that industrial policies are less distortionary as compared to import tariffs.
When appropriately designed and executed, industrial subsidies tend to be a more efficient response to industrial subsidies implemented by other countries compared to import tariffs. As previously explained, both import tariffs and industrial policies can tackle the misallocation caused by foreign industrial policies. However, import tariffs are less efficient in this regard because they elevate import prices. In contrast, well-implemented industrial policies can effectively address misallocation with considerably fewer distortions, and import tariffs (or subsidies) can be used to address the resulting terms of trade issue.
Based on their quantitative analysis, the authors identify some key insights:
First, the MIC 2025 subsidies on Chinese high-tech industries result in ‘2.47% increase in China’s welfare, and, surprisingly, a 0.44% increase in the US welfare as well.’ While China’s welfare gains can be explained through the obvious scale economies achieved with the help of subsidies, the US also gains (even if less) because of a fall in intermediate prices.
Second, welfare gains for the US from the July and August 2018 tariffs targeting China’s MIC sectors is 0.033%.
Third, in a scenario involving a non-cooperative Nash tariff game (that is, when both countries impose tariffs), there are welfare losses for both the US at −0.017% and China at −0.251%. That is, both states lose. This scenario is currently unfolding at a far greater scale with both the US and China imposing tariffs well over 100 per cent on imports from each other. Welfare losses for both are expected to be higher if the current trade war was to last long.
The fourth insight makes the case that Biden’s approach was better than that of Trump 2.0:
If it is feasible for the U.S. to subsidize its own high-tech industries, we show that, in a Nash game with both tariff and industrial policy competitions, the optimal policy for the US is a much lower tariff on Chinese high-tech imports (5.57%) plus a subsidy rate of 9.59% for its own high-tech industries. This policy combination would increase the U.S. welfare by 0.26%, even under the Chinese optimal retaliation tariffs.
Would Trump 2.0 at some point revert to Biden’s strategy?