a few months Before the 1980 US presidential election, George HW Bush visited Beijing. He received a frosty reception. Days earlier, Bush’s running mate, Ronald Reagan, had angered China by saying he wanted an official relationship with Taiwan, which China claims as its territory. America must stay out of China’s “internal affairs,” the foreign minister said — just as China would not interfere in the U.S. presidential race.
The prospect of a Reagan victory worried not only Chinese leaders but also exporters. Under President Jimmy Carter, Reagan’s opponent, America had done them a favor by establishing “normal” trade relations, which meant they faced the same low tariffs that America charged most other trading partners. However, there was a catch. Normal relations had to be approved by the President and Congress each year. Would Reagan repeal them?
Chinese exporters, as well as the American companies that buy from and invest in them, now face a similar threat from another talkative and charismatic presidential candidate: Donald Trump. If he wins in November, he has threatened to escalate the trade war he started in 2018 by imposing tariffs of 60% or more on Chinese goods. Its allies have also called for the withdrawal of normal trade ties with China, which became “permanent” in 2000. A new paper by George Alessandria of the University of Rochester and four co-authors suggests that the way exporters responded to Reagan’s threat may hold lessons for new trade wars.
Entering a foreign market is expensive for any company. It must first establish a “beachhead,” as Richard Baldwin said IMD Business School in Lausanne has written, built distribution channels, advertised to potential buyers and brought products into compliance with local regulations. Many of these upfront costs are fixed (they must be paid even if sales are small) and sunk (they cannot be recouped if the company packs up and leaves).
This has two consequences. Exporting, even in an era of globalization, is surprisingly rare. A 1985 survey of French manufacturers found that only 15% sold into foreign markets. In a survey of Colombian factories, this figure was 26%. Even in China in the mid-2000s, a time of hyper-globalization, the export rate ranged from 59% (in furniture manufacturing) to 12% (in paper and printing), according to Mr. Alessandria and his colleagues. Another consequence is that exports are persistent. Once a company has established a beachhead, it rarely evacuates from a country.
Companies must believe that the rewards will be large enough and last long enough to justify the initial costs. The prospect of tariff increases and trade wars makes such calculations more difficult. Even after Carter cut tariffs on China, the country’s exporters had to weigh the chances of them rising again. Fears were acute in sectors such as toys, where pre-1980 rates were much higher than the ‘normal’ rates applicable afterwards. Likewise, even after Trump raised tariffs on China in 2018, exporters had to weigh the chances of them falling again.
Exporting from China to America was and remains essentially a gamble on American trade policy. The pattern of betting reflects companies’ views on the tariffs they will face. Although economists cannot directly observe these beliefs, they can observe the export decisions that reflect these beliefs. Therefore, by examining how trade between America and China has evolved over time and varied from product to product, Mr. Alessandria and his co-authors can infer what companies must have believed about future U.S. tariff policy.
They believe it took some time for the 1980 tariff cuts to become credible. For years, exporters from China have traded as if the chance of a turnaround was 70% or more. The risks subsided later in the decade after Reagan made his own visit to Beijing, Shanghai and Xi’an in 1984. (It was a “breathtaking experience,” he said, although it took him two stitches to snare a quail egg with his chopsticks.) By the time China joined the World Trade Organization in 2001, this probability had dropped to about 5%.
The dynamics of the 2018 trade war are similar “but in reverse,” write Mr. Alessandria and his co-authors. Despite Trump’s fiery rhetoric, Chinese exporters did not act in anticipation of his tariffs. When the war broke out, they expected it to culminate quickly. Judging from their actions in 2019 and 2020, they believed that the probability that the war would end soon was more than 90%. When Trump left office and the tariffs did not move with him, their hopes evaporated. The probability of an end to the war fell to 46% in 2021 and to 24% in 2024. The results have a paradoxical implication: Tightening tariffs under President Joe Biden has done more damage to trade than imposing them under Mr. Trump.
Bigger and worse
Would a second trade war be just as damaging? The sheer recklessness of Trump’s latest threat is double-edged. On the one hand, a sweeping 60% tariff would be far more disruptive than the targeted 25% tariffs he imposed in 2018. But their dizzying height can make them harder to maintain. If they irritate too many consumers, harm too many American companies or take too great a toll on the stock market, they could prove relatively short-lived. Chinese exporters did not take Trump’s trade threats seriously before 2018. While they won’t want to make the same mistake again, Trump’s most damaging policies are the ones that outlive his time in office and become a permanent feature. And not everything Trump says in his presidential campaigns comes true.
The same was true for Reagan. He never realized his desire to restore official relations with Taiwan. In Beijing, Bush did his utmost to quell the anger his comments had caused. “I certainly respect your opinion about staying out of the US elections,” he said in response to the Chinese foreign minister. “I would like to stay out there myself, because it gets quite warm in the crossfire.” For Chinese exporters and the American companies that buy from them, this year’s election will be just as uncomfortable. ■
Read more from Free Exchange, our column about economics:
In defense of a financial instrument that does not do its job (February 15)
Universities fail to stimulate economic growth (February 5)
Biden’s re-election chances are better than they seem (February 1)
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