US-CHINA A New-Keynesian perspective from

the eyes of US
TRADE WAR

Course Name: Macroeconomic Environment of

Business
Presented by Group 7
Sourabh, Deepanshu, Anand, Shubhadeep,
Venosh
US Economy-From Neo Classical
towards New Keynesian
• The USA trade policy in general has sought to
 Liberalize markets by reducing trade and
investment barriers through agreements and
negotiations
 Foster an open and non-discriminatory rules-
based trading system, including through the World
Trade Organization (WTO)
 Enforce trade commitments and laws
 Support economic growth; and offer relief to U.S.
firms and workers from import competition and
“unfair” foreign trade practices
• After the failure of Neo-classical policies during the
Great depression of 1930s, US adopted a lot of
Keynesians and Post Keynesian policies.
 US-CHINA Trade
 U.S. exports to China were only $106.6 billion
 US imports from China were $452.2 billion
 The U.S. trade deficit with China in 2019 was $345.6
billion.
 The major U.S. imports from China are communications
equipment, computer equipment, miscellaneous
manufactured commodities (such as toys and games);
apparel, and semiconductors and other electronic
components
 The major U.S. goods exports to China are aerospace
products (mainly civilian aircraft and parts), oil seeds and
grains (mainly soybeans), motor vehicles, and
semiconductors and electronic components
 US-CHINA
Trade War
• The world's two largest
economies have been
locked in a bitter trade
battle for the past few
years.
• It has intensified after the
election of Mr. Donald
Trump as President of the
United States.
• The dispute has resulted in
imposition of tariffs and
counter-tariffs by both the
countries.
Major concerns of US in US-
China Trade
1. Industrial policies (including widespread use of
trade and investment barriers, financial support,
and indigenous innovation policies) that seek to
promote and protect domestic sectors and firms.
2. Government-directed financial policies that
promote high savings (but reduce private
consumption), encourage high fixed investment
levels (but may contribute to overcapacity in many
industries) and a managed exchange rate policy
that may distort trade flows.
3. Excessive State Capitalism in China.
4. Failure to provide adequate protection of U.S.
intellectual property rights and (alleged)
widespread government-directed cyber-theft of U.S.
trade secrets security to help Chinese firms.
5. Failure to implement its WTO obligations.
6. Technology Transfer Issues.
 New Keynesian School of Economics
 New Keynesian(NK) economics is the school of thought in modern
macroeconomics that evolved from the ideas of John Maynard Keynes
 In the seventies, however, new classical economists such as Robert
Lucas, Thomas J. Sargent, and Robert Barro called into question many
of the precepts of the Keynesian revolution
 The label "new Keynesian" describes those economists who, in the
eighties, responded to this new classical critique with adjustments to the
original Keynesian tenets
 Some of the major points advocated by NK economist are
 Admits the benefits of Private property and free market system  
 Stickiness of wages and prices
 Role of State especially in time of Crisis(running fiscal deficits)
 International economic institutions should play a role in encouraging
a global division of labour based on Competitive advantage and
dynamic comparative advantage
 Justification of US concerns : A
New-Keynesian Perspective
US Criticism of Chinese Industrial Policy
and State Capitalism(Point No.1 and 3)

 As per New Keynesians, the role of State is to promote free

and fair trade and intervene in time of crisis(shocks).
 Too much interference and collusion between market
participants(the Chinese Government and Firms) leads to
market failure.
 The protectionist policies for Chinese firms gives an unfair
advantage over US firms and decrease the overall gains
from the trade.
 An excess of these will decrease the competitiveness of
Chinese Industry in the long run (For example, preferential
treatment to Indian public Sector Undertakings during the
licensing era,1947-1990 led to their decline).
 Financial policies that promote high savings
& reduced consumption... (Point No.2)
 Chinese Government-directed financial
policies promote high savings but reduce
private consumption, encourage high
fixed investment levels but may
contribute to overcapacity in many
industries.
 These policies distort the natural market
equilibrium.
 We can describe demand-supply
equilibrium by Keynesian model of
income determination, AS-AD model.
 The decreased aggregate demand due to
government directed Financial Policies will
distort the equilibrium in the domestic
economy which can impact global
economy(for example reduction in China’s
import of US products).
 Financial policies that promote
high savings & reduced
consumption...(Point No.2)– contd.
• The managed exchange rate policy of China distorts
trade flows and impacts the Balance of Trade. The
US criticism is justified as this policy has led to
negative Trade balance of US with China.
• The Chinese currency has weakened since the
Trump administration began to talk of imposing
tariffs on Chinese exports in early 2018.
• By deliberately weakening its currency China is able
to offset the impact of US tariffs on its products.
US dollar- Chinese Yuan(Renminbi)
Exchange Rate Data
Failure to implement WTO obligations,
IPR, Technology Transfer(Point No.4 to 6)
 According to New Keynesians “International economic
institutions should play a role in encouraging a global division of
labour and international economic integration”.
 China has time and again failed to implement its WTO
obligations.
 Chinese firms have also failed to honor the Intellectual Property
Rights (IPR) of US firms. In 2018, the United State Trade
Representative(USTR) estimated annual U.S. economic losses
from China’s “unfair” IPR policies at $50 billion.
 Chinese government often pressurize foreign firms to transfer
technology (for example keeping transfer of technology as a key
condition to do business in China).
 China’s failure to adhere to the WTO guidelines and property
rights(IPR, Technology rights, Patents) results in market failure
and loss to foreign firms. The US criticism is also justified on the
basis of Coase Theorem (given by  Ronald H. Coase) which
states that “Markets can fail if there are no property rights and
negotiation is costly”.
 References

1. https://www.uscc.gov/sites/default/files/2019-11/2019%20Executive
%20Summary.pdf
2. https://www.bbc.com/news/business-44529600
3. https://www.bloomberg.com/opinion/articles/2016-11-18/even-trump-
is-a-keynesian
4. https://www.census.gov/foreign-trade/balance/c5700.html
5. USTR, Press Release, April 3, 2018, available at
https://ustr.gov/about-us/policy-offices/press-office/press-releases/20
18/april/under-section-301-action-ustr
6. https://www.reuters.com/article/us-usa-trade-china-timeline-idUSKCN
1VQ24Y
7. WTO’s Dispute Settlement website at
https://www.wto.org/english/tratop_e/dispu_e/dispu_by_country_e.ht
m
8. https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Value-of-W
TO-Trade-Agreements-in-a-New-Keynesian-Model-42733
9. https://www.census.gov/foreign-trade/balance/c5700.html
10.https://www.bbc.com/news/business-45899310
THANK YOU