Explanations for Business' Trade War Preferences

A case study examining the reasons behind trade war preferences for hypothetical U.S. businesses.

Few Are Better Off

The U.S. – China trade war arose from economic protectionist policies under President Trump. The conflict saw both nations raise tariffs and trade barriers on imported goods. American firms had mixed responses. Large U.S. firms with foreign subsidiaries in China opposed the trade war publicly and privately due to incentives of protecting their foreign exports. Firms involved in industries with intellectual property had no significant preference on the trade war. Some firms supported the policies due to concerns over intellectual property theft while others opposed the measures due to reliance on Chinese - American collaboration and trade. Thus, there is no preference correlation for these firms. Finally, firms in Republican leaning states were unlikely to publicly oppose, but likely to do so via private channels. This is a classic time inconsistency problem. The firm opposes privately so as not to ire the firms’ in-state consumer base, but with the interest of protecting supply chains and goods exported from China which will be further harmed as tariffs are continuously raised. Thus, the outcome for these firms is to privately oppose the trade war until the losses incurred from trade war policies are greater than potential losses from public opposition.

Evidenced by public and private opposition, large firms with foreign subsidiaries in China were highly upset with President Trump’s trade war policies. Most of these firms are multi-national corporations. With approximately 10% of global wealth ($21 trillion), MNC’s are companies which own or manage production facilities in two or more countries. Typically, these firms seek nations with political stability and low chance of harmful policy changes – trade wars disrupt these interests. The majority of MNC’s in opposition operate with vertical foreign direct investment. Vertical FDI refers to investment by an MNC in a foreign market with the purpose of exporting goods back to the home market. For instance, Apple Co. may invest in a Chinese iPhone assembly factory to ship products back to U.S consumers. Because of this, MNCs engaged in vertical FDI advocate for low trade barriers and shipping costs. Their interests align with foreign exporting goods. When trade war tariffs are enacted, shipping costs become more expensive because products are taxed, and overall trade barriers are raised. In an Axios journal article, researcher Rebecca Falconer cites a survey conducted by the American Chambers of Commerce in which, “74.9% of almost 250 MNC respondents say U.S. – China tariff increases are hurting American business.” The survey states a large decline in consumer demand as cause for this business pain, with 35% of respondents restructuring their business operations in China and over a third delaying or canceling future investments due to the trade war. These statistics explain why large MNC firms strongly oppose the trade war – the goods they produce in China become more expensive to American consumers, thus decreasing companies’ outputs, profits and future investments.

Intellectual assets are greatly important to U.S. exports. As Professor Osgood states in a research article, “licensing of intellectual property by U.S. owners to foreign consumers exceeded $126 billion dollars in 2015.” Firms located in industries which create or use intellectual property observe no correlation in trade war preferences. These firms are just as likely to support as they are to oppose President Trump’s economic agenda. While a multitude of explanations exist, the dilemma between seeking protection for intellectual property assets due to theft concerns and a reliance on Chinese research partnerships and supply chains dictate firms’ choices. Those firms with Chinese intellectual property theft concerns are more likely to support trade war, as trade barriers will protect their intellectual assets. Firms which depend upon Chinese research oppose trade war policies as fraying relations make research collaboration more difficult. Chinese intellectual property espionage is certainly a valid concern for firms. In an article titled, U.S. Intensifies Crackdown on China Intellectual Property Theft, researcher Masood Farivar states, “In 2018, the Department of Justice launched a ‘China Initiative’ with the aim of prioritizing Chinese espionage cases. Since then, the department has announced charges in nearly 24 economic espionage and intellectual property theft cases.” In addition, the FBI is currently conducting approximately one thousand investigations of suspected Chinese tech theft. For firms who believe their intellectual property was stollen via Chinese espionage, the “China Initiative”, as part of the overall trade war, is welcomed. In contrast, many U.S. firms depend on Chinese scholars for academic collaboration and trade. These firms would oppose trade war policies because they seek to import and export intellectual assets and knowledge. In an article titled, Winners and Losers in U.S.-China Scientific Research, author Jenny Lee states, “findings show that over the past 5 years, U.S. research article publications would have declined without co-authorship from China, whereas China’s publication rate would have risen without the U.S.” While the U.S. leads the world in research and development, China is a rapidly rising close second. Experts predict China will bypass the U.S. in research publication by 2022. The time period between 2014 to 2018 saw a 52.5% increase of Chinese – American co-authored journal publications, with a 2018 peak of 175,665 collaboratively published articles. This accounts for 10% U.S. and 9% of China’s total publications. A large amount of U.S. firms involved in intellectual property depend on a healthy U.S. – China relationship to maintain intellectual trade partnerships, these firms oppose trade wars.

U.S. firms located in Republican leaning states are unlikely to oppose the trade war publicly, but likely to resist via private channels such as lobbying. These firms face time inconsistency problems. They are incentivized not to displease their in-state consumer base, but do not want to suffer profit losses from trade war tariffs. Time inconsistency problems arise when policy preferences of an individual or firm change over time. When the trade war began, firms in Republican states did not oppose publicly. These firms estimated business losses incurred by angering the Republican consumer base were greater than losses from tariffs. However, they oppose privately because as time continues, the business losses from tariffs will surpass those from maintaining political alignment with the consumer base. In a behavioral economic experiment titled, Intentional Time Inconsistency, researcher Agah Turan, finds participants, “might behave according to the perceptions of others about them” when, “reputation and trust have secondary effects on the economic outcome”. These findings would therefore suggest, firms in Republican states behave according to the political ideologues of in-state consumers due to potential effects of economic outcome, regardless of the firms’ actual stance on trade war. As time continues, and losses from tariffs increase, these firms may change their preference to public opposition in the hopes of more effectively easing tariffs.

Each firms’ unique position (large MNC firms, firms involved with intellectual property, firms in Republican states) dictate the degree of trade war support or opposition. Interestingly, no firm from these findings only supports the trade war, either publicly or privately. Lack of support infers trade war policies harm all these businesses to varying degrees, few businesses are better off.

Works Cited

Falconer, Rebecca. "Trade War: U.S. Firms in China Say Tariffs Are Hurting Business." Axios, 22 May 2019 Accessed 9 Nov. 2020.

Farivar, Masood. "U.S. Intensifies Crackdown on China Intellectual Property Theft." Voice of America News, 15 May 2020 Accessed 10 Nov. 2020.

Lee, Jenny. "Winners and Losers in U.S.-China Scientific Research Collaborations." Springer, 6 July 2020 Accessed 10 Nov. 2020.

Turan, Agah. "Intentional Time Inconsistency." Springer U.S., 2 June 2019 Accessed 11 Nov. 2020.

Hypothetical Business Reasctions to Trad
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