Trade Tensions and the US Soft Power

The era of “de-risking”

The world is entering an era of de-risking. One of the risks of de-risking is it being turned into larger scale decoupling, de-globalization, and dislocation. In this context, this paper will discuss research findings on how the U.S. trade war against China that was started in March 2018 may have affected U.S. soft power as proxied by the viewership of U.S. movies and sales of U.S.-brand automobiles in China.

U.S. share of sales in the world and China

U.S. movies account for 77% of global movie sales in dollar amount with a slight decline in recent years to 67%. in contrast, the U.S. has the world’s largest military and its military expenditure is greater than the sum of the next seven military powers combined, but that amount accounts for 30% of military expenditures globally, so the dominance in the film realm is quite striking. Additionally, U.S.-origin foreign direct investment (FDI) is 27% of global FDI; the U.S. GDP is around 18% of global GDP; and U.S. imports as a share of global imports and U.S. exports as a share of global exports are at 10% or lower. Relative to even those hard military and economic powers, U.S. movies are extremely prominent in global movie scene. So, revenue from U.S. movies in China relative to all non-Chinese movie revenues in China from 2012 to more recent years is around 80%. Similarly, all Chinese exports to the U.S. as a share of all Chinese exports and all Chinese imports from the U.S. as a share of all Chinese imports are on the order of 27% or lower. The U.S. FDI in China as a share of all FDIs in China is a lower number at 10%.

Movie revenue by country as total foreign movie revenue in China

Relative to those measures, U.S. movies are extremely dominant in the Chinese movie scene. In comparison, movies from virtually any other country as a share of all foreign movies in China is a much lower number. Therefore, despite all the tensions one reads and hears about, U.S. movies are extremely popular. It’s partly a market outcome, and it’s not unique to China.

U.S. movies and products as a form of soft power

The top 15 best-selling automobile brands last year in China contained many foreign-brand products. Given that the automobile sales are important big-ticket consumer products, automobiles could also carry soft power. Movies perhaps are more direct. Other U.S. products are somewhat less direct, but they partially reflect the soft power component. U.S. movies are a special case of creative products and have been recognized by many experts as an element of U.S. soft power. As soft power, they help to spread U.S. values, U.S. interests, knowledge about U.S. institutions and history, and sympathy and potential buy-ins for the U.S. worldview.

Professor Joseph Nye Jr. defined soft power as “the ability of a country to attract or co-opt others to get desired outcomes rather than coercing with threats or inducing with payments.” In his books, he often mentioned U.S. movies as a particular example of soft power. Soft power can potentially extend or complement U.S. hard power in military and economic might. Therefore, the influence going through Hollywood to the world is also an important source of soft power.

Effect of the trade war on U.S. soft power

The current wave of trade war was launched by President Trump in 2018 against China and some other countries, but was reorganized to be concentrated on China. This was escalated by President Trump twice in terms of raising tariffs. Currently, U.S. tariffs on imports from China have been raised to an extremely high Smoot-Hawley tariff level of the 1930s, which some blame was partly responsible for the Great Depression. The Trump tariffs were justified by the Trump Administration as a penalty for Chinese government’s unfair trade policies and practices, theft of U.S. intellectual property rights, and other deviations from international rules and norms.

In theory, how the U.S. trade war affects U.S. soft power, including soft power in China, can go in either direction depending on whether citizens in the targeted country regard the rationale behind the trade war as righteous action against unfair policies of their own country, or on the other hand, potentially as policies that are inconsistent with the U.S. image and professed ideals of maintaining rule-based world order, diminishing soft power. An example of how such sanctions could improve U.S. soft power is the U.S. sanctions on Venezuela in 2014. After the U.S. announced the sanctions against Venezuela, there was an increase in U.S. movie exports to Venezuela from around 87% before the U.S. sanctions to a dominant 98% after.

However, there is no systematic evidence of how the current trade war is affecting U.S. soft power in China and other countries since soft power tends to be harder to measure. Perhaps viewership of U.S. movies and automobile sales of U.S. brands could be proxies measurements of soft power.

Double features of U.S. movies

U.S. movies possess double features in the sense they are certainly a form of entertainment, but it has been recognized by political scientists and U.S. government officials at various times that they are also an advertisement for U.S. values. For example, in the literature people refer to Hollywood as “the little State Department,” as at least indirectly it might help to promote the objective of the U.S. State Department.

But people may argue that since movies are largely not produced by governments, U.S. values in U.S. movies could be an incidental outcome. Surprisingly, it is not entirely the case, because the U.S. government has an active industrial policy for promoting certain type of U.S. movies. For any movie involving war themes, the U.S. Department of Defense often has a Hollywood liaison office, and they will offer subsidies for appropriate movies. The Central Intelligence Agency apparently also has a program to encourage movies to be made in a certain way.

One of the recent examples of this is the blockbuster movie “Zero Dark Thirty.” There are stories on the internet about how the director re-wrote the script to conform with the advice from the Department of Defense. In return, they received in kind subsidies from the U.S. government.

Findings on U.S. movies

One way to check how the trade war started by President Trump might affect how regular Chinese people receive U.S. values or U.S. products as reflected in the movies or automobiles is to explore regional variations across China. When President Trump raised tariffs, it did not raise all tariffs, because there are sector variations. Because different parts of China have different exposure to trade with the U.S., the same Trump tariff increase can translate into different kinds of impacts on people in different parts of the country. The point is, even though the Trump tariff increase is same increase for Chinese exporters, it translates into differential effects on the lives of people in different parts of the country. So, these have very natural regional variations in exposure to the Trump tariffs.

Using this regional variation, the question of how the Trump tariff increases affected specific regions of the country and whether there was a response in terms of consumption of U.S. products becomes useful for examining data. If the Trump tariffs reminded people that the U.S. action is justified and it’s a penalty to their own government’s wrongdoings, those who are more exposed to the Trump tariffs may decide to watch more U.S. movies. Alternatively, they may respond to the tariff increase by reducing their viewership of U.S. movies. The data found that regions that are more exposed to Trump tariff increase tends to reduce the viewership of U.S. movies by fairly significant amounts. One standard deviation of the increase in exposure to U.S. tariffs translated into a 5.6% reduction in U.S. movie viewership.

Those numbers by themselves may not be enough because the exposure to the Trump tariffs can also translate into reduction in income resulting in less consumption of everything, including U.S. movies, so we accounted for income effect. One way to account for the income effect is to directly account for how change in income affects change in movie viewership. Another way is to compare viewership of U.S. movies with viewership of movies in general.

Another important thing to account for is for actions of the Chinese government. One can imagine that either the central or local government’s propaganda may lead to change in U.S. movie viewership rather than consumer’s own choice. To tackle this, the research looks into evidence of potential variations in government propaganda emphasizing the trade war in regions more exposed to the Trump tariff increase. The key finding is there is no discovery of regional variations supporting the idea of greater government propaganda in more tariff-exposed regions.

Findings on sales of U.S.-brand cars

The research finds similar data patterns on sales of U.S.-brand automobiles. Exposure to U.S. tariffs seems to reduce Chinese consumers’ appetite for U.S.-brand cars. U.S.-brand automobiles come in two varieties: cars imported from the U.S. and cars made in China through joint venture companies. The imported cars are affected by Chinese increase in tariffs from the U.S. because they become more expensive, but this effect goes beyond reduced imports of U.S. cars. The data also shows this reduction applies to locally made U.S.-brand cars, which undergoes no change in costs. This tells that people in more tariff-exposed regions tend to buy fewer U.S. cars after the Trump tariff increase.

Evidence of heterogeneity

The findings also suggest heterogeneity in people’s responses based on their income level and other features. Chinese movie theaters can be classified into those that charge higher ticket prices versus those that charge lower ticket prices. Presumably relatively affluent moviegoers go to fancier theaters while other people go to less fancy movie theaters. The finding is that the reduction in U.S. movie viewership tends to be more pronounced in lower-priced theaters whereas people going to fancier theaters appear to display smaller aversion to U.S. movies. The sale of automobiles also shows heterogeneity. U.S.-brand cars occupy broad range of price categories. Consumers that buy relatively less expensive U.S. cars display stronger aversion to U.S. brands once the trade wars began whereas people who buy expensive U.S. cars show no aversion. Similarly, there is a reduction in online search for U.S. colleges once the trade war started in regions that are more exposed to U.S. tariffs. In contrast, other foreign colleges may correspondingly see an increase in application from Chinese students.

2018-2019 U.S.-China trade war

The U.S.-China trade war was started in March 2018 by President Trump. He asked the United States Trade Representative (USTR) to apply additional tariffs of 50 to 60 billion dollars to Chinese imports citing Section 301 of the U.S. Trade Act of 1974.This was announced in March 2018, and the first wave came into effect in July and August of 2018. Subsequently, President Trump raised the tariff two more times, covering an additional 200 and then 272 billion dollars of Chinese goods in July 2018 and August 2019 respectively. China retaliated with its tariff increase on 185 billion dollars’ worth of U.S. products. The escalation of tariffs stopped after the January 2020 “Phase One” agreement signed between the U.S. and China, although it did not reverse the tariffs. So, all the tariffs that were put in place remain today.

Are U.S. actions justified under international law?

How people in the recipient countries of trade tension view actions by the other country might partly depend on whether they perceive this as the right or wrong thing to do. In that context, China brought a case against the U.S. in the WTO. After a year and a half, the WTO ruled through a panel consisting of countries other than the U.S. or China that U.S. tariffs are “inconsistent with U.S. obligations under WTO Articles I and II.” WTO Article I says U.S. tariffs on imports from any country should be the same as its tariffs on the same goods from any other countries, called the most-favored nation principle. Then, violation of Article II signified a violation of a tariff commitment, as once a country announces a tariff schedule, it cannot unilaterally raise the committed tariffs. Hence, the U.S. tariff increase could be different from the U.S. sanctions on Venezuela in 2014 or the U.S. sanctions on Russia in 2022, as neither was ruled by WTO as illegal.

Number of imported movies over 2012-2019

The way China imports foreign movies is to put foreign movies into two categories: blockbuster movies and other artistic and smaller movies. Blockbuster movies had a quota of foreign movies of 34 or so movies from WTO accession negotiations. The data verified that after the Trump trade war, there was no reduction in this quota and China was importing essentially as many foreign movies as it did before. The movie imports can be controlled by the Chinese government because all movie imports are done by two state-owned firms. However, the showing of the movies by theater is essentially decided by private sectors, as 98.8% of the movie theaters in China are privately owned. It was also verified that there was no reduction in the quality of U.S. movies imported during that period.

Effects on viewership of U.S. movies

Since the Trump tariff increase on imports from China result in different regional exposures, this tariff increase can be translated into different regional exposures geographically. Statistical analyses were also done of the variations and results were graphically summarized using binned-scatter plots. The graph looks at the relationship between changes in local movie viewership from 2019 relative to 2017, using the city as observation and as individual theaters. The plot finding suggests that on balance, regions that have experienced greater increase in the Trump tariffs tend to show much bigger reduction in local viewership of U.S. movies. However, there is no corresponding change in viewership of other foreign movies, although there is an increase in local viewership of Chinese movies. So, when people decide to watch fewer U.S. movies, they switch to see more Chinese movies.

Effects on market share of automobiles

For automobiles, the scatter plots show that regions more exposed to the Trump tariff increase show bigger reduction in local purchase of U.S. cars. In contrast, there is no such correspondence between local sales of Japanese cars versus local exposure to the Trump tariffs. Interestingly, more exposure to the Trump tariffs does not lead to more sales of Chinese automobiles either but sales of German-brand cars increased. So, when people decide to buy fewer U.S. cars, they go to buy more German cars. That is an interesting finding from the data. Sorting cars by price categories from cheapest to luxury cars respectively, the finding is that regions with greater exposure to the Trump tariffs choose to buy fewer U.S.-brand cars but more German-brand cars, but in the luxury categories, there is no significant effect. So, different segments of society seem to respond differently.

Also, survey of people’s trust shows some evidence that people’s self-reported trust in Americans tended to decline in more tariff-exposed regions once the tariff war started as well.

Conclusion

To summarize, de-globalization or de-risking talk has multiple implications for global economy and global politics. However, this talk covers a very narrow topic of impact of U.S. soft power as reflected in data on U.S. movie viewership and sales of U.S. automobiles. The finding is certainly an unintended consequence of trade tension, which appeared to reduce Chinese appetite for U.S. movies and U.S. cars and maybe also U.S. colleges. This goes beyond the income effect and government propaganda effect.

Comments

ZHANG Hongyong:
This paper finds a significant negative effect of the trade war on the viewership of U.S. movies. The effect is driven by Chinese citizens’ choice and not by either income effect or Chinese government action. Also, the effect is persistent at least to 2021.

The first comment is this paper found the negative effect is milder for more affluent people. More affluent people are likely to be more educated. However, the U.S. trade war has changed the attitudes of many educated Chinese people from positive to negative. The second comment is on creative goods as a form of soft power. Data shows China’s import of audiovisual and books from the U.S. after the trade war in 2018 declined sharply; on the other hand, imports from the rest of the world increased. But, maybe the effect is short-lived, as China’s imports of all creative goods declined after the trade war, but it increased in 2021, both from the U.S. and from the rest of the world.

The third comment is about the decline of American soft power with its hard power. America’s share of global GDP declined from 28% to 23% as well as its export of creative goods in almost all categories declined in the last two decades. In contrast, the export of creative goods from China’s share and the exports of Chinese books and audiovisuals increased steadily in the past 20 years. So, U.S. soft power is declining in the long run.

SAHASHI Ryo:
Data shows that in China recently the top-selling American movies are “maverick” or heroic movies which are very American. From that perspective, the problem examined by Professor Wei and his colleagues on U.S.-China relations is appropriate.

The paper argues the problem from the perspective of the righteousness of American action and Chinese people’s purchasing behavior, in terms of the WTO ruling etc., but this change in behavior might be explained by nationalism among Chinese consumers. Also, soft power should be something that influences people without resorting to hard power. However, what matters in terms of soft power is whether America can change the Chinese government or China itself or not.

Therefore, the first question is on the longevity of this effect, because even after Trump, Biden administration kept the Trump tariffs and people may get used to that and become open to watching American movies again. My next question is if the U.S. loses the chance to sell their movies in China, it might be good for American soft power to rest of the world since that may enable them to create their entertainment without considering the Chinese market or being manipulated in that manner.

WEI Shang-Jin:
First, on the persistence of the effect, the data found continued negative effect of the trade war on U.S. movie viewership in regions more exposed to the tariffs suggesting the effect seems to be persistent through today. However, whether the effect will last in the future will be known only when new data becomes available.

The broader category of creative goods such as music, books, etcetera, are all potentially part of proxies for U.S. soft power. The movie data is uniquely good while other creative goods do not have good data. However, the suspicion is that these other goods will also reflect the same pattern.

On how well those goods correspond to the notion of soft power, movie is one example that Joseph Nye mentioned in his book as an example of soft power. However, it’s not easy to conclude that Chinese government has changed its way of doing because of U.S. actions. Further, the data does not support the idea that people have stopped watching American movies. What is seen is people in regions less exposed to Trump trade war continue to watch a lot of American movies while people more exposed to the Trump tariffs choose to watch significantly fewer U.S. movies and replace U.S. movies by watching more Chinese movies. So, it does seem to reflect choices of people.

Also, whether fewer Chinese audiences watching U.S. movies could be better for the U.S. in terms of soft power elsewhere, it is to be noted that even with the trade war, China is the second biggest market for U.S. movie studios. So, it’s hard for them to ignore the commercial appeal of Chinese market. Moreover, data suggests that the decline in U.S. movie sales in markets other than China is consistent with the idea that perhaps people elsewhere in general do not like the way President Trump managed his trade policy, although it’s not a proof.