How to use it

Economic implications of revoking China’s PNTR status

Published 01 October 2024

The US is weighing revoking permanent normal trade relations (PNTR) status from China – a move that would upend global trade. This Peterson Institute for International Economics policy brief published in September 2024 calculates the high-level impact of revocation to the US and Chinese economies and the cost of an escalation in the US-China trade war.

Here’s how to use the policy brief entitled Economic implications of revoking China’s permanent normal trade relations (PNTR) status.

Why is the policy brief important?

Some US politicians appear to be seriously considering PNTR revocation as a legitimate policy proposal and are exploring how it would work in practice. As contemplation of this proposal gains traction, it is vital that policymakers understand clearly the implications of such a drastic change. This policy brief provides important and credible analysis to give policymakers a sense of how destructive PNTR revocation could be to both the US and Chinese economies, to particular economic sectors, and to employment in the US.

What’s in the policy brief?

The policy brief includes two principal sections:

Modeling PNTR revocation; and
Results of the modeling.

How to find the key insights

Introduction; Modeling PNTR revocation

The US granted permanent normal trade relations (PNTR) status to China in 2000, ending the annual waiver process that had lifted onerous tariffs on China since 1980; granting PNTR reduced uncertainty in US-China economic relations and led to expanded FDI and trade with China; since China joined the WTO in 2001, Chinese exports to the US have increased by 300%; this import growth led to considerable displacement in US sectors competing with imports, eventually fueling interest in revoking China’s PNTR status, including through legislation proposed in Congress and in the Republican Party’s policy platform. (pp. 1-2)

This analysis uses the G-Cubed model; though Congress could give authority to the President to impose a range of tariff rates, the model assumes that revocation of PNTR would move trade with China from the conventional Column 1 tariff schedules to the far more restrictive Column 2 tariff schedule though with most Chinese imports already under some form of special protection, this shift may overstate the protective impact of PNTR revocation; the model also assumes constant US productivity growth, that revocation would be permanent, reversing the investment and trade effects inherent in PNTR status, and that China would retaliate by mirroring US tariff changes. (pp. 2-5, Tables 1-2)

Results of the modeling

Revoking PNTR would increase the price of imports in the US through the direct impact of tariffs on prices; demand for Chinese currency (RMB) would decline, causing the US dollar to appreciate relative to the RMB; the higher prices from the tariffs would be partly offset by the appreciation of the US dollar; importers of consumer and intermediate goods would switch from importing from China to importing from other countries or sourcing goods domestically. (p. 6)
PNTR revocation would lead to a decline in US incomes and a more pronounced decline in Chinese incomes; this decline would intensify if China retaliated by limiting access to its markets; China’s GDP would decline by 0.6 percent in 2025 due to effects from the tariff and if China responds by raising interest rates to protect the yuan; over time, production would shift from China to other countries leading to lower long-run GDP in the US and an even greater decline in China; aggregate employment outcomes would be similarly impacted. (pp. 6-8, Figures 1-2)

Higher tariffs would increase prices for consumer and intermediate goods, contributing to US inflation of 0.2 percent in 2025 or 0.4 percent if China retaliates; prices would remain 0.4 percentage points higher forever, though US dollar appreciation would dampen some of the impacts of the tariff increase on price levels; increased input costs would lead to inflation in the US and deflation in China because of the decline in demand for Chinese exports and tightening of Chinese monetary policy. (pp. 6-7 and 9, Figure 3)
Different sectors will be affected differently given different tariff changes, production structures in each sector, and the relative importance of foreign versus US demand for output; the three sectors with the largest declines in output in 2025 and over the long term are those exposed to trade, including agriculture (because of appreciation of the dollar), durable manufacturing and mining (because of contraction of investment and dependence on China as a source of intermediate inputs); losses in agriculture and durable manufacturing double if China retaliates; mining is not as affected because of lower trade exposure; the model understates the true impact of revoking PNTR by not fully capturing efficiency losses. (pp. 5 and 8-10, Table 2 and Figure 4)
Decline in demand for output from each sector would be mirrored by the decline in demand for labor in each sector; most job losses would be in agriculture, mining, and durable manufacturing; over time, these unemployed workers would be absorbed into the services sector; China’s retaliation would increase job losses across the economy, especially in agriculture and durable manufacturing. (pp. 10-11, Figure 5)

Imposition of tariffs and retaliation by China would immediately affect the stock market prices of the sectors most affected; US tariff policy and retaliation by China would affect overall trade balances; China’s trade balance would improve by 1.2 percent of GDP in 2026 because of RMB depreciation; Canadian and Mexican trade balances would deteriorate because of capital inflows due to reallocation from China; the US trade balance would deteriorate relative to its baseline; US imports from China would fall and imports from other sources would rise, while overall both imports and exports would fall, meaning the trade balance would not improve; the fact that some capital outflows from China would flow into the US implies that investment would fall less than savings, widening the current account and trade deficit. (pp. 11-13; Figures 5-7)
Table 3 reports the cumulative impact on the US economy in 2025-28 with and without China’s retaliation; most notably, GDP is estimated to fall by $158.7 billion and the value of durable manufacturing production would fall by $532 billion; results will be larger if US productivity growth declines in response to the disruption in availability of specialized inputs; as industrial intermediates would likely be exported from China to third countries and then exported to the US as inputs into final goods, the US may additionally tighten rules of origin, deepening adverse impacts documented in this analysis. (p. 14, Table 3)

How to apply the insights

This section provides all of the estimated impacts of PNTR revocation, and details the reasons underlying them; the direct discussions and stark graphs allow policymakers to easily grasp and visualize the negative consequences of PNTR revocation, particularly when Chinese retaliation is taken into account.
This discussion provides an important estimate that policymakers can turn to in the debate over whether to revoke PNTR for China.

Conclusion

The policy brief provides a very concise but direct analysis of the potential and likely effects of PNTR revocation for China, and is a must read for any policy maker in the US considering undertaking such action.

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External Resources

The international economic implications of a second Trump presidency – Peterson Institute for International Economics
Trump's policies on immigration, trade, and Fed independence may cause US job losses, higher inflation, and declining living standards, while global partners face trade impacts but gain from redirected capital.
Trade War and Peace: U.S.-China Trade and Tariff Risk from 2015–2050 – National Bureau of Economic Research
A new study shows that expectations for future US tariffs on Chinese imports rose more under Biden than under Trump.
Would Trump's threats of new tariffs survive legal challenge in the Supreme Court? – Peterson Institute for International Economics
The US Supreme Court may not be friendly to Trump’s plans to impose a 10% tariff on all imports.
Trump likely to raise tariffs on China in two steps, former official says – Nikkei Asia
Trump would rely on Sections 232 and 301 authorities to increase tariff rates and revoke PNTR for China.

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