A US-China trade war is the last thing the world needs
Media reports abound that US President Donald Trump is about to invoke Section 301 of the 1974 Trade Act, which empowers him to investigate and impose harsh penalties against China’s “unfair” trade practices “within days”.
Imposing trade barriers on Chinese goods might be popular among his supporters and the anti-Communist Chinese crowd, but would not necessarily be in the best interest of the United States, China or the world. A closer look at the charges might explain why.
Chinese ‘unfair trade practices’
Trump was arguably the fiercest anti-China candidate during last year’s presidential election, accusing China of “robbing America blind”, manipulating its currency, stealing US jobs and technology, and a host of other “evil” deeds. Is he right?
The United States defines currency manipulation as having a trade value exceeding US$50 billion and a trade deficit of $20 billion. Based on the numbers alone, China fits the profile, with annual US-China trade nearing $520 billion and a deficit exceeding $300 billion in 2016. However, few if any organizations, including the International Monetary Fund and the US Treasury Department, apply those criteria. Moreover, the US trade-deficit figures are either misleading or have been caused by America’s own China policies.
More than 65% of “imports” from China can be classified as “re-exports” or “inter-company trade” because they are produced or assembled for US firms. Apple’s iPad, for example, is only assembled in China with parts imported from other countries, including the US. According to the Asian Development Bank, the per-unit cost of an iPad is $174, of which China’s share is less than $12. So US Customs might be guilty of double accounting or overvaluing Chinese “imports”.
Another contributor to the US deficit might be the US Congress’ blocking of exports to China. For example, Congress bars the sale of “dual use” goods such as avionics to China because they could be used on Chinese jet fighters. Since most goods can be classified as usable for both civilian and military purposes, US firms have incurred a considerable loss of potential revenues from this policy.
Further, the US is not innocent on currency manipulation, having deliberately undervalued the greenback in 2002 for a 20-year period and launching quantitative easing in 2008. The latter prompted the German and Brazilian governments to accuse the US of creating a “currency war” because it increased the money supply, in effect depreciating the value of the dollar against other currencies. In this way, export prices fell relative to those of imports.
Ironically, the problem of US currency manipulation is the fact that the dollar is the world reserve currency. During periods of international financial instability, investors gravitate to the greenback to weather the uncertainty, thereby increasing demand and therefore the value of the US dollar and in effect erasing any advantage US exports might have gained.
Though China did manipulate its currency in the past, it has not done so in the last few years. Indeed, the People’s Bank of China, the country’s central bank, has deliberately appreciated the yuan against the US dollar and other major currencies to avoid being labeled as a currency manipulator.
In any event, the US accusing China of what it is doing is like “the pot calling the kettle black”, making Washington guilty of a double standard.
Stealing American jobs
On stealing “good-paying” US manufacturing jobs, Trump’s alma mater, the University of Pennsylvania, has found that most of these jobs were eliminated by automation. The bailout money the federal government gave to manufacturing companies deemed “too big to fail” was largely spent on manufacturing innovation, replacing workers with robots.
On closing factories, it was US businesses’ decision to relocate manufacturing abroad in an effort to increase profits, bypass irritating labor-relations issues (robots don’t talk back or demand higher wages) and regulations on reducing pollution.
In any event, blaming China for the job losses and factory closures will not bring back jobs or manufacturing to the US. On the contrary, the returned “factories” may be even more automated to offset higher wages.
For example, the $7 million Trump gave to Carrier for not moving production to Mexico may only save a thousand or so jobs in the short run. Since the company intends to spend the money on innovation, the “saved” jobs will likely disappear in the longer term.
What’s more, the market will dictate where production will be located. For example, Ford and other US companies are expanding production in China in defiance of Trump’s threat of raising tariffs on goods produced on foreign soil. The Chinese market and its comparative advantage in manufacturing are too profitable to ignore.
Stealing US technology
It is difficult to determine whether China steals US technology, but a condition for investing or forming joint ventures in China is the transfer of advanced technology and management methods to the local partners. The willingness of US firms to accept that condition is a choice they made, and not a consequence of coercion by China.
Chinese companies also re-engineer old technologies and pour in huge amounts of money on research and development. For example, the high-speed-railway technology that China bought from Germany and Japan was stripped down, thoroughly examined, and subjected to huge expenditure to make it more advanced.
Moreover, speculating that Chinese has stolen US technology is just that – there is no evidence to prove such accusations.
Neither country doing too badly
Contrary to Trump’s rhetoric that China is “eating America’s lunch”, US firms and families have benefited hugely from the US-China trade relationship. The average American family saves nearly $1,000 a year by purchasing Chinese “imports”. The increase in real income raises private consumption and investment. Keeping prices low and stable also keeps interest rates low and stable, affording US firms an attractive investment climate.
US companies such as Apple owe their prosperity largely to China, considering that an iPad costs $174 to produce and the company charges $500 or more depending on the model. In short, US firms did not deal with China because they loved the country, but because they could earn huge profits from it.
A big chunk of the Chinese trade surplus is used to buy more than $1.2 trillion in US Treasuries, helping to fund American public programs, including military hardware, which ironically could be used against China.
What’s more, trade with China has created more than 2.5 million jobs in the US, according to its Department of Commerce. States such as California and Iowa are highly dependent on the Chinese market and investment.
China has also benefited from its trade relationship with the US, creating millions of jobs, bringing in advanced technology and capital, and other economic and innovation-enhancement activities.
Trade war won’t ‘Make America Great Again’
First, barring Chinese “imports” would trigger an inflationary spiral in that the US government would be taxing US products. Higher inflation would force the US Federal Reserve to raise interest rates, potentially stifling economic recovery.
Second, insufficient domestic demand (due to prohibitively high private and consumer debts) is the biggest reason the US is unable to recover from the 2007-08 financial crisis. Accessing external markets is essential for spurring economic growth. There is no better or more lucrative market than China’s.
Trade is a two-way street. China would undoubtedly retaliate by banning the import of US goods or raising tariffs. Coupled with insufficient domestic demand, losing the Chinese market could be a replay of a Deep Recession.
Finally, China has a Plan B: the Belt and Road Initiative, other markets around the world, and its huge domestic one, enabling it to cushion the losses from a trade war, notwithstanding that it will encounter higher unemployment and slower economic growth in the short run.
Taking the argument to its logical conclusion, having a trade war with China is not only unnecessary, but would also be devastating for the US, China and the world because of globalization. Perhaps Trump has come to that conclusion by delaying an announcement on an investigation of China’s “unfair trade practices”.