US - China Trade War

Photo Source: Financial Times

Written by Naveed Qazi | Editor, Globe UpFront


For quite a while, world’s two largest economies, or superpowers, as a matter of fact, have been locked in a trade war. The result has been imposition of tariffs on hundreds of billions of dollars worth of each other’s goods.

While U.S. President Donald Trump has long accused China of unfair trading practices, forced transfer of American technology, and intellectual property theft, China on the other hand believes that United States is trying to curb its rise as a global economic power. The reason behind it is China’s military expansion into the South China Sea, and its expansive Belt and Road Initiative, as well as an ambitious plan to move up the value chain ladder, which was outlined in 2015.

The trade war has changed the global landscape, disrupting supply chains, most notably in the technology sector. Lucy Colback, in an Oped for Financial Times wrote: “perhaps the most significant consequence of this is the potential for a longer-term decoupling of China and the U.S., and the emergence of two rival and separate spheres of influence, in both trade and technology.”

Trump’s “America First” campaign ignited the trade war in recent times, and the uncertainties around the trade war eventually harmed the global economy. Trump’s tariff policy aims to encourage American consumers to buy American products, by making imported goods more expensive. During his election campaigns, he wanted to bring more production back into the country, in order to protect U.S. jobs.

But, the reality lies somewhere else, as many Americans don’t care about these new developments. Americans would rather pay as little for computer, electronics or clothing, even if it means other Americans lose their jobs.

Many are also concerned about the political leverage of China over U.S. fiscal policy. If it was not China, that bought Treasury’s on a large scale, interest rates would have risen in U.S. and thrown the country into a recession. However, this would not be of China’s interests, as of now, because U.S. shoppers would then buy fewer Chinese exports.

According to a recent B.B.C. report, U.S. has imposed tariffs on more than $360 billion of Chinese goods, and China, in retaliation has levied tariffs on more than $110 billion of U.S. products, lately. This has led to higher costs for U.S. businesses and consumers. In this scenario, the annual trade deficit wouldn’t likely diminish sharply, which has risen and fallen, over the years, and hovered around $345.6 billion, in 2019. When it comes to U.S. companies competing with cheap Chinese goods, they must reduce their costs, or go out of business. To reduce costs, they often outsource jobs to China, or India.

If Trump were to start a continual trade war, the most immediate effects would be felt by American companies such as Walmart, which import billions of dollars of cheap goods. The price of these goods would skyrocket, because of new set tariffs. The end result would likely be a war of attrition that China is infinitely in a better position to win.

In current times, China’s foreign currency reserves now stand at more than $3 trillion. In contrast, the U.S. has foreign exchange reserves that levitate at $120 billion. An increase of tariffs would automatically trigger penalties in the World Trade Organisation, and might even lead to WTO’s collapse, which would then lead to higher tariffs against U.S. exports. While all of this might take a little while, China would likely emerge unscathed, but the scenario will be catastrophic for American businesses and employment.

In August 2019, when US Treasury Department officially designated China as a currency manipulator, the news had prompted further selling in global financial markets, and raised speculation that China could take even more aggressive steps to devaluate its currency. A year earlier, exporters from most U.S. states also experienced dismal sales to China. Total U.S. merchandise exports to China fell 11% to about $107 billion, according to U.S. Commerce Department. Particularly hard hit were Texas, Florida and Alabama –each state saw sales plunge to more than 25%.

As the trade war has dragged, the companies have had to consider finding alternative sources of inputs for their production chains, too. It was less simple than buying completed goods, from new vendors, and switching to new component suppliers that come with friction costs as well as, potentially higher prices. With the result, trust, quality assurance, and logistical networks were all to be rebuilt. As the chain is not well oiled, at least to start with, the manufacturers lose.

Also, due to an uncertainty paralysis around the globe, nearly one third of respondents to an AmCham China survey said that they had delayed or cancelled their investment decisions. In a September 2019, EUCham survey, nearly two thirds of respondents said that they had left their strategies unchanged, but were monitoring the situation closely. A previous questionnaire of the same survey reflected that majority respondents were trying to adapt to the trade war, while the remaining had delayed investment and expansion decisions.

The conflict between the US and China is not simply economic — it has political, cultural and military dimensions. For these reasons, the trade war will unlikely diminish anytime soon. 

Former Federal Reserve chair, Janet Yellen had also warned that competition between the United States and China could also slow the development of artificial intelligence, 5G mobile networks and other technology related to America’s national security.

During the Future Forum panel discussion, the Financial Times’s Martin Wolf noted that even the Americans don’t seem to have decided what they want. Mr Wolf said that the phase one trade deal came “in the context of America going through a massive rethink in its relations with China, and it hasn’t made its mind up yet”.

With phase one trade deal signed, it is now possible for China to respond to Trump’s tariff pressure. The deal tests the limits of U.S. power, however, in the past, the Trump administration has sent contradictory messages, at times insisting U.S. companies to get better access to the Chinese market, and at other times, ordering the U.S. companies to leave China.

The centerpiece of phase one deal is a pledge that China will buy some $200 billion in U.S. goods and services. In return, the United States will suspend some of the new tariffs Trump previously announced. But, this appeal to managed trade will ultimately increase Chinese leverage over U.S. So long as U.S. exports depend on the appeasement of Chinese politicians, the threat that China will pull the plug on the system will continue to hang over U.S.–China trade relations.

According to an Oped by Geoffrey Gertz in Brookings: “the phase one deal does not achieve any of the complex structural reforms U.S. policymakers have been seeking around industrial policy, the Made in China 2025 program, and broader state influence in the economy. Earlier experiences suggested neither U.S. diplomatic appeals nor WTO trade restrictions would sway China into giving up these core aspects of its economic model. The lesson of the phase one deal is that aggressive tariffs won’t either.”

The Trump administration continues to insist these problematic issues will be resolved in a phase two deal. But, its highly unlikely that it would happen. By using different tactics, U.S policymakers have always had a limited ability to change Chinese behavior. The moot problem is that Washington needs a strategy that deals with China as it is, not as it hopes it might be. That's how the problem with China would be resolved.

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