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Trade War Realities

Below is my in depth analysis of the current trade dispute between China and the United States. While I do express my own opinions, I reference the sources that I find my hard data from. My opinions are the conclusions that I draw based off of my research and findings. I will tell you that while I was researching for this article, I found that a lot of the information that I thought was true was really completely false or just very skewed from what reality actually is. I intend for this to be a discussion so please let me know your thoughts.

Sections: Introduction Trade Demands Tariffs Intellectual Property Currency Devaluation Different Perspectives State of Affairs Way forward

Trade War

The United States and China have made their demands and both have been unwilling to compromise; the most recent talks between the two superpowers ended with the United States imposing tariffs from 10% to 25% on $200 billion worth of Chinese imports. On 5 May, President Donald Trump went to social media to inform the American public about the increased tariffs and also informed the public on 6 May that these tariffs will help reverse the $500 billion lost annually in trade relations which China. Presumably, the $500 billion is a slight rounding up of the $419 billion deficit derived from the difference of the imports and exports between the United States and China each year. This implies that the money is lost because we should be exporting more to China than we are importing.[efn_note] Branch, Foreign Trade Data Dissemination. "Foreign Trade: Data." U.S. Trade with China. April 21, 2009. Accessed June 21, 2019. https://www.census.gov/foreign-trade/balance/c5700.html#2018[/efn_note] President Trump claims that the difference will be made up in part by the money made from the tariffs. That means $50 billion coming from the $200 billion in already tariffed goods (assuming that importers still choose to purchase the tariffed goods) leaving $369 billion remaining in the trade deficit. The reality of the current situation is that there is a massive difference in economic surplus for China. How the United States got in this position and how the U.S economy plans to remain competitive is the reason why the Trump administration is starting to take the hardline in negotiations that we are currently seeing, especially in regards to America’s stance on the Chinese attainment of American intellectual property through illegitimate means. Intellectual property being defined as a work or invention that is the result of creativity, such as a manuscript or a design, to which one has rights and for which one may apply for a patent, copyright, trademark, etc. China’s actions show that it wants to make a serious challenge for global political and economic hegemony through its direct and covert actions. The United States started drawing a line in the sand by initiating the first steps towards a trade war or at least a trade dispute for now, but things look as though they will force escalation on each side. If the United States desires to remain the world’s economic broker, the U.S government must create a comprehensive plan to address surging Chinese ambitions by understanding the Chinese economy’s global position and its government’s methods, capabilities, and intentions in order to effectively retaliate with a unified coherent response that brings China into a sustainable, accountable international system.

Reportedly, the United States has sent the Chinese government a list of 142 demands that needed to be addressed, however the Chinese believed the demands were unreasonable or impossible. The U.S government in return has accused China of refusing to address inherent issues of the current system in place. Below are the key demands published from the most recent negotiations:

The United States’ Trade Demands:

The U.S. wants China to stop subsidizing Chinese companies in the specific tech sectors in which China is attempting to seize control of the market.

Set up new policies and procedures that will protect American intellectual property.

Wants China to buy about $200 billion more of goods to decrease the trade deficit.

China’s Trade Demands:

China wants the United States to reduce its tariffs on Chinese imports across the board.

China wants to be granted market-economy status. This designation would affect the way that China is treated while operating in the global economy.

China wants to be able to back out if it perceives that the United States broke its commitments.

In return for China’s demands, the U.S. wants China to remove its own tariffs and restrictions on U.S agricultural goods, end its practice of illegitimately acquiring U.S companies’ intellectual property, and the government wants to reserve the rights to emplace more tariffs or additional restrictions.[efn_note] Behsudi, Adam, and Rebecca Morin. "What the U.S. and China Want from Trade Talks." POLITICO. November 27, 2018. Accessed June 18, 2019. https://www.politico.com/story/2018/11/27/us-china-trade-talks-990766[/efn_note] As stated above, the talks broke down and President Trump raised the amount on pre-existing tariffs by 15%.

What are tariffs and why do we use them as economic sanctions?

The 15% increase in tariffs has been enacted and will be placed on imported goods indefinitely but likely will be lifted once progress is made in future trade talks. A tariff is a tax on imported goods from a specific country. As China is America’s largest importer, that is a significant amount of goods that are still needed by American businesses and consumers and will have to either be bought at increased prices or imported from somewhere else. Most likely this will still result in increased prices since the price margin is one of the reasons imports from China are so popular. the usage of tariffs to wage a trade war is a gamble utilizing the strength of the U.S economy as collateral. The tariffs will affect industries in the sphere of sino-american import/exports and the U.S is betting that the economy is diversified enough that the economic damage will be constrained to industries with close ties to the import/export market. The intended end state of the high tariff gamble is that the U.S economy will adjust by importing the goods formerly purchased from China from a different market at a price lower than the tariffed Chinese goods. The risk comes from the possibility that there are no other viable markets that the required goods come from and the time and price variables significantly affect the American industries’ ability to compete in the global economy. The specific concern is in the tech industry where the United States imports significant amount of rare earth metals, electronics, and manufacturing equipment from China. The United States is importing a large portion of its electronic infrastructure, the means to make its own electronics, and its manufacturing equipment at the not small sum of $245.8 billion each year.[efn_note] Bartash, Jeffry. "Why the U.S.-China Trade Deficit Is so Huge: Here's All the Stuff America Imports." MarketWatch. Accessed June 21, 2019. http://snip.ly/7htk3r#https://www.marketwatch.com/story/why-the-us-china-trade-deficit-is-so-huge-heres-all-the-stuff-america-imports-2018-09-17.[/efn_note]

American Intellectual Property under threat

While America’s Silicon Valley is still the technological Mecca of the world, its technologies and ideas are being produced and manufactured outside of the United States due to the cheaper production costs in China. The companies are working with Chinese subsidiaries (company controlled by another company) who utilized U.S patents to help export goods across the globe, but these state-sponsored Chinese subsidiaries illegitimately acquire access to these technological and industrial patents to compete with the U.S. companies. U.S companies have long recognized the vast economic potential of the cheap manufacturing costs, labor, and immense domestic market in China. The decades of interactions between the U.S companies, the state-sponsored Chinese corporations, and the Chinese government have led to the current state of political and economic affairs that exists today. Companies working with Chinese subsidiaries also inevitably work with the Chinese government who have been seeking to take advantage of American companies just as American companies want to utilize the cheap Chinese manufacturing infrastructure. U.S companies brought their advanced, patented technologies and industrial systems with them as they conducted operations in China, and the Chinese government has systematically leveraged their domestic policies and their positions in state-run companies, joint-enterprises, and regulatory boards to coercively acquire American intellectual property through corporate espionage and direct governmental interference.[efn_note] Wei, Lingling, and Bob Davis. "How China Systematically Pries Technology From U.S. Companies." The Wall Street Journal. September 26, 2018. Accessed June 21, 2019. https://www.wsj.com/articles/how-china-systematically-pries-technology-from-u-s-companies-1537972066. [/efn_note] The illegitimately obtained patents have helped contribute to the monumental rise of the Chinese economy over the past decades by stealing knowledge that American companies put vast amounts of time, resources, and experience into creating and patenting. This is the real underlying dilemma of the trade war. The United States does not want its corporations’ patented knowledge to be taken and then used to undercut them by Chinese competition that has cheaper manufacturing and labor costs and a devalued currency.

Chinese currency devaluation

China’s competitive advantage in the export market comes from its currency not being completely tied to the global economy like the U.S. Dollar (USD) and other major currencies are. While the fluctuation of market factors and a country’s economic strength are taken into account for currency valuation, the Chinese Renminbi (commonly called the Yuan) has historically been pegged to USD and internally manipulated by the Chinese central bank instead. Meaning, regardless of how the dollar fluctuates with the global market, the Chinese government adjusts the value of the Yuan to ensure that a weakened dollar would not inhibit China’s ability to export cheap goods. China’s economic strategy of producing cheap exports and maintaining a devalued currency fueled an average increase of 10% Gross Domestic Product (GDP) each year from 1970 to 2010. However since 2010, China’s economy has dropped to around a 7% annual GDP growth. For comparison, the United States, the United Kingdom, and Japan have been averaging 2% annual growth since 2010.[efn_note] The World Bank. "GDP Growth (annual %)." Worldbank.org. Accessed June 15, 2019. https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=CN. [/efn_note] In 2015, despite its relative economic success, China further devalued the Yuan to ensure that its goods were still competitive on the global market and to combat the decrease in the annual GDP growth. The effect of a devalued Yuan on the American economy is complicated. Firstly, a devalued Yuan directly means cheap manufactured goods for the American public. Clothing, electronics, and machinery are much more readily available for import since it is not cost effective to manufacture these goods domestically in the United States. Secondly, a Yuan pegged to the dollar means that China is purchasing U.S Treasury bonds as a means to ensure that the Chinese economy has a firm financial investment to peg the valuation of its currency to. Chinese ownership of U.S debt accounts for about 5% or $1.1 trillion of the $19 trillion of U.S public debt. Chinese debt ownership is a commonly preyed upon topic as it makes for great political rhetoric to incite public fear. However, Japan, our ally, owns a similar amount of public debt at around $1 trillion or 4.7%. While over $1 trillion in debt ownership is certainly not ideal, it is not close enough to the $22 trillion total for China to “own” the United States.[efn_note] "MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES." Treasury International Capital (TIC). Accessed June 21, 2019. https://ticdata.treasury.gov/Publish/mfh.txt. [/efn_note] Lastly, a devalued Yuan decreases American industry’s ability to compete against China in the export market. American industry cannot compete with the price points of the Chinese exports due to how much more purchasing power the USD has in China compared to the United States, thus the current $419 billion trade deficit with China. Since the conclusion of World War II, the international community has largely agreed to cease competitive currency devaluation through the Bretton Woods Agreement which put into effect a number of global monetary functions such as attempting to end currency devaluation, set up the International Monetary Fund, and the World Bank. Of note, the end of the Bretton Woods Agreement also ended the formal process of major powers pegging their currencies to the dollar.[efn_note] Stephey, M.J. "Bretton Woods System." Time. October 21, 2008. Accessed June 21, 2019. http://content.time.com/time/business/article/0,8599,1852254,00.html. [/efn_note] While the majority of the countries in the world have agreed to work under the same international economic framework, China has attempted to walk the line in order to enjoy the benefits of the global economic system and to exploit the lack of coherent enforcement of international law.

The U.S’ and China’s perspectives

China’s actions show they do not believe that they have to maintain equilibrium in the international market and this highlights that there is an intrinsic difference between the political process and ideological values of the United States and the western world and China. American society views everything through the lens of individual liberties and (classically) liberal democracy. The founding fathers of the United States had the ability and opportunity to analyze 800 years of western political thought, as well as, the successes and failures of past states in order to create a political and economic system that took the best parts of its predecessors. Americans, past and present, still reevaluate this system and strive for equality for all its inhabitants, the right to life, liberty, and the pursuit of happiness. China has developed under a completely different cultural and political context. The communist party still firmly holds power, not the Chinese people. This has led to the formation of a hybrid economy that allows for the expansion of enterprises but only through integration with the state. The state sponsored companies in the end answer to the Chinese government and are obligated to fall in line with the state vision for the future.

In 2011, China revealed their initiative, “Made in China 2025”, that aims to comprehensively overhaul China’s industrial and technological institutions. The scale of this restructuring is immense and complete. China wants to revolutionize how it does business in every aspect of economic activity. One of the main goals is to increase its independence from foreign parts, technologies, and materials to a total of 40% in 2020 and 70% in 2025. This 14 year model is inspired by the German Industrie 4.0 plan, but is even more [efn_note] Kennedy, Scott. "Made in China 2025." Made in China 2025 | Center for Strategic and International Studies. July 10, 2019. Accessed June 21, 2019. https://www.csis.org/analysis/made-china-2025. [/efn_note] unprecedented given each country’s relative size and overall scale of their pre-existing infrastructure.[efn_note] Digital Transformation Monitor. "Germany: Industrie 4.0." January 2017. https://ec.europa.eu/growth/tools-databases/dem/monitor/sites/default/files/DTM_Industrie 4.0.pdf. [/efn_note] The Chinese intentions are two fold. Firstly, the Chinese government claims that part of their initiative is to become the most efficient and most advanced economy in the world (and the largest). Secondly, they are using the initiative as a catalyst to combat their decrease in GDP growth and ensure that their own debt concerns do not continue to grow. China has had its own issues with increasing debt in the past decade that correlates with the decrease in GDP growth. Chinese national debt sits at about $5.2 trillion or 47% of its total annual GDP.[efn_note] "The World Factbook: China." Central Intelligence Agency. February 01, 2018. Accessed June 21, 2019. https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html. [/efn_note] While this is not a dangerous number, it may not be portraying the entire picture of Chinese debt. Chinese local governments enjoy quite a bit of financial freedom to pursue projects and have become notorious for building up debt resulting in an issuance of $419 billion worth of treasury bonds for local Chinese governments in 2015 to attempt a bail out.[efn_note] Hong, Shen. "China's Plan for Local Debt Amounts to a Bailout." The Wall Street Journal. June 23, 2015. Accessed June 21, 2019. https://www.wsj.com/articles/chinas-plan-for-local-debt-amounts-to-a-bailout-1434998702. [/efn_note] It is widely disputed if China’s debt numbers are accurate and it is even speculated that the local debt figures are skewed more due to possible creditors outside of the chinese financial structure creating a form of off the books, shadow debt. However, through Made in China 2025, China looks to be executing a comprehensive plan to vault every aspect of its economy into the highest echelon of the global economy.

Current state of affairs

It has yet to be seen to what extent the trade dispute between China and the United States will disrupt the economies on both sides, but it is clear that the situation will escalate before a new equilibrium is formed. Escalations from the United States beyond tariffs have already started as the country took serious measures to protect its companies’ intellectual property. Tech giant, Google, was forced to disallow further usage of the Android operating system on phones produced by the state-owned phone producer, Huawei (pronounced Hwa-way) due to concerns of the security of intellectual property. Also, congress will soon vote on legislation to ban Chinese companies from the New York Stock Exchange if they don’t allow the Public Company Accounting Oversight Board to view their audits and make the appropriate adjustments within a 3 year period. Chinese companies ironically claim that the audits contain state secrets and will not share them with the United States.[efn_note] Barfield, Claude. "China and US Capital Markets: For Once, 'leveling the Playing Field' Is Not a Protectionist Cover." American Enterprise Institute. June 20, 2019. Accessed June 21, 2019. https://www.aei.org/publication/china-and-us-capital-markets-for-once-leveling-the-playing-field-is-not-a-protectionist-cover/?mkt_tok=eyJpIjoiTWpsaE5qVmpNR1F3WW1ZMyIsInQiOiJseklad3RsdEZDbExIOHd4WlBiMkZiOVdKXC9jSkZRZE9LbFo5R3I1QzFHQkhpR3BPQVwvWko2RFluWWZcL2h0SVNjUWJUMnB5NTg2NjE3SnlzWUs5cThYWXFvUWdZc3pOSVNHUGRpMzVwK0N6RHJNU1wvQnRlcjFtanpCVnFjWGtmbVQifQ==.[/efn_note] Therefore, the United States believes that if they cannot provide any oversight then those companies should not be a part of an American stock exchange. The United States’ measures seem to indicate a more hardlined strategy from the United States though no coherent, overarching strategy has been vocalized by Washington. In the short term, the combination of tariffs and the revocation of access to economic privileges such as technologies and the American market system will have real impact on the Chinese economy. However in the long-term, these techniques are likely to force China into its desired self-reliance of Made in China 2025 even earlier by making China diversify its export market and by attempting to undermine the United States’ economic position. China will be able to produce a higher quantity of desired goods at a cheaper price than any of its competitors without coordinated intervention. It is likely that President Trump and President Xi Jinping will meet up at the upcoming G20 summit in Japan on 28 June 2019 to discuss the current trade dispute. It would not be completely unexpected for President Trump to walk away having the beginnings of a deal in place. However, it would also not be completely unexpected for President Trump to dig in his heels on lack of compromise on his key priorities.

Proposed way forward

The United States can only combat China’s ambition by forcing China into legitimacy. Tariffs are a band-aid that do not actually address the dilemma at hand for Americans. The United States must prioritize the protection of American intellectual property and force China to weight its currency solely off of market prices to reduce China’s competitive advantage. Lack of action is eroding the dollars strategic value as the international reserve currency.[efn_note] Amadeo, Kimberly. "China's Plan to Replace the U.S. Dollar with the Yuan." The Balance. February 12, 2019. Accessed June 21, 2019. https://www.thebalance.com/yuan-reserve-currency-to-global-currency-3970465. [/efn_note] China is increasingly conducting a larger portion of its international business in Yuan (instead of dollars) and intends for the Yuan to replace the dollar as the international reserve currency. The United States is fortunate that its position is in the best interests of the rest of the international community who are also affected by the Yuan’s devaluation; however, the government’s current strategies have not been coordinated with its own allies. President Trump has implemented new tariffs on Mexican, Canadian, and the European Union (EU) goods for various political and economic reasons.[efn_note] Pramuk, Jacob. "It's Not Just China: Trump's Trade War Is Raging on Several Fronts." CNBC. May 13, 2019. Accessed June 21, 2019. https://www.cnbc.com/2019/05/13/trump-carries-out-tariff-trade-wars-with-china-eu-canada-and-mexico.html. [/efn_note] An economically dominant China directly competes with the markets that the U.S government implemented tariffs on. The United States should be working towards strengthening trade relations with other markets to decrease reliance on Chinese goods instead of spreading economic chaos. The United States has presented no strategy to pursue a sustainable equilibrium with China and has provided no leadership in the global community either. The only way to bring China to economic legitimacy is through a unified coalition of trade partners that operate in a free and equal system without threat to their foreign business interests and their intellectual property. This is done through transparency and communication with our allied trade partners, through incentivizing trade with new markets to alleviate the reliance on Chinese goods, and by garnering meaningful international pressure to hold China accountable.

How it affects you:

The two direct options to affect change by the individual American citizen are to either vote for elected officials who will address the legitimate issues of our policies with China and to vote with your dollar in order to hurt Chinese manufacturing. Both options would take a significant shift in public actions to make a difference. I think that individual Americans should be able to have faith in their elected officials that are currently in office to listen to their constituents and make decisions for their best interests. Also, elected officials should be proven leaders that are looking at world events with forethought. There are members of Congress that take the economic and potentially ideological threat from China seriously, but many of them preach from a fire and brimstone perspective that comes across as fear-mongering. We deserve elected officials that can make a coherent plan, manage domestic legislation, and can look at the future of America from a global perspective that ensures the future well-being of the American constituency. We need a plan that will inspire innovative economic growth and bring about a globally sustainable economic equilibrium. Cheap Chinese goods are good for the bank accounts of the average American consumer; however, it must be also perceived that it comes at the long-term cost to American industries and to the global economic system. I challenge you to bridge party lines and hold whoever your representatives are accountable. We do have some hard working, caring elected officials, but I believe their priorities are skewed by petty squabbles and by blind party allegiance. It is up to the public to communicate their dissatisfaction. Be vocal, be articulate, affect change.

-Grant Kyle Jones, colossuspolitics.com

#foreignpolicy #china #unitedstates #politics #tariffs #economy #intellectualproperty #currencydevaluation

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