11 minute read
Trade Frictions
Strategic Vision vol. 8, no. 42 (June, 2019)
Challenge, uncertainty surround ongoing trade war between China and US
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Shao-cheng Sun
US President Donald Trump and PRC President Xi Jinping meet during the G-20 Summit in Germany.
photo: Shealah Craighead
America’s economic relations with China have expanded steadily since that country opened its economy to the world in 1978. Bilateral merchandise trade exploded from US$2 billion in 1979 to US$660 billion in 2018. However, tensions have surfaced over several economic issues that include the trade deficit, cyber espionage, and violation of intellectual property rights (IPR). The administration of US President Donald Trump has dedicated itself to decreasing the US trade deficit. On 8 March, 2018, President Trump announced additional tariffs on steel (25 percent) and aluminum (10 percent) against China. In retaliation, China raised tariffs (from 15 percent to 25 percent) on US products.
On 5 May, 2019, Trump stated that the previous tariffs of 10 percent levied on US$200 billion worth of Chinese goods would increase to 25 percent. In response, China imposed a 25 percent tariff on US$60 billion worth of US goods on 1 June, 2019. During the G20 Osaka summit on 29 June, 2019, Trump and his Chinese counterpart President Xi Jinping agreed to something of a truce in the trade war: Prior tariffs would remain in effect, but no future tariffs were to be enacted. Trump delayed the proposed tariffs to encourage renewed trade talks with China. This article looks at why Washington initiated the trade war, how Beijing has responded, and what impacts can be expected.
Intertwined economies
At present, China is America’s largest import country (US$540 billion), the largest foreign holder of treasury securities (US$1.1 trillion), and the third-largest export market (US$120 billion). In 2015, US exports to China and bilateral Foreign Direct Investment (FDI) flows provided 2.6 million jobs for Americans. Chinese visitors spent US$33 billion in the United States in 2016 (the largest visitor spending). Boeing Corporation delivered 202 planes to China in 2017 (26 percent of global deliveries). Despite the bilateral trade being closely intertwined, there are other interests that triggered the trade war.
The US trade deficit with China set a new record in 2018. US trade in goods and services with China totaled a whopping US$737 billion. Exports were US$179 billion and imports were US$558 billion. The deficit reached US$379 billion. The Trump administration thinks that this deficit is detrimental to the US economy because it had eliminated or displaced 3.2 million US jobs between 2001 and 2013. Some US policymakers view this as an unfair trade relationship. Reducing the growing deficit has become Trump’s priority as he strives to create more jobs for Americans.
China’s lack of IPR protection has been criticized by US firms as one of the most significant problems they face when doing business in China. US business and government representatives have voiced concern over the economic losses suffered as a result of China’s IPR infringement. Global IPR theft costs the US economy US$300 billion, of which China accounts for between 50 percent (US$150 billion) and 80 percent (US$240 billion). The US Department of Homeland Security reported that in 2017, goods from China accounted for 78 percent of seized counterfeit goods, with a value of US$941 million. It is little wonder, then, that Trump has criticized China’s poor IPR protection laws.
The Nimitz-class aircraft carrier USS Theodore Roosevelt (CVN 71) transits the Gulf of Alaska after participating in Exercise Northern Edge 2019.
photo: Anthony Rivera
From Beijing’s perspective, China has made progress in improving IPR protection by citing the fact that Chinese IP royalties paid to the United States increased from US$3.46 billion in 2011 to US$7.2 billion in 2017. Beijing has also established 16 IP courts in China, and increased penalties for trademark violations from US$73,000 to US$436,000. Mark Cohen, a senior fellow at the Berkeley Centre for Law and Technology, says, “No doubt China has made good steps in improving IP protection, but China is not addressing US concerns.” For the US, it is also about issues related to theft of trade secrets and technology transfer.
The US intelligence community believes that the Chinese government is a major source of cyber economic espionage. Chinese hackers are the most active perpetrators in the world. Tom Donilon, the former National Security Advisor, stated that China should take serious steps to investigate and stop cyber-espionage. On 19 May, 2014, the US Department of Justice issued an indictment against five officers of the People’s Liberation Army for cyber-espionage.
On 25 September, 2015, President Xi and thenPresident Barack Obama announced that they had reached an agreement on cyber security and agreed to set up a high-level dialogue mechanism to address cybercrime. The decision was made to implement a cyber-hotline, enhance investigations and information exchange, and combat cyber theft for commercial gain. Despite these mutual agreements, the US intelligence community has identified ongoing Chinese cyber activity.
Technological edge
Chinese firms have invested billions of dollars in the US technology industry, raising concerns that Beijing has gained access to critical US technologies. These investments demonstrate China’s intentions of developing high-tech industries to continue economic growth and to increase its military strength. Most US scholars suggest that policymakers should boost innovation in the US economy to maintain a technological edge rather than try to block Chinese investment.
The Trump administration has raised security concerns over global supply chains of advanced technology, such as information, communications, and telecommunications (ICT) equipment. China is the largest foreign supplier of ICT equipment to the United States: In 2018, US ICT imports from China totaled US$157 billion (60 percent of US ICT imports).
Trump, on 15 May, 2019, issued an Executive Order on Securing the Information and Communications Technology and Services Supply Chain. The order enunciated the administration’s view that US purchases of ICT from foreign adversaries (China in particular) posed a risk to the United States and banned certain ICT transactions. The Trump administration believes that increased Chinese investment in US high-tech sectors could undermine US economic competitiveness.
Beijing has gradually taken a tougher approach in response to US tariffs. In the beginning, China offered concessions, such as agreeing to purchase an extra US$1.2 trillion of US products and allowing US companies to gain access to the financial, automobile, and energy sectors. However, President Xi presided over a high-level government meeting and called on all officials to be prepared for a full-scale trade war. Chinese leaders see Trump’s tariffs as a US plan to prevent China’s rejuvenation. As a result, the Chinese government responded with hostility. China has taken the following approaches against US tariffs. The first approach has been to push the US to back off. The Chinese ministries of commerce and of foreign affairs have responded to US tariffs with a vow to fight to the end. After Washington increased tariffs on US$50 billion of Chinese goods on 15 June, 2018, Beijing announced its own tariffs on the same scale and intensity in return. Every time the US has escalated the fight, China has talked tough. On 21 June, 2019, Xi met with a foreign delegation and told them that China would fight back against US trade tariffs. Both countries intensified their trade dispute on 6 May, 2018 as Beijing said it would increase tariffs on US$60 billion worth of US products. China’s Finance Ministry announced that it was raising tariffs on a wide range of US goods from 10 percent to 25 percent.
The Nimitz-class aircraft carrier USS Theodore Roosevelt (CVN 71) transits the Gulf of Alaska after participating in Exercise Northern Edge 2019.
photo: Chuck Kennedy
Next, China has used a “talk and fight” approach to US tariffs. When the global stock market plummeted in 2018, it created an opportunity for Xi to engage Trump, and they agreed to a three-month truce at the end of 2018. The message that China is sending to the United States is, essentially, “If the US wants to fight, China will fight to the end; If the US wants to talk, China is ready.”
Popular support
Beijing has used its nationalist propaganda to stir up public sentiment and to prepare its citizens for the trade war, and to resist what it calls US “bullying.” Clearly, the leaders in Beijing are garnering popular support for a trade war. China might also stop purchasing US agricultural products, reduce orders from Boeing, and dump US Treasuries.
Since Trump launched punitive tariffs against China, many economists have expressed concern over the impact of the trade war. Most predicted that both the United States and China would experience economic slowdowns, with China being hit especially hard. However, Lawrence J. Lau, a Professor of Economics at the Chinese University of Hong Kong, believes that China can weather the effects of a trade war with only a marginal drop in economic growth. The immediate impact is psychological, particularly in the stock markets. Many of the Chinese stock markets have already declined. US consumers of targeted Chinese products, as well as producers, will also be affected immediately. In the broader picture, there are likely to be several major developments from the trade war between the US and China.
First, it is unlikely that the trade war will improve the US trade deficit. Trump’s top economic adviser, Larry Kudlow, acknowledged that the United States and China would suffer as a result of the tariffs, but he claimed that the United States would benefit in the end if the trade war forces China to give better treatment to US businesses than it had in the past. With growing US protectionism aimed at China, US imports from China are declining. From January through April 2019, the United States imported US$20.6 billion less from China than in the same period a year earlier. Increased imports from Mexico, South Korea, and Taiwan reflect shifts in global value chains. The US deficit with China decreased by US$11.7 billion in the first four months of the year, but the US deficit with other countries went up. The total US deficit increased as well. The protection aimed at China does not improve the US trade deficit because value chains relocate to other countries. The trade war is unlikely to reduce the US deficit.
Second, there will be no winner in the trade war. Economists Dan Hanson and Tom Orlik concluded that if tariffs expand to cover all US-China trade, global GDP will experience a US$600 billion hit in 2021. On 4 August, 2018, China fell from second- to third-largest market capitalization. On 4 December, 2018, the Dow Jones Industrial Average declined nearly 600 points due to the trade war. Now China has imported soybeans from Brazil instead of from the United States. According to a study by the National Retail Federation of the United States, a 25 percent tariff on Chinese furniture would cost US consumers an additional US$4.6 billion in annual payments. In October 2018, United Technologies and Ford made forecasts that the tariffs would cost them US$100 million and US$1 billion, respectively. US exporters may have to reduce costs and lay off workers to remain competitively priced.
Third, the trade war will impact Taiwan businesses in China. Taiwanese companies are an integral part of the global supply chain. In June 2018, an assessment by Taiwan’s National Security Council said that US sanctions would have little effect on Taiwan’s related industries and Taiwanese companies based in China. However, a spokesman for Foxconn said that the trade war was the biggest threat it faced. Presidential Spokesman Alex Huang admitted that if Trump levied a 10 percent tariff on US$200 billion worth of other Chinese goods, the impact on Taiwan would be more severe. There are 50,000 Taiwanese companies invested in China and Taiwan is a major supplier to China. These exports made up around 2 percent of Taiwan’s GDP. Many of these products are shipped to the US and could be seriously affected by US tariffs. Now many Taiwanese businesses are considering whether to move their manufacturing operations out of China. Such a move would be expensive.
An electronics factory in Shenzen, China. Taiwanese companies with operations in China may have to reconsider the benefits of returning to Taiwan.
photo: Steve Jurvetson
Consultant Oxford Economics predicted that the trade war could cost the global economy US$800 billion in reduced trade. Despite the United States and China renewing trade talks, there are reasons the conflict could continue for a while. First, negotiators have made little progress resolving the essential USChina disagreements. For example, Beijing has not been doing enough to stop theft of US intellectual property in China. Second, the US negotiating position has been heavy on punitive sanctions and light on constructive dialogue. Third, with the increasing tariffs, the need for greater concessions from China to justify these costs becomes less likely to be met, as China does not want to appear weak in the face of US pressure.
The trade war will have a great impact on the United States and China, and even Taiwan. Taiwanese companies with operations in China might suffer a significant hit, and they may have to reconsider the benefits of returning to Taiwan. Indeed, Taiwanese businesses in China should diversify their investments and consider moving back to Taiwan. The government in Taiwan should observe developments in the trade war closely and continue to come up with countermeasures for diminishing the impacts felt by Taiwanese.
Dr. Shao-cheng Sun is an assistant professor at The Citadel specializing in China’s security, East Asian affairs, and cross-strait relations. He can be reached for comment at ssun@citadel.edu
