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Economy

10 Truths About China-U.S. Trade

Jul 23 , 2018

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Sunlight Toy Factory in Tangxin, China (Picture Credit: Chris)

The Trump administration is engaged in a trade war with the whole world. Many people think that Trump and his trade policy team are a group of extreme trade protectionists whose bodies have entered the 21st century, but whose thoughts are still in the 19th century. Driven by outdated trade concepts, they over-emphasize trade imbalances and launch trade wars with major trading partners around the world, bringing chaos to the global trade order.

The Trump administration accuses China of unfair trade policies. China is accused of taking advantage of the US, forcing US companies to transfer technology to local companies, stealing US intellectual property rights, and Chinese students and scholars studying in the US are supposedly collectors of technical intelligence. These unfounded allegations are demonizing China, fanning the negative sentiment of China amongst the American public, and as a result, deepening the hostility between the two peoples.

I believe that what is urgent now is to let the people of both countries, especially the United States, understand the truth about China-US trade.

First of all, China-US trade is free and fair. Although China, as a developing country, has higher tariffs than the US, it has lower tariffs than many developing countries, including India. China is not forcing people to buy from it, and US importers are not stupid. China’s imports have helped the US middle class, which have experienced slow income growth for years, to buy more goods with the same income. The increase in Chinese exports in 2017 is precisely the result of strong US growth and increased consumer confidence.

Second, China's market is basically open after its accession to the WTO in 2001. China is the fastest growing market for US exports. If the Chinese market is not open, it is impossible to see 56% of US soybean exports, 26% of Boeing aircraft, and 16% of US automobiles exported to China.

Third, US export controls are a barrier to more exports to China. Like some other developing countries, China's comparative advantage lies in cheaper labor. America’s comparative advantage lies in capital, technology, and land. Driven by this difference, China exports labor-intensive products to America, and the US exports technology products and agricultural products to China. As the US Chamber of Commerce in China complains, the US export control policies are stricter than those of Europe (especially Germany) and Japan, limiting US exports to China. US export controls should take part of the responsibility for the trade deficit.

Fourth, US-China trade takes place within the global supply chain. While globalization has brought wealth and growth to countries, it has not changed the division of labor between the rich and the poor nations. In reality, the US is at the high end of the supply chain, while China is at the low end of the supply chain. Apple's iPhone is the most typical example. Almost all iPhones are assembled in China, but Chinese workers and factories only receive 5% value added (mainly labor costs), and Apple's design, branding, and sales account for nearly 60% of the value added, and American investors from Apple share these profits. However, as the final assembly point of the iPhone, China has to bear the entire value of all Apple exports to the US. The global supply chain exaggerates China’s exports to the United States by as much as 40-60%, according to different economists.

Fifth, Trump and other protectionists only emphasize the Sino-US trade deficit in goods, but they deliberately ignore the US surplus with China in service trade. For example, according to Chinese statistics, the US service trade surplus with China in 2017 was as high as $54.1 billion; if the US standard applies, the total US service trade surplus with China in 2017 would exceed $90 billion. The US has gained a lot of benefits from Chinese tourists and students, and from exporting copyrights and patents to China.

Sixth, another thing trade protectionists deliberately ignore is that the sales of US companies investing in China have surpassed $500 billion. They not only make huge profits from the fast-growing Chinese market, they also lead to the export of US parts and components as well as intellectual property rights to China, which in turn promotes growth in the US economy.

Seventh, the latest data refutes the accusations about China’s so-called “theft of intellectual property rights”. Although the system of intellectual property rights started late (since the early 1990s), China has established a relatively complete intellectual property legal protection system, including the establishment of intellectual property courts and specialized judicial institutions, and the protection of IP rights has clearly taken effect. For example, in 2017, China’s external payment of intellectual property fees reached $28.6 billion, a 15-fold increase from the time when it joined the WTO in 2001. US intellectual property owners are the biggest beneficiaries.

Eighth, as for the so-called "forced technology transfer" problem in China, there is no evidence that the Chinese government has a law or regulation that imposes this requirement on foreign-invested enterprises, and there is no enforcement of the transfer of technology on US companies. The great success of the US auto industry in the Chinese market indicates that China-US joint ventures are mainly based on voluntary contractual behavior. General Motor and Ford have exported a large number of automobiles and parts to China through joint ventures, becoming one of the largest automobile manufacturers in China.

Ninth, the industrial policy “Made in China 2025” is one of the main goals of the Trump administration’s attack on China. Obviously, he is worried that China will adopt the so-called “state capitalism” policy and enhance the competitiveness of Chinese enterprises in the high-tech industry through state subsidies. This accusation is unfounded, because of the following factors: the use of industrial policies to upgrade the technology of Chinese enterprises is China's development right and is in line with WTO regulations. Second, China's policies are only guidelines, they’re not mandatory. Third, China's industrial upgrade is necessary because, with the rise of labor costs, China's labor competitive advantage is mostly lost, and China's economic growth is facing enormous difficulties. In addition, the United States itself has a large number of subsidies in agriculture and manufacturing. The recent abuse of Section 301 and Section 232 provisions (in name of national security) is an example of the US version of state protectionism.

Tenth, China’s trade practices have not violated WTO rules. Since China joined the WTO 16 years ago, the country has, generally speaking, complied with all its obligations in its accession protocol. This is the WTO's evaluation of China's performance. As two major trading nations, China and the US have been subject to a biennial trade policy review. And in the cases where the WTO dispute settlement mechanism ruled that China's policy does not conform to WTO rules, China has corrected it; by contrast, the United States obeys WTO judgments far less often.

In conclusion, China does not want to fight a trade war and hopes to develop stable, mutually beneficial, and fair trade relations with the United States. Trump launched the largest trade war in history against China, slapping tariffs on $50 billion worth of Chinese exports, and now threatens to levy tariffs on an additional $200 billion or even $500 billion. Obviously, Trump's trade war is typical trade bullying, and the Chinese government is forced to resolutely fight back. At the same time, China is accelerating market-oriented reforms and opening up the market to foreign investors as a counterbalance to trade war challenges. Given the fact that China is already the largest domestic sales market and is further opening up its market, the US may lose opportunities to other competitors if the Trump administration insists on a trade war with China. Moreover, the escalation of trade war recalls the tragic history of the 1930s, when the US Congress passed the high tariff trade protection law, the Smoot-Hawley Tariff Act of 1930. The result was a world-wide trade war, a currency war, and finally the totally destructive World War II. The wise American people should be more aware of the results of this period of history and oppose the policy of trade war.

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