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China-US Strategic Competition

Oct 19, 2018
  • Zhong Yan

    Senior Fellow, CITIC Institute for Reform and Development Studies

Serious imbalance in China-US trade is the direct cause of Trump’s trade war. The US side requires China to reduce the trade deficit by $100 billion, and further open its market. According to Chinese statistics, it had a $275.8 billion surplus in goods trade with the US, accounting for 65.3% of its total goods trade surplus; US statistics, however, showed a $375.2 billion deficit in goods trade with China, which accounted for 46.3% of its overall deficit in trade of goods, higher than its deficit with the next eight other countries combined (which together accounted for 44%). This directly resulted in such claims as “the US has been ripped off in trade with China” and “the US has rebuilt China”, which are essentially against the basic ideas of free trade. Free trade is based on comparative advantage as well as mutual benefit and win-win cooperation. Trade has grown rapidly between China and the US because it meets the structural needs of both countries. China-US trade has created tremendous economic benefits for both countries. China is the US’ fastest-growing export market and the largest source of imports, and trade based on both countries’ comparative advantages of their respective economic structure has boosted US economic growth, lowered inflation, promoted industrial advancement. US transnational corporations have enhanced international competitiveness through integrating the strengths of both economies, creating numerous business opportunities and profits for US companies. Through bilateral trade, the two nations jointly realized great economic interests, promoting economic developments. One has not taken advantage of the other; the only question here is who benefitted more.

  The US trade deficits don’t reflect real distribution of the benefits from bilateral trade. First, Chinese and US statistics diverge dramatically, showing a nearly $100 billion difference in 2017, with US official data being overestimated by almost 20% each year. The US officially counts transit trade from Hong Kong into overall China-US trade, yet a great part of this comes from other countries and regions, and China isn’t the real source of such exports. While calculating US exports to China, US authorities calculate export volume based on FOB prices, and calculate import value based on POD prices, doubling handling, transporting, and insurance expenses in calculating US deficits in trade of goods. In addition, in calculating US exports to China, they don’t count goods sold to China via transit trade from such places as Japan, South Korea, Taiwan, Hong Kong, and Macao, greatly overestimating US deficits. Second, the current approach to place of origin statistics for trade in goods exaggerated US deficits in trade with China. On the global value chain, China, as the “world’s factory” only gets the added value from the assembling process. The current statistical methods, however, count overall value of those goods into Chinese exports. That US-bound exports from foreign-funded firms based in China, with raw materials, intermediate products, or key components from those firms’ mother countries or third countries, are also deemed as Chinese exports further amplified US deficits. The actual state of benefits distribution in China-US trade isn’t as imbalanced as might seem from the US deficits in goods trade. On the contrary, constant increases in bilateral trade reflects a high degree of mutual complementariness, mutual benefit, and balance between their trade relations, economic structures, and industrial chains.

China-US trade has become a source of trouble mainly because the US has always considered free trade an important policy tool. When American industries demonstrated strong competitiveness, the US government emphasized free trade and open markets, amplifying the advantages of the American economy. Once the industrial technologies and competitiveness in the marketplace rise and constitute a challenge for American industries and companies, the US government would raise the banner of fair trade, and intervene to prevent the former from gaining advantages against their American counterparts. What happens to China today is hardly different from what happened to Japan previously. As a disciple of traditional American theories of economic development, Trump believes the purpose of free trade is to facilitate a country’s own development, especially manufacturing, which can increase tax revenues, promote technological progress, enhance corporate competitiveness, and help realize full employment. Once free trade can’t serve that purpose, he wouldn’t hesitate to abandon it. The real purpose of his trade war is to suppress the rapid rise in Chinese economic competitiveness, and consolidate US advantages in long-term strategic competition. His two core aims are: first, to attract more China-based firms to invest in third countries, or directly invest in the US, through creating anticipated instability in China-US trade ties; second, to slow Chinese indigenous technological progress. Unlike the trade war against Japan, though, since China’s current international strategic status is far above that of Japan's in the past, in order to secure success the US will go beyond bilateral relations and trade, and engage in competition with China in international economic institutions and in economic, science and technology, and cultural fields.

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