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Economy

The Trade War As A Prelude

Jul 26 , 2018
  • Ann Lee

    Former visiting professor at Peking University

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The Trump administration’s conventional narrative for launching a trade war with China is that it is trying to right past wrongs. The wrongs often cited as reasons are: 1) the U.S. trade deficit with China has only grown larger because China isn’t buying enough; and 2) the Chinese have been stealing or forcing Americans to transfer technology in joint ventures. These justifications mask the true reason, which is to stop China’s rise as a challenger to the U.S.-led world order.  

While the U.S. export trade deficit with China has indeed grown, China alone cannot be blamed for this outcome. For one, China wants to buy more from the U.S., specifically technology, which would have eliminated the deficit altogether. However, it is the American government that has blocked China from making those purchases, which, in turn, makes the trade deficit larger.  If China is limited to buying mostly low-priced commodities like agricultural products and natural gas from the U.S., it can’t possibly close that gap when the U.S. is importing higher priced goods such as high-tech products from China. China, after all, can eat only so many soybeans.

Furthermore, the products the U.S. imports from China are mostly owned by American companies, so the profits mostly accrue to U.S. companies and not to the Chinese. For example, when China ships iPhones to the U.S., the entire value of the iPhone gets counted in the export numbers from China, but almost the entire profit gets recorded by Apple. This is because, though the product is manufactured in China, Apple owns the iPhone itself. Further, Chinese assembly workers are estimated to earn a minimal two percent of the cost to manufacture the iPhone. The remaining profits from iPhones manufactured in China are earned by the Korean, Japanese, and Taiwanese companies that produce the semiconductors and other parts that go into the iPhones. The trade accounting, however, doesn’t accurately reflect the reality of this international production process. The accounting system was created during a time in which companies only manufactured in their own country and did not heavily utilize global supply chains the way they do today. The trade deficit number in this context is therefore essentially meaningless.

If Americans want to be accurate in assigning blame, they should take aim at their own institutions. U.S. companies decided to relocate their operations to China, and away from the U.S., in order to maximize their profits. No one forced these American executives to fire American workers and relocate to China; they simply followed their capitalistic instincts. If President Trump pushes these companies to relocate their operations back to the U.S. by erecting tariffs so that offshoring becomes too expensive, these companies may do that, but it would come at a huge cost. Following Trump’s lead would force companies to rebuild their operations in the U.S., a move that would be very expensive. These higher costs would then be passed onto the consumer in the form of higher prices. To further rub salt in the wound, these U.S. companies would be more likely to rebuild their operations using robotics, so fewer of the fired Americans would get rehired. Following the current policy would doubly hurt average American workers by failing to generate jobs while raising consumer costs at the same time. 

The Federal Reserve and U.S. financial firms also affect trade through currency manipulation.  Ever since the U.S. dollar became the reserve currency after WWII, the interest rate policy at the Fed has been the biggest source of currency swings around the world because most money in circulation is controlled by U.S. financial firms. Today, China has roughly $3 trillion in reserves while the U.S. financial firms directly or indirectly control $700 trillion. Thus, whenever the Fed decides to raise rates, American financial firms buy more dollars. This causes all other currencies to fall in relation to the dollar, as has happened today. China’s currency is not the only one falling; every currency from Canada to Chile is falling in relation to the dollar, making their exports more competitive than Americans’. Again, China is not to blame for this phenomenon.  

Finally, most of the U.S. GDP (approximately 70%) is composed of services, not manufactured goods. China’s economy, which is over 50% services, actually has a deficit with the U.S. of almost $30 billion when it comes to services such as tourism, accounting, etc. And let’s not forget that many U.S. companies like Starbucks and Walmart opened stores in China and sell products in huge numbers to Chinese consumers. None of these sales are recorded in the U.S. export numbers because the sales occur within China and are not goods being shipped from the United States.   

Regarding forced technology transfer through joint ventures, again, the critics have failed to understand or explain the full picture. Nobody is forced to do anything by the Chinese. U.S. executives seeking to form a joint venture in China had a choice of whether they wanted to accept the deal the Chinese were willing to offer them or not. The Chinese often bring capital, labor, marketing and distribution channels to the table to enable the joint venture to succeed. American companies often only had to provide the technology. These companies decided on their own volition to go forward because they wanted to access and profit from the Chinese market. Americans have to understand that once they are operating in someone else’s country, they have to follow the laws and rules of that country. U.S. companies would not have succeeded in these new markets without Chinese help as they lack knowledge of operating in that culture with no language skills or personal relationships. Chinese help came with a cost, and that cost was technology transfer.  Renegotiating bad deals can be done without imposing tariffs or crying over spilled milk.

Despite the fact that China is not solely to blame for the perceived shortfalls in trade with the U.S., the Trump administration is going after the Chinese with a vengeance. Why? The Chinese are seen as the sole peer competitor to the U.S. The Department of Defense can only justify its growing budget if they have a fearsome enemy. That used to be the Soviet Union, but now it’s China, even if China has no stated desire to confront the U.S. or threaten its security directly. Citing the argument that China refuses to back down on the Nine-Dash Line claims or does not have a pro-democracy bent seem like excuses for American war mongering. A full explanation of the false security issues would require a much longer paper, but suffice to say, a trade war with China is only the beginning of a protracted attempt by the American government to curtail China’s growing economic and political influence around the world. Best fasten your seatbelts.  

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