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Trade Protectionism Will Harm China-U.S. Relations

Jul 29 , 2016

The eighth round of China-US Strategic and Economic Dialogue was held in Beijing not long ago. An unexpected dispute over the steel trade became a very thorny topic of the Dialogue. China is now the biggest steel producer and exporter in the world, with its crude steel production capacity standing at 1.13 billion tons, which accounts for nearly half of the world’s total. US Under Secretary of the Treasury Nathan Sheets charged that the excess capacity of China’s steel industry was having a huge impact on the relevant industries in the US, Europe and elsewhere. In March and May, the US Secretary of Commerce levied an astonishingly high punitive tariff of 522.2% on Chinese steel.

The issue was stirred up in American public opinion and, for a while, China became the “perpetrator” of global industrial excess. As a matter of fact, the US accusation against China is unfair. After the outbreak of the international financial crisis in 2008, China invested 4 trillion RMB to “stimulate” the domestic and global economies. The investment, mainly used for infrastructure development, has boosted the growth of industries such as steel, cement and electrolytic aluminum. From 2009 to 2011, China contributed over 50% to global economic growth. It is fair to say that China has paid a high price to help the world overcome the financial crisis.

As China sees it, the issue of excess steelmaking capacity should be viewed through the prism of history. The main cause of the issue is the sluggish demand in the global market. It is not fair to put the blame on a particular country, nor should trade remedy measures be abused. The fact is, China has been making tremendous efforts to reduce its steel production capacity in recent years. In 2015 alone, its steelmaking capacity fell by 90 million tons. Besides, more than half of steel producers in China are private companies. The Chinese government needs to take market-oriented measures such as stricter environmental, energy and quality standards, rather than use directive means to cut capacity. The government also needs to formulate supportive fiscal policies to address mass layoffs of workers and other problems that come with capacity reduction and cope with the complicated political pressure accordingly. On the one hand, the US wants China to deepen its market-oriented reform and maintain social stability, and on the other, it demands that China reduce its excess capacity immediately. These two tasks are obviously contradictory.

The dispute over steel trade actually reflects the growing protectionist tendency in the US. A report by the American Institute for Economic Research suggests that imports from China took away 2 to 2.4 million US job opportunities from 1999 to 2011, accounting for around 40% of the 5.6 million job losses in the US manufacturing industry during the period. A survey conducted by the Pew Research Center in September 2015 shows that 60% of Americans believe that it is a very serious problem that US jobs are taken away by the Chinese. Donald Trump, the Republican candidate for US president, claims that once he is elected, he would levy a tariff of 45% on Chinese products. He also pledges to help Pittsburgh get back the steel industry from China. Democratic Party nominee Hillary Clinton has also repeatedly criticized China for so-called “unfair trade”.

The fact is, “Made in China” products have brought immense tangible benefits to the American people over the past decade and more. In the past 15 years, taking into account inflationary factors, the income of American people has registered almost no increase. Without inexpensive goods from China, most people in the US would have fared even worse. According to a research by the Federal Reserve Bank of San Francisco, of every one dollar spent by Americans on Chinese products, about 55 cents get into the hands of Americans involved in shipping and sales of the products. Many “Made in China” products are actually assembled from parts imported from the US. The punitive tariffs imposed by the US government on Chinese steel products may please American steelmakers, but it will also increase the costs of those American companies that use Chinese steel as their raw materials. And when Chinese companies cut their steel production, they will also reduce imports from the US of high quality, high-priced coal, a key material for steelmaking, and this will put American coal firms at risk.

Historically speaking, US protectionist measures almost never succeeded. In 2009, the Obama administration levied a tariff as high as 35% on Chinese tires. It is estimated by the Peterson Institute for International Economics that this policy only preserved around 1,200 US jobs, while making American consumers spend an additional $1.1 billion to buy tires. The George W. Bush administration once also imposed tariffs on foreign steel products and the policy soon received opposition from the United Automobile Workers and others in the US, for it increased the burden of automakers.

Still less should the American people forget the bitter lessons of last century’s Great Depression. Amid global economic sluggishness, the US chose to erect tariff barriers. In 1930, the Smoot-Hawley Tariff Act was adopted. Originally designed to protect US industries and job opportunities, the Act hiked tariffs by an average of 20% on more than 20,000 imports. But on the very day that President Hoover signed the Act, the US stock market tumbled 10%. During the two years following the adoption of the Act, global trade plummeted by 67%, and American exports plunged by as much as 75%. This “Beggar-thy-neighbor” trade policy ultimately dragged the whole world into a devastating war.

All in all, the US trade protectionism toward Chinese products will eventually backfire. China is very likely to impose retaliatory measures for American products. In this globalized world, free trade sometimes brings worry to the people of a country, but no country will benefit from trade protectionism. What the US government has done will not help remedy the problem of its steelmakers. In fact, excessive trade protectionism is the main cause of its steel industry’s lossmaking and other problems. Is the resurrection of the steel industry in Pittsburgh really a boon to the US economy? Trump might not be in the best position to answer this question.

The statistics of the Chinese Commerce Ministry show that in 2015, trade between China and the US stood at $560 billion. The US is China’s second largest trading partner, and China has overtaken Canada to become the largest trading partner of the US. It goes without saying that trade is the backbone of China-US economic relations. The two sides therefore need to adopt a smarter approach to address their trade frictions. In particular, the US needs to ease its export controls over China and allow China to buy more of its high-tech products. The US also needs to facilitate the direct investment of Chinese companies in the US, which will help create more jobs for the American people.

What is more disturbing is that the historical cloud of the Great Depression still overshadows the world economy today. In 2015, global trade only increased by 2%. Only five of the past 50 years have seen global trade growth dropping to such a low level. During this year’s Strategic and Economic Dialogue, given the enormous responsibility shouldered by China and the US in promoting the global economy, the two countries need to display their political resolve to oppose trade protectionism, and work jointly to uphold an open and inclusive global trade regime. This not only bears on economic growth, but it also underpins lasting peace among countries.

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