The US Trade War: How China Should React

The major root of the trade war between the US and China has been embedded in the trade deficit. Even being a major power, the US has not been able to bridge up the gap of trade deficit. It has been argued that trade war originates from Chinese trade and industrial policies. – Dr Bawa Singh*

 

 

During the presidential campaign 2016, Donald Trump had made more than 280 promises. However, the poll promises were formalized through the “Contract with the American Voter,” on October 22, 2016, listing out about the 60 promises for action, the day President would be in office. Out of these promises, currently, the plan to curtail Chinese trade was put in practice by the initiating the trade war to bridge up the trade deficit with China. In this context, the new trade war has already been set in by imposing a higher tariff against China, particularly its steel and aluminium. It will remain interesting to see how the trade war will unfold and how China would react?

Image: The Independent

 

Out of the  280 poll promises made during the presidential campaign (2016), Donald Trump formalized the same through the “Contract with the American Voter,” issued on October 22, 2016. Realizing the drastic consequences out of trade deficits with China, Trump rolled out a  plan to curtail Chinese trade was the key plank of “Make America Great Again” policy. At the domestic front, the US administration has repeatedly acknowledged that economic slowdown and unemployment in the country are attributed to the trade deficit with China. Trump criticized frequently the North American Free Trade Agreement (NAFTA).

He has taken it as, “the worst trade deal the US has ever signed.” He has also called Trans-Pacific Partnership (TPP) as “the death blow for American manufacturing.” Donald Trump in a video message (November 21, 2016), introduced an economic strategy of “Putting America First.” The main focus of the strategy would be to negotiate  the “fair, bilateral trade deals that bring jobs and industry back to American shores.” Only after the three days after becoming president (January 23, 2017), President Trump withdrew the US from the Trans-Pacific Partnership with the conviction to strengthen the U.S. economy.

Image: Bloomberg

The most serious concern for Donald Trump is China and hence he avowed to turn the trade balance in the US’ favour by imposing high tariffs and other non-tariff trade barriers to resuscitate its economy and creation of job opportunities.

 

Trade between the US and China

As per the office of US Trade Representative (USTR), China is the largest trading partner of the US. China is the largest goods trading partner of the US, the quantum of which was standing at $578.2 billion in two way during 2016. The trade in services between the US and China stood at an estimated quantum of  $70.3 billion (2016).

The exports of the services on part of the US is $54.2 billion while the imports of the same were $16.1 billion having services trade surplus in its favour of the value of $38.0 billion (2016). The exports of goods on part of the US is totalled at $115.6 billion, whereas the imports of the same are $462.6 billion. Therefore, as far as the trade balance is concerned, it is in favour of China, totalled at  $347.0 billion in 2016.

As far as the US export of goods is concerned since 2001, it has shown exponential growth i.e., 503%. In 2016, it was reached to $115.6 billion, however, the same has shown somewhat minor slump i.e., 0.3% ($330 million) during the year of 2015. The top goods include in the export category are agriculture ($ 21 bn); grain, seeds, fruit ($15 billion); aircraft ($15 billion); electrical machinery ($12 billion);  machinery ($11 billion) and vehicles ($11 billion). In the services category, the export was estimated at $54.2 billion (2016). It is said that it was increased roughly 908% since 2001. The leading services exports from the U.S. to China are intellectual property (trademark, computer software), travel, and transport sectors.

The US is the largest destination for Chinese exports. The Chinese goods export to the US is totalled $462.6 billion (2016). However, it has shown somewhat decline at the rate of 4.3% ($20.6 billion) from 2015, but it has shown continuous increased growth at the rate of  60.8% since 2006. The Chinese contribution in the overall US goods import accounts for 21.1% (2016). The Chinese goods export list included electrical machinery ($129 billion), machinery ($97 billion), furniture and bedding ($29 billion), toys and sports equipment ($24 billion) and footwear ($15 billion). China is the 3rd largest agricultural goods exporter to the US i.e., $4.3 billion (2016).

The major concern on part of the US is the trade deficit, which is in favour of China. In 2016, the same was stood at $367 billion (2015), however, it was decreased at the rate of 5.5% decrease ($20.2 billion) totalling at $347 billion in 2016. Again, the trade deficit reached $375 billion (2017). The US exports to China were only $130 billion, whereas its imports from China were $506 billion. Moreover, China is the largest lender to the US. The debt of the US from China as of January 2018, is $1.17 trillion. The leadership of the US perceived that it gives a massive political leverage to China over the US fiscal policy.

  

Trade War between the US and China

  • The major root of the trade war between the US and China has been embedded in the trade deficit. Even being a major power, the US has not been able to bridge up the gap of trade deficit. It has been argued that trade war originates from Chinese trade and industrial policies. Apart from these policies, Chinese currency manipulation has further put both countries into confrontational mode. However, Trump’s being one plus year in office, the trade deficit has not been showing any positive sign in the US favour. Ultimately, he had to launch a salvo of tariffs against China as in the year of 2017, the U.S. trade deficit with China is stood at US 375 billion in 2017.  The  U.S. exports to China is only $130 billion, whereas its imports stood at $506 billion.

Image: Fathom Consulting

The trade deficit of the US vis-a-vis China has been perceived as a consequence of the laters’ restrictive trade practices. The restrictions include a wide array of barriers to foreign goods and services. Although, China has introduced its open market economy in 1978 and even expanded the scope of the same after becoming the member of the WTO (2001). However, China has introduced the market economy but its trade and industrial policies are aimed at protecting the state-owned enterprises by levying the high tariffs over the imports. Moreover, the other restrictions such as the industries required special permission to import goods, inconsistent application of laws and regulations, transfer of technology from the foreign firms for the Chinese market access etc. Apart from these restrictions, the lack of transparency and currency manipulation on part of China has been emerging as major concerns for the Trumps’ regime. Therefore, it has become a major compulsion on part of the Trump regime to take a hard-line stance against China.

Within the seventy-day in administration, President Trump  in his administration’s annual trade policy report to Congress (March 2017), had openly challenged the World Trade Organization (WTO) particularly for “China’s unfair advantage.” He went further with the accusation of  Chinese dumping of steel, aluminium and chemical products. In the same month, the US Department of Commerce had announced two antidumping (AD) and countervailing duty investigations (CVD) against China. Even the pre-Trump regimes have also been engaged with China over the dumping cases in the WTO. The Obama administration had become frustrated over Chinese economic reforms and increasingly sceptical about the prospect for future reforms. Till date, the US has registered 16 cases against China, to address its concerns such as Chinese Ads, CVDs,  industrial policy and the dominance of state-owned enterprises. In this background, China has turned to the Dispute Settlement Mechanism (DSM) of the WTO to address such perceived unfairness use of such investigations. China had filed 11 cases against the US at the WTO as the former percieves per se the leading target of the United States’ AD and CVD investigations. Robert E Lighthizer (United States Trade Representative) has also given an indication that the U.S. may take action against the WTO for its alleged failures not to check the Chinese unfair trade practices.

President Trump has aired portentous signals with the beginning of the year of 2018. The salvo of high tariffs had launched against its trade deficit with China. President Trump by using the Section 301 of the US Trade Act of 1974, had unilaterally imposed trade tariffs on China. In January, he imposed tariffs on solar panels and washing machines. In a tweet issued on March 2, 2018, Trump asserted that “Trade wars are good and easy to win.” President Trump had signed an executive memorandum on 22 March 2018 to enforce  25 percent tariff on steel and a 10 percent tariff on aluminium imports. The measures have been designed to counter the Chinese unfair trade practices as the administration believes that it involves stealing of the US companies intellectual property. Trump gave signals that the tariffs would cover at least cover  $60 billion in tariffs on Chinese goods.

Chinas Reactions

China has reacted very aggressively to the US’s new trade war. It has been seen that China is in assertive mode and not going to budge to the US pressure. The Chinese Foreign Ministry spokeswoman Hua Chunying said, “We don’t want a trade war, but we are not afraid of it.” If we unfold the statement, it clearly conveyed the message to the US, how China is likely going to take the sanctions? Moreover,  the Chinese Commerce Ministry has also used the same tone and tenor while asking the Trump regime on 28 March not to go ahead with such planned tariffs.

It can be taken as a warning signal to the Trump regime as China could set off a same chain of reactions. Moreover, the Xi government has given clear signal that China would,“fight to the end.” Although, the US economically and militarily is in a stronger position, at the same time China has also been following the suit. China has emerged as a stronger economy, moreover, it is a major lender to the US which gives its stronger position vis-a-vis the US. If the trade war lingers on, the losses or gains are not unilateral. One can perceive that the US has to suffer more losses as compared to China.

The developing countries have already opened up and messed up their economies under the global institutions’ pressure. In this milieu, loss of employment opportunities, health services and education, suicides of the farmers, loss of local industries and many more challenges have become the part and parcel of the people’s life.  In this milieu, it should be left to the individual countries’ decision, how much its economy is to be opened? Moreover, if any country is asked for the same, it should be under the international laws, not as per the individual countries’ whimsical and impulsive actions.

Read:

The US Suspension of Security Aid to Pakistan: Will It Give Geopolitical Space to China?

 

Dr Bawa Singh has been teaching in the Department of South and Central Asian Studies, School of Global Relations, Central University of Punjab, Bathinda-India. He has been contributing articles in Modern Diplomacy, Diplomat, Eurasian Review, South Asian Monitor, Dialogue AIDIA and IPPR.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of The Kootneeti Team.

 

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