When President Donald Trump suddenly hiked tariffs on $200 billion worth of Chinese imports two weeks ago, China said it would respond with “necessary countermeasures.” But then it announced a tariff increase on just $60 billion of United States goods. China simply doesn’t import enough from the United States to match tariffs “tit-for-tat,” hence the $140 billion shortfall in its retaliation.
Eamon Barrett wrote on Fortune Magazine that China’s softening economy coupled with the fallout of increased export tariffs will put downward pressure on its official currency, the renminbi, which is also referred to as the yuan. The central government has tended to prop up the renminbi in recent years to spur China’s transition to a consumption-led economy. However Chen Long, a China economist at consultancy Gavekal Dragonomics, argues it is now in Beijing’s best interest to let the renminbi slide.
Financial Times newspaper last week reported that as Walmart delivered a stark warning last week that President Donald Trump’s widening trade war with China would lead to higher prices for American consumers, John Flynn stood in front of one of the US retailer’s stores in Virginia defiantly defending the US president. “I think he’s doing the right thing, America is becoming very dependent on stuff from China,” said Mr Flynn, a 55-year-old real estate agent who grew up in the steel country of western Pennsylvania. “If prices go up, prices go up. It’s going to hurt the Chinese in the long run too. So it’s just a matter of who blinks first,”he said, as he stepped into his Honda Accord.
Mr Flynn’s words from the parking lot in Manassas, near the site of the first major land battle of the American civil war, will give President Trump comfort that he can prevail in the biggest economic gamble of his presidency. The standard line from President Donald Trump and those who support his get-tough approach toward Beijing is that because China sells more to the U.S. than the other way around, Washington has the upper hand in its game of tariffs. “China buys MUCH less from us than we buy from them,”Trump recently tweeted, “so we are in a fantastic position.”
According to Michael Schuman, the author of The Miracle: The Epic Story of Asia’s Quest for Wealth and Confucius: And the World He Created, statistically, that’s true. The United States exported only $120 billion worth of goods to China in 2018, compared with the $540 billion it imported. China has a lot less stuff to tax, so the amount of damage it can inflict on the American economy and business through tariffs is much more limited. That view seemed confirmed when China announced a surprisingly moderate package of new duties in retaliation for President Trump’s latest broadside. While United States hiked tariffs from 10 percent to 25 percent on $200 billion of Chinese products, and is threatening to slap on even more, China responded by increasing tariffs on only about $60 billion of American goods.
Michael Schuman strongly argued that in practice, though, the fight is not as uneven as the trade, China has many weapons at its disposal beyond tariffs to make life miserable for American chief executives. The intrusive Chinese state has all sorts of levers to control the economy and society, and in an environment that lacks rule of law, officials can pull them at their pleasure. They also have far more targets to aim at than the trade data suggests. Many American companies have substantial operations within China that are tremendously important to their bottom lines. General Motors and its partners, for instance, sold more than 3.6 million vehicles in China last year, almost all of them manufactured locally. Starbucks operates more coffee shops in China than in any other market aside from the United States. These businesses are vulnerable to government-inspired nefariousness, from product boycotts and state-press smear campaigns to regulatory investigations.
Tom Clifford, an Irish journalist based in Beijing analysed that the trade spat between the United States and China isn’t about deficits or tariffs. It’s about Pennsylvania, Wisconsin, Ohio, Michigan. The view from China is that Republicans and Democrats are united in using China as a bogeyman because they need someone to blame. President Donald Trump’s anti-China message helped him win these states, and he knows that the path to a second term in the White House, Oval Office door runs through these states in 2020.
President Bill Clinton, George W. Bush and Barack Obama believed that China’s integration into the global economy would lead it to democratize and that United States dominance at China’s doorstep in East Asia would continue. According to Tom Clifford, it was a miscalculation that bordered on the naive. Domestically, China has been increasingly repressive since Xi Jinping became president, but its economy has gradually opened up.
As the United States Chamber of Commerce in 2018 stated in a study on intellectual property: “Unlike many of its developing economy peers, China is making concrete progress in building a 21st century national IP environment.” The reason for this is not based on altruism, but on reality. Chinese companies have gotten better at invention. Consequently, China has a stake in creating a legal system that protects inventions from being ripped off.
Philip Bowring, an Asia-based journalist, formerly the editor of the Far Eastern Economic Review and columnist for the International Herald Tribune stated that China has one great fear – the “middle-income trap.” This could trigger political instability. The unwritten agreement between China and the Chinese people is: You stay out of politics, we’ll make it worth your while. In practical terms, this means that rising wages must not undermine the advantage of China as a center of low-cost manufacturing before it develops the capacity to produce higher-value goods. Assembling, the rationale goes, must be replaced by inventing. Otherwise economic growth will stagnate and popular unrest will follow.
According to Philip Bowring, China controversially requires many United States companies to create joint ventures with Chinese firms in order to sell to Chinese consumers. How could they? It’s akin to stealing in American eyes. A White House report last year cited these joint ventures as evidence of “How China’s economic aggression threatens the technologies and intellectual property of the United States and the world.” But this is not unusual. According to the United States Chamber of Commerce, which last year ranked 50 countries on how well they protect the intellectual property of foreign companies, China ranked above Turkey, Brazil, South Africa and the Philippines, just below Mexico and six places below Canada.
Tom Clifford suggest a better safety net as the homemade solution for Americans. Retaining health care if they become unemployed, retraining programs, an option to be able to send their children to college without incurring massive debt, would greatly lessen hardship in the world’s leading economy. These surely are the issues that should be addressed with at least as much vigor as tariffs on Chinese goods.
Tom Clifforg also noted that China too has problems, many of them similar to those of Americans. High medical costs, exorbitant college fees, inadequate social security and migrant workers from rural areas who are denied basic services after they arrive in major cities looking for work. But it has brought the vast majority of its population out of dire poverty.
The China threat has galvanized American politicians, but sadly mostly for playing blame games. China is not perfect, far from it, and it has challenges that it must overcome. Does it try to use trade to its own advantage? Certainly. Is it alone in this? Certainly not. China is changing and no one can say for sure how these changes will play out. But China is not America’s problem. It may even be part of the solution. But you won’t hear that on the campaign trail.