12 Nov 2019 19:36 IST

America’s trade war with China is hurting both countries

It’s all about which side blinks first in the duel to become the world’s most influential country

CNBC reported ominous trade numbers this week. US imports from China have fallen a sharp $53 billion through the first nine months of the year, compared with the same time period last year, largely because of the tariffs that the US has imposed on China. US exports to China, meanwhile, are down $14.5 billion over the same time frame, also a result of retaliatory Chinese tariffs.

China is definitely hurting. It had a trade surplus of nearly $500 billion with the US just last year. A loss of a mammoth $53 billion in sales to the US is a big hit to the vast Chinese manufacturing hinterland. It is not as though other countries have stood ready to pick up the slack in US consumption — those countries have problems of their own. It is little wonder that Chinese companies are now forced to scale production back, shutter factories, and send workers home.

America is hurting too. China, with a hungry middle-class larger than America’s entire population, has been a prime export market for thousands of American companies. When China buys less — not only because of its retaliatory policies to punish American tariffs but also because the slower Chinese economy is lowering consumption — it directly hurts American exporters. Jobs and dignity are lost and local communities lose tax revenues. Luckily for America, the economy is still strong and unemployment is at historic lows. This strength has resulted in displaced workers finding new jobs and staying afloat.

Trump and trade

US President Donald Trump has been consistent in his complaints about trade imbalances for at least 30 years. Initially, his target was Japan. Talking to Oprah Winfrey in a 1988 interview, he said, “..and yet we let Japan come in and dump everything in our markets. [What we have] is not free trade. If you ever want to go to Japan and try to sell something, forget about it. It’s almost impossible.”

He has also been consistent in one other aspect. He does not blame Japan or China for their trade surpluses with the US — but rather prior, friendly, globalist administrations dating back to the elder George Bush. His charge is that as China began to grow, American companies and administrations turned a blind eye to China’s trade practices because the large Chinese market represented too big a potential to upset apple carts.

No fair game

China’s trade practices have been well documented and most economists agree that China does not always play fair. The national China policy is the root cause of the problem. For-profit private enterprise has been the engine of China’s miracle, but the Chinese government, beholden to the Communist Party, controls key gears of the machine.

All land is still owned by the government. The vast infrastructure of roads, bridges, power plants, ports and telecommunications networks are government-owned. State-controlled banks exercise enormous power over private companies. The Bank of China is known to manipulate the value of the yuan to make Chinese goods less expensive. A mere visit by a Communist Party official to resolve a land dispute between a farmer and the state is settled within minutes, nearly always in the state’s favour. The government forces Chinese companies to buy from companies that are sick, kicking in subsidies if necessary to keep the hum going. China also subsidises companies that dump products in world markets at prices below cost so that China can weaken — and eventually wipe out — international competition.

When western companies arrive in China, the going is initially good as Chinese companies use their large dollar reserves to buy direct, at market prices. But the party doesn’t last. A state agency soon demands that western companies start manufacturing in China, always with Chinese partners. This is a tough nut to swallow because manufacturing techniques often represent key intellectual property assets for foreign companies. When they reluctantly agree — the market is too large to ignore — the Chinese partners soon demand the transfer of design and engineering technology as conditions to further expansion.

Aggressive China

After President Xi Jinping launched his One Belt One Road (OBOR) and the Made in China (MIC) 2025 initiatives, China has become even more aggressive in attempting to establish world domination. According to Investopedia, China is already a leading player in iron, steel, aluminium, textiles, cement, cellphones, personal computers, shoes, chemicals, toys, electronics, rail cars, and ships. MIC 2025 would extend this dominance to ten new industries including next-generation IT, robotics, artificial intelligence, aerospace, new energy vehicles, new materials, biomedicine, and agricultural equipment. If China is successful, there will not be a single advanced sector in the world in which China would not be a key player.

To add to the tension, the US strongly believes that in many fields, when China needs sensitive technologies, its hackers and spies simply steal western blueprints. There is clearly no country in the world that works so closely with its industries for the sole purpose to win. China is using every power that it has, including geopolitical, economic and military, to not only assert the dominance of its existing industries but also those of future ones.

For three decades, American presidents talked tough about China, especially about human rights, but went along. President Trump has been alone in taking the fight to China at great cost. The trade war is therefore about which side blinks first in the duel to become the world’s most influential country in the 21st century. It’s not a war that will end any time soon.