On August 18, US Trade Representative Robert Lighthizer formally launched an investigation into alleged theft of intellectual property and forced transfer of innovation and technology by China under a rarely used 1974 trade law, after an order signed by US President Donald Trump on August 14.
The move risked reigniting a simmering feud with China and ratcheting up tensions. It could eventually lead the US to slap whopping tariffs on Chinese imports unilaterally, especially on cheap steel and aluminum, as well as sanctions or other severe trade restrictions or penalties to protect US industries.
Official news agencies in China have criticized the move, saying it could poison overall Sino-US relations and hurt both countries.
Trump has been trying to find a balance between working with China to address the North Korean security threat and his “America first” trade agenda. He has admitted that the USTR investigation is connected with the former.
In fact, China and the US share the same interests in regard to denuclearization and peace on the Korean Peninsula. The trade investigation could be a measure to punish China for insufficient support to contain a rising security threat and provocative and escalatory behavior from North Korea, rather than a source of leverage to push Beijing to help rein in Pyongyang’s nuclear ambitions and missile program.
Trump’s stated priority is bringing jobs to the US, and he often tweets about his success in getting companies to create employment there. He seems hell-bent on complaining about China’s trade policies and, before entering the White House, pledged to impose tariffs of up to 40% on Chinese imports. Some argue that the US has been duped into enabling China’s ascendency, ignoring the fact that it is China’s cheap exports that contribute to low inflation and high well-being in the US.
Sino-US trade totaled US$648 billion last year, with a massive US trade deficit of a $350 billion, leading some critics to accuse Chinese companies of copying or stealing US products and ideas and then selling them in their own market or back to the US at a lower price. Some US companies arrogantly argue that China employs a variety of rules and practices, contrary to global norms, that wall its market off from foreign competition.
The Chinese government and Chinese companies have also been blamed for deliberately targeting US companies’ pioneering technologies under the “Made in China 2025” initiative, a long-term plan for China’s global dominance in a wide variety of high-tech industries, which seeks to have Chinese-made materials account for 70% of manufacturing inputs within the next eight years.
The United States’ aggressively anti-China stance and outdated Cold War mentality could impinge severely on the rapprochement Beijing has been trying to seek with Washington.
Until recently, it has been hard to see where the next financial crisis will come from. Imposing trade sanctions could trigger the bursting of China’s credit bubble, inevitably engendering social and political unrest, exacerbating China’s economic woes and thwarting its economic advances.
In the 25 years leading up to the last financial crisis, China developed a hugely successful trade-oriented growth model, relying on a massive domestic labor force with low wages and external consumers in Western countries such as the US. When the financial crisis of a decade ago threw Western economies into the doldrums, demand for cheap Chinese exports suddenly dried up, which caused factories to be mothballed.
Since 2008, to avoid a sharp rise in unemployment, China has pumped the economy full of credit to finance even less profitable investment. As a result, China’s credit-driven expansion has accounted for more than half of global growth. Its banks’ assets on balance sheets have increased fourfold since 2008, reaching the value of $35 trillion, while China’s private debt has increased from 120% of gross domestic product to 210% over the same period. Some expect that like all bubbles, this one too will burst eventually.
As the US persists with its anti-China strategy, other economic attacks will follow. The next attack is likely to be labeling China as “a currency manipulator”, with the logic that China has purposefully kept the yuan artificially cheap in order to gain an unfair trade advantage and hamstring US manufacturers. Such a move could pave the way for further sanctions.
The best strategy for China is to find alternatives to the US as export markets. Otherwise, to avoid a trade war, on the one hand, China will probably need to remove the so-called barriers that hamper exports of high-tech US companies to China; on the other hand, China might need to tolerate some protectionism in some sectors – such as steel – in some US rust-belt states that supported Trump’s election.
A version of this article was accepted for publication by the Global Times.