US President Donald Trump has sharply escalated a trade war with China by deciding to impose annual tariffs high enough to effectively block about US$60 billion worth of Chinese products from entering the US.
The tariffs are in retaliation for the theft of intellectual property and forced technology transfers by Chinese companies. China exported US$505 billion worth of goods to the US in 2017, while the US exported only US$130 billion in goods to China during the same time period.
That large deficit with China was at the center of Trump’s presidential campaign. But he had so far held off on imposing significant tariffs on Chinese goods because he said he was receiving help from Beijing in curbing North Korea’s nuclear and missile program. With Trump now agreeing to meet with North Korean leader Kim Jung-un, the US president appears to have decided there is little need for restraint on increasing trade pressure on China.
The tariff measure is stoking worries about retaliation from China that could affect US agricultural and technology exports. Trump said the move was meant to persuade the Chinese to cut their US$375 billion trade surplus in goods with the US last year by at least US$100 billion.
But how is that to be achieved? US Trade Representative Robert Lighthizer may be reverting to the playbook he helped devise as deputy USTR in the 1980s when dealing with America’s trade deficit with Japan. He then negotiated “voluntary restraint agreements,” or VRAs, with Tokyo agreeing to limit the export of Japanese cars and other products to the US.
This managed trade policy persuaded Tokyo to support the transplant of Japanese auto and electronics factories and their supplier networks to the US to reduce the trade deficit.
Since VRAs are now largely banned by the World Trade Organization, Lighthizer turned to sanctions under Section 301 of the US Trade Act of 1974 as a new tool to pressure Beijing.
Whether this strategy will work remains an open question. One problem is that China is not an ally of the US like Japan, but a competitor that has strong mercantilist instincts that discourage the relocation of its factories overseas.
Moreover, Trump’s trade policy also involves discouraging Chinese investments in US technology companies to prevent Beijing from acquiring trade secrets. This included the recent blocking of a takeover bid for Qualcomm by Singapore-based chipmaker Broadcom because of the latter’s alleged links to China.
Restrictions on Chinese investments in the US, particularly in strategic industries, are likely to get tighter. Congress is considering widening the scope of the Committee on Foreign Investment in the United States to allow it to scrutinize foreign investments on national security grounds more closely. This would be primarily aimed at Chinese investments or investments by third parties with Chinese interests. The legislation is enjoying bipartisan support among both protectionist and free trade lawmakers.
There is also growing support for reciprocity in demanding the same conditions for Chinese companies to operate in the US as those required for American companies in China. “If Alibaba wanted to invest in the United States, I’m sorry, you need to have an American partner and Alibaba needs to give us their source codes,” said Robert Manning from the Atlantic Council, a Washington-based think tank.
These investment restrictions thus make it unlikely that a “Japanese solution” can be found for the Chinese trade surplus with the US. They also open the Trump trade policy to criticism despite widespread sympathy for the administration’s argument that China is engaging in unfair trade practices.
“If Alibaba wanted to invest in the United States, I’m sorry, you need to have an American partner and Alibaba needs to give us their source codes”
The tariffs are likely to increase the cost of Chinese electronics and clothing imports amid fears that inflationary pressure in the US is already starting to build due to higher interest rates, a tight labor market and stimulus spending.
The tariffs could also provoke a retaliatory response from China that would harm the US farming sector since China is a major buyer of soybeans and sorghum, and curtail sales of US passenger jets. There are also fears that China might sell some of its US government bond holdings, which would rattle financial markets, increase interest rates and add to inflationary fears.
An alternative to resorting to tariffs would be for the Trump administration to take its case to the WTO. But the Trump administration has accused the WTO of being biased against the US in its trade judgments. Lighthizer recently said that the WTO “has proven to be wholly inadequate to deal with China’s version of a state-dominated economy that rejects market principles.”
By focusing now on China as its principal trade adversary, however, Trump is beginning to undo the damage he has wrought among US allies with his other recent trade decisions. Coupled with the new tariffs against China, the Trump administration announced that it would grant broad exemptions to the European Union, South Korea, Canada, Brazil and Mexico from steel and aluminum tariffs that are due to go into effect on March 23.
There is also renewed talk that the US might try to rejoin the Trans-Pacific Partnership to form a united front against China trade practices, which are also being criticized by many US allies.
What we may be witnessing is the start of a recalibration of Trump’s trade policy. Recognizing that it is not alone in its assessment of China’s trade and investment practices, the US might yet decide to improve its messaging to engage in coalition-building. That would include reducing its focus on trade in physical goods and bilateral trade deficits and opting instead for a broader view that would put China center stage.
Taking out the value of made in china products by american companies that export them back to US and elsewhere and the trade surplus would shrink ..more than the U$100B Trump is barking for. This might be the fastest road to remedy the surplus but it is the high value Made by China products that Washington has in mind of keeping out.
I wish the US will go all the way in tariffs on China and in a year or so will learn to shut up once for all. Then it will start to deal with the real problems( if they are ever fixable and not too late).
My worry is that the trade war will create a tsunami of bankruptcies such that it’s irreversible. Good luck, everyone!
My guess is it’s about forcing China to help with the N Korean deal. Otherwise, it’s hard to imagine any sensible person would want to destroy a fragile World economy and pop the US stock market and real estate bubbles.
What the US politicians, so-called economists like Navarro and the pundits do not bring up is the impact of the USDollar as reserve currency on the US trade deficit.
If the USD is not a reserve currency, the US would have to finance its imports by buying foreign currencies, driving down the value of USD which makes imports more expensive and leading to a fall in imports. This is a self-adjusting mechanism.
Increasing imports for China depresses the yuan and the US calls it currency manipulation.
Currently, and since the 2nd World War, the US does not have this auto self adjustment. With USD as reserve currency, the US just issues USD to pay for imports and with increasing global trade and economic growth, the value of USD is maintained. This is an unfair economic advantage and an unfair trade practice.
Exporting countries holding the USD are holding a fiat currency which are worthless pieces of paper and what to do with them?? So the USD are recycled back to the US by " investing " in US securities, flooding the US with liquidity and financing the next round of imports, cheaply. The US has been importing on the cheap.
USD as reserve currency made it pain free for the US to pull out from the 2008 financial collapse which caused trillions of dollars of economic destruction around the world. Root cause of the financial destruction was the sub-prime gambling by the large US banks. Subsequent QEs did not depress the dollar.
The US trade deficit is equal to the excess of spending/investment over savings. This is an economic law. US is not saving enough because it can finance spending cheaply without inflationary pressure. A symptom of this excess spending is the missing 21 trillion USD missing from the Federal Budget which reflects a systemic and chronic breakdown in spending/accounting controls. Google Catherine Austin Fitts for this. The Congressional Military Industrial Complex spending has gone out of control with 1 USD trillion military budget and 1,000 bases around the world. An F35 costs almost a billion. And the military has never been audited.
Instead of addressing the root cause of its trade deficit, the US government took the easy way out and blame China for its self-generated economic problems.
Of course the US would not let go of USD as the reserve currency. It wants the cake and eat it too. It wants everything.
The transfer of technologies to Chinese joint-venture partners is a condition for entering the Chinese market, not ‘forcing’ them as its critics would like the world to believe. Foreign firms have a choice of whether or not to invest in China! China is not the only country that imposes conditions on foreign investment; Japan and Western nations do the same.
Getting into the China market in exchange for sharing their technology was a deliberate business decision for profit and cheap labor/manufacturing cost, NO chinese coercion was involved.
You want to play in the China market, you go by their rules. If you can’t abide by their rules, don’t enter (Bil Gates)
The point about IP is that it’s a dynamic, ever-changing asset. The owner of IP can profit by sharing it via joint venture or license. IP can also leak away, as employees leave the company, for example. Competitors can copy and reverse engineer to achieve the same ends.
Everybody steals IP from everybody else. China was not the first nor will be the last. Whoever is more advanced, that country is more likely to be the target for IP theft. China is making significant technological advances now and soon it will be the target to steal from.
American hi tech companies steal from each other all the time. They are the best qualified to advise how to counter and guard against the theft of IP.
The so called forced transfer of technology was also done by Korea, Taiwan and Japan. In fact Japan was much more restrictive than China. How many U.S. cars are sold in Japan? Don’t tell me on how good Japanese cars are. In the 1970’s Japanese cars were small and crapy and yet U.S. did not sell many cars in Japan. Taiwan for a long time had prohibited high tariffs on Japanese cars due to the residue feeling from WWII.
John Burton,
Thank you for a most objective unbiased article.
In my opinion China should just accept the situation on the ground as it presents itself.
I have this to say directly to the Chinese Government.
We play ‘wei-qi’ and not Western ‘chess’. We play ‘mahjong’ and not ‘bridge’. Do not play the game that the U.S. want us to play.
Please do not spend our entire international trade administration resources, all the scarce time and energy, focusing on dealing with the United States. Have 1/3 of our relevant staff to deal with them playing ‘chess’ or ‘bridge’ but divert 2/3 of our relevant staff playing wei-qi on countervailing measures and directions like speeding up on the OBOR initiative, securing the Asian market by all available and conceivable, enhance trade with Russia, Europe and Africa and the Middle East. Open up these 3 new fronts and go on the ‘attack’ there and treat the U.S. front strictly as a defence, starting with a ‘holding’ position and then retreating to a ‘winding down’ position.
And what have you guys been doing?
When Trump made his announcement where were you guys? Why weren’t you immediately using intermediaries and other offshore facilities in buying up all the stock and securities with our U.S. dollar holdings, when the consequent contagion hit the stock exchanges in HK, Tokyo, New York, London and Europe. You should have already made a few trillion dollars in total on Day 1?
And do not panic! Keep a cool head and hand and move like silk and be inscrutable and insouciant.
Get a good legal team and tie up the U.S with a long winded litigation in the WTO.
Get moving on trade credit to ASEAN, India, Africa and East Europe.
Take the opportunity to train the Africans and South Americans in retail trade. Do not allow Chinese citizens to do retail in the underdeveloped countries. Think long term! If the Chinese monopolise the retail sector that would make China look like an exploiter than a friend. This is to me the problem that was and is in ASEAN and the Pacific Islands. At the ground or shop floor level the local natives must be seen to be the bees buzzing in their own beehives. They must monopolise their retail trade. Otherwise the Chinese would be both exporter and importer! Chinese must only get involved at the wholesale level. China should only be the source of the honey!
Get the message through the Chinese diaspora grapevine. That the Americans are cheats and trying to move the goalposts when they are losing. Would China be allowed to do what they are doing if the trade surplus was the other way? No! So there lies the ‘cheating’ by the loser. China gets blamed when the U.S. has impoverished itself through diverting economic resources to military hardware production and then fighting losing wars. Like using hundred dollar bills to light up up a cigar! Like throwing money into the ocean!
Build up a strong case for the injustice and the inequity and the cheating. Exhort all Chinese whatever their citizenship or political or ideological position – that we have to confront this modern ‘Opium War’. By analogy like in the Opium war the U.S. telling us how to trade – that is we can only trade with them if we lose money! What sort of logic is that?
Exhort all Chinese not to buy American goods or visit America or send our children to Universities there. Shift direction to Germany or France or even Japan or South Korea. Get busy on WeChat and other iMedia to touch base with the Chinese diaspora.
Get natural resources from Eastern Europe or Central Asia or South America. Stop importing from Australia the knave of the U.S.
Anyone caught using American brand goods in China should be exposed and ostracised by the netizens immediately. Note that the Chinese Government should not get directly involved here because of WTO rules.
Anyone caught not using Chinese manufactured goods if one is available of similar quality and function should also be exposed and ostracised by the netizens immediately. Note that the Chinese Government should not get directly involved here because of WTO rules.
Also the Chinese rich should start being frugal and big continue with their lavish extravagant lifestyle. Would not look good when economic pressure is on the Chinese factories and their poor workers.
Tax the rich a bit more and provide income subsidies to workers who get retrenched as a results of this trade war. Communism must be seen to be effective in bad times like Capitalism has proven to be effective in good times. We must adjust to fit!
That is enough from me for the moment.
Vincent Cheok
John Burton,
Thank you for a most objective unbiased article.
In my opinion China should just accept the situation on the ground as it presents itself.
I have this to say directly to the Chinese Government.
We play ‘wei-qi’ and not Western ‘chess’. We play ‘mahjong’ and not ‘bridge’. Do not play the game that the U.S. want us to play.
Please do not spend our entire international trade administration resources, all the scarce time and energy, focusing on dealing with the United States. Have 1/3 of our relevant staff to deal with them playing ‘chess’ or ‘bridge’ but divert 2/3 of our relevant staff playing wei-qi on countervailing measures and directions like speeding up on the OBOR initiative, securing the Asian market by all available and conceivable, enhance trade with Russia, Europe and Africa and the Middle East. Open up these 3 new fronts and go on the ‘attack’ there and treat the U.S. front strictly as a defence, starting with a ‘holding’ position and then retreating to a ‘winding down’ position.
And what have you guys been doing?
When Trump made his announcement where were you guys? Why weren’t you immediately using intermediaries and other offshore facilities in buying up all the stock and securities with our U.S. dollar holdings, when the consequent contagion hit the stock exchanges in HK, Tokyo, New York, London and Europe. You should have already made a few trillion dollars in total on Day 1?
And do not panic! Keep a cool head and hand and move like silk and be inscrutable and insouciant.
Get a good legal team and tie up the U.S with a long winded litigation in the WTO.
Get moving on trade credit to ASEAN, India, Africa and East Europe.
Take the opportunity to train the Africans and South Americans in retail trade. Do not allow Chinese citizens to do retail in the underdeveloped countries. Think long term! If the Chinese monopolise the retail sector that would make China look like an exploiter than a friend. This is to me the problem that was and is in ASEAN and the Pacific Islands. At the ground or shop floor level the local natives must be seen to be the bees buzzing in their own beehives. They must monopolise their retail trade. Otherwise the Chinese would be both exporter and importer! Chinese must only get involved at the wholesale level. China should only be the source of the honey!
Get the message through the Chinese diaspora grapevine. That the Americans are cheats and trying to move the goalposts when they are losing. Would China be allowed to do what they are doing if the trade surplus was the other way? No! So there lies the ‘cheating’ by the loser. China gets blamed when the U.S. has impoverished itself through diverting economic resources to military hardware production and then fighting losing wars. Like using hundred dollar bills to light up up a cigar! Like throwing money into the ocean!
Build up a strong case for the injustice and the inequity and the cheating. Exhort all Chinese whatever their citizenship or political or ideological position – that we have to confront this modern ‘Opium War’. By analogy like in the Opium war the U.S. telling us how to trade – that is we can only trade with them if we lose money! What sort of logic is that?
Exhort all Chinese not to buy American goods or visit America or send our children to Universities there. Shift direction to Germany or France or even Japan or South Korea. Get busy on WeChat and other iMedia to touch base with the Chinese diaspora.
Get natural resources from Eastern Europe or Central Asia or South America. Stop importing from Australia the knave of the U.S.
Anyone caught using American brand goods in China should be exposed and ostracised by the netizens immediately. Note that the Chinese Government should not get directly involved here because of WTO rules.
Anyone caught not using Chinese manufactured goods if one is available of similar quality and function should also be exposed and ostracised by the netizens immediately. Note that the Chinese Government should not get directly involved here because of WTO rules.
Also the Chinese rich should start being frugal and big continue with their lavish extravagant lifestyle. Would not look good when economic pressure is on the Chinese factories and their poor workers.
Tax the rich a bit more and provide income subsidies to workers who get retrenched as a results of this trade war. Communism must be seen to be effective in bad times like Capitalism has proven to be effective in good times. We must adjust to fit!
That is enough from me for the moment.
Vincent Cheok
US intellectual property…is it quite what is once was? Does China have to steal it for what it is worth when these days they can acquire anything worthwhile rather freely.
If Trump really wants to go after the culprits in the US balance of trade woes he should be going after the US Chamber of Commerse. They are the guys and gals who took US manufacturing and relocated it to China for a quick buck. Just another strategy that came back to bite the US in it`s Azz.
The US is concerned that companies that "CHINA BUYS" and "OWNS "cannot tell the "NEW OWNERS" the trade secrets of the company "THEY NOW OWN"? The key word here is "OWN". If they "OWN IT" then they "OWN ALL OF IT" secrets and all. I would love to see what Mark Zuckerburk, Warren Buffet and Bill Gates would have to say to the owners of a company they were negotiating a deal to buy, if the present owners told them that they could buy the company but the secrets of production or what ever were not going to be part of the deal.All the guys trying to sell the company would hear would be .the scraping of chairs on the floor as the prospective buyers got up and made a rush for the exits. Who in their right mind would buy a company under those conditions? Thats like buying a gold mine but the only thing you own is the tunnels, shaft etc. but not the ore body where the gold is..
Indeed. Also, one of the main reasons why the trade deficit exists is that the US restricts the export of high-value technology goods to China. The US talks a big game about fairness and free market, but what it really wants is an arrangement that gives it an advantage and perpetuates its domination of the world.
cooperations ineach leader of the country,, to defeato or lost the brokers or antagonist or bad hands n feet to distroy the god and wellness of the planet earth ,must push to closer kindness to each ther to solve the problem of the planet earth ..avoid any misunderstanding ,,must alert in all prophet in the planet.. muhammad .. gomez