The US-China trade war has had an adverse effect on the world's second-largest economy. Image: iStock

Do not be surprised if US President Donald Trump’s “on and off again” trade-war threat against America’s biggest trading partner is switched off again before July 6, the date a wave of tariffs on Chinese goods is due to come into effect. The fact of the matter is that neither the US nor he can afford a trade war.

In fact there is no reason for a trade war against China. Just because trade czar Peter Navarro or trade representative Robert Lighthizer say China is stealing US technology and manufacturing jobs, that does not mean it is true, at least not to the extent they accused it of.

Dubious trade deficit figures

First, Trump is probably well aware that his tariffs on the “hit list” of Chinese “imports” could bring down US businesses and hurt consumers. More than 60% of “imports” from China are produced by US enterprises destined mostly for the US, Chinese and other markets. Imposing a tariff on these “imports” amounts to a tax on American businesses and consumers.

What’s more, the deficit figure that Trump throws around is misleading and grossly distorted. Deutsche Bank estimated that the US actually had a trade surplus of US$20 billion with China in 2017 when including US enterprises selling goods to the country. In a similar analysis of US-China trade, the US-based Peterson Institute of International Economics echoed that number.

Technology theft argument

Second, people like Peter Navarro ignore the fact that China has acquired much technology through outright purchase or technology transfer. The anti-China crowd also do not mention that the Chinese government has poured in a huge amount of money for research and development.

What’s more, US firms transferring technology to US-China joint venture partnerships makes economic and financial sense. Combining advanced technical and management technology with a highly skilled labor force and China’s comprehensive infrastructure system have made some US companies extremely wealthy.

As well, according to the World Bank, the Organization for Economic Cooperation and Development and others, China has been spending more than 2% of its GDP on research and development activities, allowing it to build the world’s fastest supercomputer and placing the country at the forefront of artificial intelligence, high-speed rail, financial technology and driverless cars.

Outsourcing very profitable

The reason for US businesses’ decision to outsource production overseas was primarily an economic or financial one: It is extremely profitable.

The US designs and develops a product (such as Apple’s iPad), outsources engineering and manufacturing of high-technology parts (mostly) to Asian economies (Japan, South Korea, Taiwan and others), and sends parts to China for final assembly at plants owned (mostly) by Hong Kong and Taiwanese investors. Thus the Chinese “imports” are largely “re-exports” of goods and services produced elsewhere, including the US.

The outsourcing model has proved extremely profitable for large US corporations such as Apple and Dell because they earn the lion’s share of the profits, leaving less than 10% to Chinese interests. According to a January 2010 report in PC World, Brian Marshall of BroadPoint AmTech estimated that a 16-gigabyte Wi-Fi-only iPad cost Apple about $290 to produce (including $20 set aside for warranty services), but the company sold the gadget for $499 in the US.

Apple’s iPhone was equally profitable, according to a 2011 Forbes report in which staff writer Agustino Fontevecchia revealed the following information:

Distribution of profits                              Percent of total

Apple                                                              58.5

China labor                                                       1.8

Non-China labor                                             3.5

Cost of inputs                                                  21.9

South Korea                                                      4.7

Japan                                                                  0.5

Taiwan                                                                0.5

EU                                                                        1.2

Non-Apple US                                                   2.4

Unidentified                                                      4.7

Source: Forbes

Apple is not alone in making huge profits from outsourcing production to China and other countries – profits that a trade war could wipe out.

China is right: No one wins

Yes, millions of Chinese workers would be laid off in a trade war, but the vast majority would likely return to their villages or farms in the countryside, as happened during the 2008 financial crisis. Where will unemployed US workers go? Social unrest might be far more severe in the US than in China.

US investor Peter Schiff was quoted in a June 25 RT.com report as saying that the greenback could “crash and burn” amid a trade war with China. His logic was based on the assumption that a trade war would flood the world market with US dollars, creating massive inflation. That is, China could be like Russia, selling off huge quantities of US Treasuries. That in turn would force the US Federal Reserve to raise interest rates, stifling consumption and investment in America.

Trump could also pay a political price.

Trump’s 2020 re-election bid

Trump’s trade-war threat would not only “screw” America and the world, it might hurt him as well. History tells us that no leader is likely to be re-elected if he or she tanks the economy. George H W Bush’s failure to win a second term as US president was for that reason: He did not heed the warning “It’s the economy, stupid,” a phrase coined by then presidential candidate Bill Clinton’s campaign manager James Carville.

According to the US-based research organization Investopedia, Herbert Hoover failed to win re-election as US president because he was accused of not paying enough attention to the economy at the height of the Depression.

Trump’s trade-war threat against China (and the world) might mean his becoming the sixth sitting US president not to be re-elected. This is because the effects of Trump’s trade war would be very much like those of the 1930 Smoot-Hawley Act, which imposed tariffs on more than 20,000 imported goods to protect American jobs. Trade partners retaliated, turning a recession into the “Great Depression.” Since China, the European Union, Canada, Mexico and other countries are already vowing retaliation, history might repeat itself.

Further, imposing tariffs on imports would not bring manufacturing and jobs back to US shores. US corporations would either relocate to other low-wage nations or, if they actually do return, turn to automation.

Worse, Trump’s advisers are misleading the American people. It was not China that hollowed out US manufacturing and destroyed jobs. Indeed, US manufacturing jobs were moving to Mexico and Asia in the 1980s and 1990s, well before China joined the World Trade Organization and engaged in US trade in a big way.

Defying Trump

Further, not everyone in the US is buying Peter Navarro’s line that China would lose more than the US in a trade war or that America would emerge stronger and happier from such a conflict. Bloomberg reported in June that staff at the White House’s National Economic Council were pushing for talks with China to avoid a trade war set for July 6.

What’s more, China Daily reported on June 22 that Commerce Secretary Wilbur Ross said he was “optimistic” that a “trade truce” between the US and China might be in the offing. China Daily also indicated that some senior state government officials and business executives were defying Trump’s trade policy. Indiana Commerce Secretary James Schellinger and Governor Eric Holcomb said they were directly reaching out to China, bypassing Trump’s trade posture.

Trump will likely seek ‘trade truce’ with China

Finally, Trump might encounter opposition from  his Asian allies, particularly South Korea, Japan and Taiwan. As indicated earlier, China is the “assembler” of goods produced elsewhere, suggesting that any tariffs imposed on the final product would hurt the countries that produced that product’s parts.

Should Trump and his advisers consider the implications of their tariff threat, the US does not really have any choice but to reach a “trade truce” with China and its other trading partners. Thus this author reiterates the position that a US-China trade war is highly unlikely.

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Ken Moak

Ken Moak taught economic theory, public policy and globalization at university level for 33 years. He co-authored a book titled China's Economic Rise and Its Global Impact in 2015. His second book, Developed Nations and the Economic Impact of Globalization, was published by Palgrave McMillan Springer.

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