US-China trade war set to drag on

US President Donald Trump initiated a trade war against China in 2018 because he felt the latter was “eating America’s lunch,” but some, including this writer, would argue that it might be the other way around. Taking advantage of China’s manufacturing comparative advantage and having access to the Asian economic powerhouse’s huge and increasingly affluent market, American enterprises earned huge profits.

Apple’s iPhone costs around US$245 to produce from start to finish but its average price is over $750, depending on the model. Factoring in the probability that Apple was responsible for more than 75% of the production cost, it could be argued that China fed the US champagne and caviar while America was feeding China peanut-butter sandwiches for lunch.

On the “trade deficit” with China that Trump complained about, it was largely caused by the trade relationship between the two economies and accounting methodology. US enterprises such as Apple use China as an export platform, shipping parts produced in the US, Japan, South Korea and other countries to China for final assembly. But accounting practices are such that the value of the iPhone, for example, from the “exporting country” was recorded as $245 if not higher, but China’s share was less than $8.50. For these reasons, the US will always incur a trade deficit with China.

On the US complaint of China’s “unfair” trade practices, it is like the pot calling the kettle black. For example, the US decided to devalue the dollar to gain an export advantage in 2002. US currency manipulation did not end there: Resorting to quantitative easing in 2008 to raise funds to bail out banks and enterprises deemed “too big to fail” was also meant to depreciate the dollar. More recently, Trump put pressure on the US Federal Reserve to lower interest rates so that the value of the greenback could sink lower relative to other currencies. China, on the other hand, did not lower its policy interest rate for the purpose of currency devaluation. Indeed, China defended the yuan from falling to avoid being accused of currency manipulation by US.

Thus unless the US and China change the trade relationship and make allowances for re-export values, the deficit issue will not go away.

Therefore, it is not only that the US-China trade war might be a long way from ending. If anything, the war could worsen because the two antagonists even disagree on what has supposedly been agreed on. The US side has said that China was committed to buy $40 billion worth of agricultural goods over two years, but the Chinese side insisted that purchases would be based on needs and prices. The Chinese side in fact stated that it would not lift the quota on corn and other farm products nor would it buy less from other countries such as Brazil.

Furthermore, the trade war has always been a struggle over power and ideology between the world’s two largest economies. The US, in fact, has gained far more from China than it lost to the Asian giant because American firms became more productive and competitive by relocating production to China. For example, low-priced “imports” from China saved the average American family almost $1,000 annually and kept inflation and interest rates low, all of which were conducive to investment and consumption. However, China’s rapid economic growth, allowing it to leapfrog the technology frontiers – from weapons development to manufacturing – was viewed by the American political and security establishments as a threat to US national security that must be stopped at all costs.

The US indeed wants to pick a fight with China, demonizing and isolating it at every opportunity. It accuses the Asian giant of incarcerating more than a million Uighurs in Xinjiang, suppressing human rights in Hong Kong, creating “debt-trap diplomacy” and a host of other misdeeds. As well, Trump set up the Indo-Pacific Strategy to revive the quadrilateral strategy of having four “like-minded democracies” – the US, India, Australia and Japan – counter China’s rise.

Furthermore, American lawmakers are doing their best to “de-couple” the US from China, banning US firms from selling technology products to their Chinese counterparts, barring Chinese telecommunication equipment from their market, restricting visas for Chinese scholars and students, and a host of other anti-China policies.

It would therefore not be a surprise if Phase 1 of the US-China agreement to end the trade war is short-lived because the US did not really gain any more from China than was already committed to during Trump’s 2017 state visit to the country and earlier rounds of negotiations. It could indeed be argued that signing Phase 1 might be Trump’s re-election strategy to regain support from farmers who lost billions of dollars in sales revenues and are facing an uncertain future because of his politically motivated trade war.

Phase 2, if there is one, will likely be more difficult to negotiate because the US is demanding that China give up its development posture and way of governing. There is no way  China would do that, suggesting that US-China trade, technology and geopolitical conflicts will be the new normal for years to come, regardless of which of the two major political parties captures the White House or Congress. History will tell that the Democrats and Republicans are very much united on China, or indeed any country that is in a position to challenge US supremacy.

That is a sad commentary, because the trade war has already stressed out the US, Chinese and world economies. According to the US Federal Reserve, the trade war has cost the American economy more than $45 billion and reduced manufacturing activities. Chinese, US and world economic growth has nosedived, to around 6%, 2% and 3% respectively. One can only speculate what will happen to the world if the trade, technology and geopolitical wars continue or worsen.

Furthermore, none of the US anti-China policies have worked. Instead of killing Huawei, US rants actually improved the company’s fortunes, increasing its revenue by 18% in 2019 to more than $120 billion. Instead of joining the US to counter China, India, Japan and Australia are making rapprochement with the Asian giant.

It’s time for US lawmakers to rethink their China policy.