Donald Trump's Trade War Is a Misguided Attempt to Contain Chinese Dominance

The United States, a waning hegemon, is unwilling to make space for China in the world economy.

The US–China trade war is affecting the global economy. Tariffs have affected the manufacturing sector: with employment levels falling and increasing costs for the consumer, financial markets are tightening. Morgan Stanley, an investment firm, has warned that the US economy could be contracting. On 1 September 2019, the US imposed 15% tariffs on over $125 billion worth of Chinese goods, while China also imposed a 5% tariff on US crude oil. 

When the US admitted China into the World Trade Organization (WTO) in 2001, the then Clinton administration remarked that getting China to agree to internationally accepted norms of trade was a “one way street” to friendlier relations between the countries, and an opportunity to embed China in the global economy. However, this has not gone according to plan. From being smaller than France in 2001, some estimates put China as the world’s largest economy now, and the Communist Party of China (CPC) under Xi Jinping seeks to position the country at the centre of a “new economic order.”  

The decision by the US—and more specifically the Donald Trump administration—to impose increasing tariffs on China is an attempt to stem China’s global influence. Trump has justified tariffs on the basis of using “unfair trade practices.” One in five US companies claim that China has stolen their intellectual property (IP) rights. 

This reading list looks at China’s rise in the world economy, the current trade war, and discusses why the US’s methods to arrest Chinese influence are questionable. 

1) How Did China Join the International Economy?
The Chinese Communist Party officially adopted the goal of export promotion in 1979, which was seen as the primary means to acquire foreign exchange and to modernise the economy. Gautam Sen writes that Chinese exports rose from $16 billion in 1978 to $138.4 billion by 1997. 

A number of unusual features are evident in the evolution of the Chinese economy during the past 20 years. The first is the crucial importance of international economic relations for economic growth and its continuing role in the development of China’s economy. China’s comparative advantage in labour-intensive manufacturing is greater than would be expected for a country of its size because of poor endowment in land, which thus also predicts food imports. The second is the fortuitous political environment that allowed international market access despite the lack of GATT membership, particularly the availability of MFN status on a bilateral basis with the US—underlining the political calculations involved in international trade relations. The third is the extraordinary relationship with Chinese overseas investors, the conduit for inward foreign direct investment into China and the catalytic underpinning for China’s export drive.

In the 1990s, Sen writes that China also made a deliberate shift from a labour-intensive to a capital-intensive economy, keeping with the Chinese government's push that favoured technology-intensive industries. Chinese foreign investment also focused on science and technology, which resulted in greater technological knowledge transfer back into mainland China. 

One cognate aspect for appraising the impact of Chinese overseas investment on China’s economy is its indirect catalytic role in stimulating more investment because it helped to bolster post-reform economic growth in China. As the "firstcomers" they also smoothed the path for the "latecomers," especially western and Japanese investors, because it enabled the Chinese authorities to gain experience of how to deal with foreign investment and recognise its contribution to the economy. It also instigated the development of infrastructural and other facilities that made it possible for foreign investors to operate with greater ease in China.

2) Tariffs as a Threat to US Imperialism
Raymond Lotta argues that China’s “competitive advantage”—a large supply of exploitable labour—has been used to push into the export markets of advanced economies, which will form a base for the Chinese Communist Party to pursue their own geostrategic interests in the region.

China is deeply involved in the world economy. It is the world’s largest holder of US dollars. It is engaged in competitive struggles for raw materials and energy resources in Africa and elsewhere with the US (and other imperialist powers). China is emerging as a growing and increasingly assertive geo-economic force in the world. And US imperialism, for its part, has been increasingly targeting China as a potential long-term competitor and adversary.

Further, Lotta writes that Chinese dollar holdings—the largest of anycountry in the world—are a source of significant leverage against the US, which depends on countries like China to cover financial imbalances caused by the US's spending on wars, social programmes, interest payments, etc, which account for more than it earns in taxes.

China is utilising political and diplomatic ties, weapons sales and training agreements, and low-interest loans to advance its interests. It is ideologically positioning itself in parts of the third world by criticising US domination and some of the US policies that squeeze third world countries. And it is taking advantage of the fact that the US is focused and tied down in west Asia, where its wars for greater empire are now being waged. The US imperialism has been increasingly targeting China as a strategic competitor … It is in the context of China’s rise in the world economy and rivalry with China that we can begin to see US demonisation and “scapegoating” of China: for exporting unsafe foods and medicines, for intellectual property-rights infringements, for human rights violations, and for increasing its military spending. 

3) Is US Trade Protectionism Justified?
Biswajit Dhar writes that the US’s goods trade deficit began deteriorating towards the late 1990s and early 2000s, which coincided with China joining the WTO. Dhar argues that while Chinese exports to the US have steadily grown, China is responsible for less than half of the trade deficit of the US. 

In 2017, US’s trade deficit with China was $375 billion, but its overall trade deficit stood at $775 billion. In other words, even if it succeeds in blocking of all imports from China, the US will still be left with a gaping hole in its trade balance. Thus, if the Trump administration has to succeed in its protectionist intents, the only option it has is to follow the path of autarchy. This means that the initial steps of the trade war launched by the President of the US, which targeted imports of steel and aluminium from several other key trade partners, including the European Union (EU), Korea and India, make more logical sense than his subsequent China-alone retaliation.

Dhar also questions whether the Trump administration’s strategy of levying tariffs on nations to overcome the trade deficit will work. The tariff war, writes Dhar, was initiated with two goals: to levy taxes on steel and aluminium imports in order to promote the US's domestic steel industry, and to take action against China for “harming American intellectual property rights.”

This decision has two disquieting dimensions, stemming from President Trump’s comment that the tariff hikes are “reciprocal tax” against countries, including developing countries like India, since they use tariffs on products imported from the US. The first is that it blatantly violates the multilateral trade rules of the General Agreement on Tariffs and Trade (GATT) and its successor organisation, the WTO … Not to be restrained by Trump administration’s trade protectionism, most countries adversely affected by its unilateral actions of trade protectionism have responded by taking “rebalancing measures.” However, this term seems no better than a euphemism for trade retaliation, taken either directly or by making a notification to the WTO. This has raised the grim prospects of a trade war, reminiscent of the early 1930s. Nearly nine decades ago, the trade war had escalated in absence of global trade rules, but today, major economies seem to be walking the same path, this time by disregarding the multilateral trade rules that have evolved over the decades. Pushing the framework of trade rules governed by the WTO to the brink can seriously disrupt global trade, the implications of which can be far-reaching. 

4) Is the Tariff War a Cover?
Avinash Persaud writes that the US economy is “sinking,” and rather than address the issue, the Trump administration seems content to blame everyone else—especially China—for its problems. Against a devaluating dollar and restricted trade access, Persaud cautions against the world economy turning to China for support, which may not work well.

Surely, the US and China are not going to the brink of a trade war? Someone will blink first, right? It is always best to assume others are just as rational as we are. Let us hope so, but, on the one side we have a nation in denial, immersed in fake news. The balance of independent observers would say that if economic development of the country as a whole is the goal, the principal problem the US and other advanced economies need to solve are delivering the training, and upskilling that will protect US workers from Chinese competition in a fundamental, sustainable way. Other familiar problems are underinvestment in public infrastructure, a host of practices that lead to a lower participation in the workforce and poor public health.

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