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The Invincible Trade War between the United States and China



At the end of June, the leaders of China and the United States announced at the G-20 meeting in Osaka, Japan, that they had reached a detente in their trade war. U.S. President Donald Trump claimed the two sides had put negotiations "on the field." He set new tariffs on Chinese goods and lifted restrictions that prevented US companies from selling to Huawei, the black-listed Chinese telecommunications giant. Markets met, and media outlets praised the move as a "ceasefire."

The supposed ceasefire was a false dawn, one of many that marked the on-and-off diplomacy between Beijing and Washington. Everything was not quiet on the trade front; the guns never stopped firing. In September, after a summer of heated rhetoric, the Trump administration increased tariffs on another $ 1

25 billion Chinese imports. China responded by issuing tariffs for a further $ 75 billion US goods. The United States may impose additional tariffs in December, bringing the total value of Chinese goods subject to punitive tariffs to over half a trillion dollars, covering almost all Chinese imports. China's retaliation is expected to cover 69 percent of US imports. If all the threatened tours are put in place, the average rate of US imports of Chinese goods will be about 24 percent, up from about three percent two years ago, and that Chinese imports of American goods will be almost 26 percent , compared to China's average rate of 6.7 percent for all other countries.

The parties to this trade war may yet return from the abyss. There have been over a dozen rounds of high-level negotiations with no real prospects of a settlement. Trump believes tariffs will convince China to cave in and change its allegedly unfair trade practices. China may be willing to welcome some problems, such as buying more US goods, further opening the market to US companies and improving intellectual property protection, in exchange for removing all new tariffs, but not to the extent that Trump requires administration. Meanwhile, China hopes that its retaliatory actions will lead to enough economic pain in the United States for Washington to reconsider its stance.

The figures suggest that Washington does not win this trade war. Although China's economic growth has slowed, tariffs have hit American consumers harder than their Chinese counterparts. Fearing a recession around the corner, Trump must count on the fact that his current approach violates the US economy, poses a threat to the international trade system and fails to reduce the trade deficit that he abhors.

Trump may back from his self-destructive policy toward China, but US-Chinese competition will continue beyond his tenure as president. Much of the coverage of the conflict makes it seem like a clash of personalities, the resentment Trump has against the unmatched will of Chinese President Xi Jinping and the Chinese Communist Party. But this friction is systemic. The current costs of the trade war reflect the structural realities that underpin US-Chinese economies. It is worth tracing that dynamic as the two major powers try to find a new, appropriate balance in the years to come.

PROTECT LOBSTERS

The trade war has not produced the desired results for the United States. Washington first raised tariffs on Chinese imports in 2018. That same year, Chinese exports to the United States increased by $ 34 billion, or seven percent, the year before, while U.S. exports to China declined by $ 10 billion, or eight percent. In the first eight months of this year, China's exports to the US fell by almost four percent compared to the same period last year, but US exports to China shrank much more, by almost 24 percent. Instead of narrowing the trade gap, tariffs have coincided with an expansion of the US trade deficit with China: by almost 12 percent in 2018 (to $ 420 billion) and by another eight percent in the first eight months of this year. [19659002] There are at least two reasons why Chinese exports to the United States have not fallen as much as the Trump administration hoped they would. One is that there are no good substitutes for many of the products the US imports from China, such as iPhones and consumer drones, so US buyers are forced to absorb tariffs in the form of higher prices. The second reason is that despite recent headlines, not much of US-bound goods production is leaving China soon, since many companies rely on supply chains just there. (In 2012, Apple attempted to move production of its high-end Mac Pro computer from China to Texas, but the difficulty of obtaining the small screws that hold it together prevented relocation.)

Some export-oriented production leaves China, but not for USA. According to a May survey by the US Chamber of Commerce in Shanghai, fewer than six percent of US businesses in China plan to return home. Sixty percent of US companies said they would stay in China.

Much of American-bound production does not leave China any time soon.

The damage to the economy on the import side is even more pronounced for the United States than for China. Economists at the Federal Reserve Bank of New York and elsewhere found that tariffs in 2018 did not force Chinese exporters to cut prices; Instead, the total cost of the tariffs affects US consumers. When tariffs raise the prices of goods imported from China, US consumers will choose to buy replacements (when available) from other countries, which may be more expensive than the original Chinese imports, but which are cheaper than the same goods according to customs. The price difference between Chinese imports before customs duty and these third-country damages is what economists call a "deadweight" loss for the economy.

Economists estimate that the weight loss resulting from existing US $ 200 billion customs duties on Chinese imports will be $ 620 per household, or about $ 80 billion annually. This represents about 0.4 percent of US GDP. If the United States continues to expand its tariff regime as planned, the loss will more than double.

Meanwhile, Chinese consumers are not paying higher prices for US imports. A study from the Peterson Institute for International Economics shows that since the beginning of 2018, China has raised its average tariff on US imports from 8.0 percent to 21.8 percent, and has lowered the average tariff rate for all its other trading partners from 8.0 percent to 6.7 percent. China imposed tariffs only on US goods that can be replaced with imports from other countries at similar prices. It actually lowered tariffs for US products that cannot be bought anywhere else cheaper, such as semiconductors and pharmaceuticals. As a result, China's import prices for the same products have fallen overall, despite higher US import tariffs.

Beijing's quick calculations are well illustrated by the example of lobster. China introduced a 25 percent tariff on US lobster in July 2018, which fell by a 70 percent drop in US lobster exports. At the same time, Beijing cut tariffs on Canadian lobster by three percent, and as a result, Canadian lobster exports to China doubled. Chinese consumers are now paying less for lobsters imported from essentially the same waters.

THE INCREDIBLE DEFICIENCY

Beijing has proven far more capable than Washington of minimizing consumer and economic pain. But the trade war would be more palatable to Washington if the confrontation with China was to achieve Trump's goal. The President believes that China is "ravaging" the United States. He wants to reduce the US total trade deficit by changing China's trade practices. But imposing tariffs on Chinese imports has had the paradoxical effect of inflating the US total trade deficit, which, according to the US Census Bureau, rose by $ 28 billion in the first seven months of this year compared to the same period last year.

The unpleasant truth for Trump is that US trade deficits do not come from practices of US trade partners; they come from US consumption habits. The United States has had a persistent trade deficit since 1975, both collectively and with most of its trading partners. Over the past 20 years, US domestic spending has always exceeded GDP, resulting in negative net exports or trade deficits. The shortage has shifted over time, but has remained between three and six per cent of GDP. Trump wants to boost US exports to trim the deficit, but trade wars inevitably invite retaliation, leading to significant reductions in exports. Increasing the volume of exports does not necessarily reduce trade deficits unless accompanied by a reduction in the country's consumption and investment. The right way to reduce a trade deficit is to grow the economy faster than at the same time domestic spending, which can only be achieved by encouraging innovation and increasing productivity. A trade war does the opposite, and damages the economy, hinders growth and hinders innovation.

Even a total Chinese capitulation in the trade war would do no harm to the overall US trade deficit. If China buys more from the United States, it will buy less from other countries, which will then sell the difference either to the United States or to its competitors. For example, consider airline sales of the US company Boeing and its European rival, Airbus. Currently, both companies operate at full capacity. If China buys 1,000 more aircraft from Boeing and 1,000 fewer from Airbus, the European aircraft manufacturer will still sell the 1,000 aircraft, only to the United States or to other countries that may have purchased from Boeing instead. China understands this, and it is one of the reasons why they have not set higher tariffs for US aircraft. Whatever the outcome of the trade war, the deficit will not be greatly changed.

A RESILIENT CHINA

The trade war has not really hurt China so far, largely because Beijing has managed to prevent import prices from rising and because exports to the US have been less affected than expected. This pattern will change as US importers begin to move from buying from China to buying from third countries to avoid paying high tariffs. But assuming China's GDP continues to grow at around five to six percent each year, the effect of that change will be quite modest. Some pundits doubt the accuracy of Chinese economic growth figures, but multilateral agencies and independent research institutions put Chinese GDP growth within a range of five to six percent.

Skeptics also miss the bigger picture of China's economy slowing down as it shifts. into a consumer-driven model. Some industry will leave China if high tariffs become permanent, but the importance of such a development should not be overstated. Regardless of the fear of Trump's tariffs, China is gradually dependent on its dependence on export-driven growth. Exports to the United States as a share of China's GDP fell steadily, from a peak of 11 percent in 2005 to less than four percent in 2018. In 2006, total exports accounted for 36 percent of China's GDP; by 2018, this figure had been cut by half, to 18 percent, which is much lower than the 29 percent average for the industrialized countries of the Organization for Economic Cooperation and Development. Chinese leaders have long sought to steer their economy away from export-driven production to a consumer-driven model.

To be sure, the trade war has given a severe psychological toll on the Chinese economy. In 2018, when tariffs were first announced, they caused an almost panic in China's market at a time when growth was slowing thanks to a round of credit crunching. The stock market hit a bump, falling around 25 percent. The government initially felt pressured to find a way out of the trade war quickly. But as the smoke became clear to reveal little real damage, confidence in the market declined: stock indices had risen by 23 percent and 34 percent on the stock exchange and Shanghai by September 12, 2019. The resilience of the Chinese economy in the face of the trade war helps explain why Beijing has strengthened its negotiating position despite Trump's escalation.

The resilience of the Chinese economy helps explain why Beijing has strengthened its negotiating position.

China has not experienced a recession in the last 40 years and will not have one in the foreseeable future, because the economy is still in an early stage of development, with GDP per capita only one-sixth of the United States economy. Due to declining savings rate and rising wages, China's economy is shifting from investment and export to private consumption. As a result, the country's growth rate is expected to decline. The International Monetary Fund estimates that China's real GDP growth will fall from 6.6 percent in 2018 to 5.5 percent in 2024; other estimates put the growth rate at an even lower figure. Although Chinese growth may slow down, there is little risk that the Chinese economy will contract in the foreseeable future. Private consumption, which has risen, representing 35 percent of GDP in 2010 and 39 percent last year, is expected to continue to boost and drive economic growth, especially now that China has expanded its social safety net and welfare regulations, freeing private savings for consumption. .

By contrast, the US economy has had the longest expansion in history, and the inevitable downturn is already on the horizon: GDP growth in the second quarter of this year dropped to 2.0 percent from the first quarter of 3.1 percent. The trade war, without taking into account the September escalations, will shave off at least half a percentage point of US GDP and that much of the drag for the economy may tip it into the expected slump. (According to a Washington Post poll in September 60 percent of Americans expect a recession in 2020. The outlook for a recession could give Trump the impetus to cancel the trade war. Here is a likely way the trade war will end. does not yet feel the pain of customs duties, but a turning point is likely to come as the economy begins to lose steam.

If the trade war continues, it will be in line with the international trade system, which depends on a global division of labor based on each country's comparative When this system becomes less reliable – when it is disrupted, for example, by boycotts and hostilities in the trade wars, countries will begin to disconnect.

China and the United States become economically linked in the hip, each being the other's largest Any attempt to disconnect the two economies will have disastrous consequences for both and for the whole Consumer prices will rise, economic growth in the world will slow down, supply chains will be disrupted and labor-intensive duplicated on a global scale, and a digital divide – in technology, the Internet and telecommunications – will significantly hamper innovation by limiting technology horizons and ambitions of companies.

Silver linings

Trump's trade war does not seem to be merely seeking to reduce the trade deficit. Rather, his administration sees tariffs as a means of slowing China's economic growth and checking the growing power of a geopolitical competitor. At the heart of this Gambit lies the notion that China's system of government engagement in economic activities represents a unique threat to the United States. Robert Lighthizer, the US Trade Representative, has insisted that the purpose of the tariffs is to encourage China to review its way of doing business.

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Robert Lighthizer, United States Trade Representative, in Washington in May, 2019


Erin Schaff / The New York Times / Redux

Ironically, China's private sector is the hardest hit by the trade war, as it accounts for 90 percent of Chinese exports (43 percent is from foreign-owned firms). If the trade war persists, it will weaken the private sector. China may well agree to commit to buying large quantities of US goods as part of a settlement. But such purchases can only be made by the authorities, not by the private sector. The US should recognize that securing such a commitment would basically force the Chinese government to remain a major presence in economic matters. The Trump administration's trade policy threatens to undermine its own stated goals.

U.S. officials should reconsider their analysis of the Chinese economy. To believe that it is a unique "China model" of economic development, which represents an alternative and a threat to liberal market systems, is ahistorical nonsense. China has achieved rapid growth over the last 40 years by moving away from the old system of state control over the economy and embracing the market. Today, the market plays a dominant role in resource allocation, with the private sector accounting for more than two-thirds of the economy.

However, the government-controlled sector is still too big, inefficient, wasteful and morbid, more of a trajectory than a boon to the economy. It is also a source of increasing friction between China and the West, which fears, for good reason, that Chinese government subsidies and supports the unfair advantage of state-owned firms. This regime needs to be changed, both for China and for its trading partners.


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