The U.S.-China trade war kicked off with the United States imposing a preliminary a 25% tariff on $34 billion worth of Chinese goods that would be followed by another 25% tariff on $16 billion worth of Chinese exports. China retaliated with a collective 25% tariff on $50 billion worth of U.S. goods, concentrated towards U.S. lobsters, soybeans and cars. The war rose to great scales as the Trump administration proposed instituting a 25% tariff on $200 billion worth of goods to be followed by an additional tariff on $267 billion worth of Chinese goods while the Chinese government heightened its policies to $110 billion worth of tariffs on U.S. commodities. Most recently, Trump has instituted a 10% tariff on $300 billion worth of Chinese imports. To counter, China decreased the value of its currency and nullified the tariff’s potential effects while also making global commodities more expensive in dollar values. China’s policies pose a threat to both the U.S. economy and the global economy with the IMF reporting that trade wars could potentially account for a $455 billion loss in U.S. GDP and global growth prospects would only expand by 2.6%. While Trump seeks to reach an agreement with Chinese President Xi Jinping, trying to “get back to the table,” China is focusing on a resilient strategy that intends to wait out Trump’s claims regarding the trade dispute. With stocks falling as trade war tensions rise and rising as hopes for a solution grow, the United States and China have been stuck in this turbulent cycle that seems never-ending. In the following, I discuss the current situation of the U.S.-China Trade War and explore its various causes.
China’s trade malpractices have for years taken advantage of the American economy and continue to give China the upper hand. Specifically, China promotes its own exports in an attempt to block trading partners, particularly the United States, from gaining a foothold in trading with China’s rapidly-growing domestic market. Following the path of neo-mercantilism, in which a nation stimulates the growth of its economy using subsidies, tariffs and trade barriers to dominate other competition, China has instituted practices that have hurt the United States for the last few decades.
In recent years, Beijing has implemented discriminatory policies that allow them to force technology transfer from U.S. companies. The National Medium and Long-Term Plan for the Development of Science and Technology, for example, set a precedent for how Chinese companies can take advantage of standards that allow the Chinese market to have access to foreign firm technologies. When licensing intellectual technology from foreign firms, China imposes legal restrictions that only grant foreign firms access to China’s markets at the cost of licensing contracts, fueling a patent system that allows China to file patents of the technology as their own and have control over core foreign imports in its markets. On the other hand, China imposes no such contracts on transactions between its own firms when dealing with technology transfer.
China also tends to target industries with innovative and financial potential and provides capital and protection to Chinese companies to take part in the market. The solar sector provides a recent example as Chinese firms like Jinko-Solar Holding Co Ltd have produced solar panels and equipment in great quantities but are exporting them to other areas like Eurasia, Central America, and Africa to gain a share in the global solar energy market. Other “unfair” economic policies include subsidies that favor Chinese industrial networks and lowering the prices of U.S.-export products like aluminum foil and steel tubing below their production costs before raising prices after China has reduced competition from their American competitors. China’s state-owned enterprises dominate the railway, media, and tobacco industries and many SOEs are banks that provide stability to the domestic economy. Banks also benefit from subsidies as they can borrow using a one-term loan rate, which is less than the rate of inflation, and essentially increase the amount available in investment for Chinese firms.
Additionally, China’s ban on certain U.S. agricultural products (like poultry and pork) has eliminated a significant consumer market for American farmers. Due to concerns about avian flu, China banned U.S. poultry imports in 2015, erasing an export market for the United States that had produced $272 million in 2014. Furthermore, there is a striking imbalance and unequal tariff barriers between the two countries. In one example, the United States charges a 2.5 percent tariff on Chinese automobile manufacturers while China institutes a 25 percent tariff on U.S. imported cars. These practices represent a driving force behind recent U.S. actions to escalate its trade war.
Another motive for the United States in the trade war includes addressing the Made in China 2025 initiative. The MIC 2025 refers to China’s future plans for domestic technological and resource growth, setting forth proposals to inspire innovation in manufacturing sectors, augment technological development, reduce inefficiency of materials consumption and dominant the high-tech future industries in aerospace technologies and artificial intelligence systems. The highly-ambitious framework emphasizes the desire for China to gain a latent comparative advantage, in which China boosts domestic industries with low production costs and reduce transaction costs through large-scale investments that overlook unstable infrastructure. This approach would allow China to finance loans to be paid off in the long-term and accelerate China’s labor productivity at a massive scale. The plan extends beyond 2025, suggesting that China will achieve to 70 percent technological self-sufficiency by 2025, become the world’s leader in AI research by 2030, reach manufacturing dominance by 2035, and eventually proclaim itself the world’s resource and manufacturing leader by 2049. China believes its development model will not only achieve domestic advances in innovative sectors but also drive their dominance in such industries in the world economy over the next few decades.
As China promotes the role of service trade in the country’s economic plan, the continuing efforts through MIC 2025 will create even more domestic-based jobs and foster new areas of professional services and informational technology, thereby becoming a source of output for the Chinese economy. While China continues to promote the initiative through various legislative policies, the United States views the plan as yet another unfair trade practice. There are also concerns with how this expansive plan could present opportunities for the Chinese Communist Party government to ambitiously empower governments, local enterprises, public institutions and think tanks in the region. With concern for how China has explicitly stated its desires to accelerate and dominate over the global network, the United States has brought up the MIC 2025 repeatedly during trade negotiations in hopes to limit the overall unfair system that poses threat to its “trading superpower” status and to free trade practices across the world.
Talks to resolve the U.S.-China trade war have stalled since they came to a truce in June. Unlike past trade disputes between the two countries, this trade war appears as if it will drag on. The dispute also makes clear the limits of World Trade Organization in addressing these types of crises. The WTO’s mission is to promote fair trade and does so by establishing guidelines for countries to follow and work out their differences. However, since both the United States and China keeps putting additional tariffs on each other, the WTO cannot negotiate a deal between the two to prevent the trade war. Without a deal, coming to a compromise through the WTO could take months or years.Trump can thus prolong the existing talks towards China’s trade policies while attempting to make China change its trade actions under his terms through 2020, a desire similar to the one he voiced during his 2016 presidential campaign.
On the other hand, there are concerns that Trump is taking a risk at the cost of the American economy, exemplified by the Dow’s loss of 766 points following Trump’s new tariffs. As Trump attempts to maintain his rigid stance against China, hoping to craft deals that will most benefit the United States and punish China for its past practices, the United States has to deal with the economic repercussions that include higher prices for U.S. consumers purchasing Chinese-made shoes, phones and electronics. However, the United States must understand that its economy will have to withstand short-term losses in order to put the hammer down on these long-standing Chinese malpractices and thereby benefit the economy for the long-term. The ideology that no deal is better than a bad trade deal has garnished support among voters who believe in forcing China to fix their malpractices and maintaining a strong stance against caving into Chinese demands and Trump desires to continue along this line of progress carrying into his re-election campaign, viewing the recent conflagration as a way to strengthen its position in the upcoming U.S. 2020 presidential election.
Arnav served as a BASC intern during the Summer of 2019. He is a Senior at American High School in Fremont