News Analysis |
Top economic advisor to President Xi Jin Ping of China, Liu He, warned that a trade war between the US and China would harm both countries.
Trade discussion between officials and China were held earlier month at the White House. So far, there has not been any major breakthrough. The Minister of Commerce in China, Zhong Shan, stated in a press conference,” We are continuing our discussions.”
The minister also added that “everyone knows trade wars hurt others without helping [the countries that started the trade wars] themselves.” Zhong said this at a time when the annual session of the National Party Congress in Beijing in underway. “There are no winners in a trade war and it would bring disaster to our two countries as well as the rest of the world.”
Recently, the US president Donald Trump tweeted that it’s very easy to win a trade war. A 25% Tarrif on steel and 10% on aluminum imports were also announced by Trump last week, a move which has not only been criticized in China but the EU and within the US as well. Gary Cohen, a top advisor to Trump on economy, resigned in protest.
The trade deficit between the US and China, according to the US Census bureau, is a whopping $375 billion.
The US and China are the two biggest economies in the world, with a combined GDP of nearly $30 trillion whereas the GWP or Gross World Product (Essentially, the GDP of all the countries in the world) stands at $75 trillion. The US has the largest consumer market in the world, while China is the largest producer of goods in the world, including 70% of all mobile phones, 80% of all air conditioners and 60% of all shoes in the world. It’s no surprise that China has come to be known the ‘factory of the world’.
From these facts about US consumption and Chinese production, it follows that Americans are buying more products from China than the other way around. A trade deficit between the two would result naturally. The trade deficit between the US and China, according to the US Census bureau, is a whopping $375 billion.
The Minister of Commerce of China also addressed this trade deficit in his press conference. He said that research done by the American government inflates the trade surplus in China’s favor by about 20%. He also added that if the US removed restrictions on high-tech exports to China, the trade deficit would get reduced by nearly 35%. China has previously criticized tighter US high-tech export rules. This trade deficit was a subject of much attention and mocking by Trump during his campaign for the presidency. At a rally in Fort Wayne, India in May 2016, Trump said that ‘we can’t continue to allow China to rape our country and that is they’re doing.”
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In November of last year, Trump visited China and met with Xi Jing Ping where he said that he gives credit to China for taking advantage of the US (i.e. manage to skew the trade deficit in China’s favor).
Trump seeks to reverse this trade imbalance in America’s favor. He had promised to do so on the campaign trail. He also said that he would eliminate the US’s $19 trillion trade deficit in eight years. It is with this intent that he has imposed tariffs on imports on certain goods. The American economy has been doing rather poorly, especially since the 2008 housing bubble crash. Growth rate in the US remained below 2% for a number of years. At the same time, China kept growing at a rate of 7% of more, on average.
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America’s domestic industry has declined as American consumers began to buy relatively inexpensive consumer goods made in China. Millions of blue-collar jobs are said to have shifted from the US to China in the last two decades, with some three quarters of manufacturing jobs moving to China. The cost of labor is much lower in China. Consequently, the cost of production is also lower in China. Companies preferred shipping production to China because, if they didn’t, their competitors would have. The American worker, thus, became a victim of globalism, as Trump is wont to say. In one his more famous speeches, Trump said that ‘we will no longer surrender this country or its people to the false song of globalism’.
According to the IMF, globalization refers to the increasing integration of economies around the world, particularly through the movement of goods, services, and capital across borders. Globalism is a term that has come to encompass the pitfalls of globalization, as all regions in the world do not benefit equally from globalization.
The decline in American production is said to be one the major reasons behind anti-establishment populist sentiments that gave rise to Trump. Trump was smart enough to capitalize on it during the campaign trail. After getting into office, however, his decision to impose levy on aluminum and steel imports has been criticized widely. It is set to make beers, cars and baseball hats, for example, more expensive for the American consumer. America’s allies are not happy with the decision either. The president of the European commission, Jaun-Claude Juncker, said that the bloc [EU] was ready to respond to tariffs by Trump by imposing levy on top US exports such as Harley-Davidson motorcycles, Levi’s jeans and Kentucky Bourbon Whiskey.
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The Minister of Commerce of China, Zhong Shan, also said, “China does not wish to fight a trade war, nor will China initiate a trade war, but we can handle any challenge and will resolutely defend the interests of our country and our people.”
It is not only China but American allies as well that have criticized Trump’s move to hike tariffs in imports. Protectionist measures by one country’s economy will probably incentivize other countries to do the same. Neither the consumer nor the producer benefits from such policies in any country involved in this globalized world of ours. Instead of import tariffs, investment in increasing domestic productivity is a policy option worth considering.