The Sound of China Breaking – Silence

One of the biggest issues with trade wars is their complexity. I have watched as the President has declared victory in one or another trade conflict, most recently in his meeting with the head of the European Union. The reality is that trade negotiations are always in flux, and once any discussions take place, there is movement no matter how small. Most folks without any real background in the economic realities inherent in trade agreements, tariffs and trade wars, have no perspective on exactly what happens and how these economic realities ultimately impact their lives. So when there is the slightest give and take, even if everyone was acutely aware of where the easy concessions were going to come from regardless, they honestly believe it when Donald Trump declares a victory… even though very little if anything happened, at least on the most controversial aspects of the disagreement.

It is equally fascinating when one government pledges to increase the import of a competing party’s specific product. As the EU promised to import more soybeans from Mid-Western farmers, perhaps making up for the massive cutbacks in China against that agricultural product as retaliation for Trump’s tariffs on Chinese goods, Trump declared a massive victory. But there’s a little catch that trade negotiators fully understood: who exactly in the EU was going to make that extra soybean purchase? That was kind of not mentioned, and clearly it was not any governmental body that was going to implement that purchase. Illusory? Yup! Try and enforce that! You cannot.

It’s pretty clear that trade wars seldom if ever generate the desired result. Throughout modern history, seriously prolonged unresolved trade wars have taken down regional economies and even triggered or deepened global recessions and depressions. Yong Wang, professor at the School of International Studies, Peking University and a nonresident senior fellow at the Center for China and Globalization in Beijing, writes for the July 31^st Los Angeles Times:

“China doesn’t want to fight Trump’s escalating trade war, but it will defend itself. At the same time, it is reaching out to other foreign investors to counterbalance U.S. actions. America may lose investment opportunities if the Trump administration persists. Worse, the president’s actions recall the 1930s, when Congress passed the protectionist Smoot-Hawley Tariff Act. The result was a worldwide trade war, a currency war and finally World War II. The American people should remember that history, and oppose Trump’s trade war on China.” Professor Wang’s perspective is shared by economists the world over.

Speaking on an analysts’ call on July 31^st, Apple CEO Tim Cook observed: “Our view on tariffs is that they show up as a tax on the consumer and in the end result in lower economic growth, something that sometimes can bring about a risk of unintended consequences… The trade relationships the U.S. has with other countries–it’s clear that several of them - are in need of modernizing… We think that tariffs are not the best way of doing that… The risk associated with the macro effects are very difficult to quantify… It could be an economic slowdown in one of the countries, or a currency fluctuation.”

U.S. industry leaders and more than a few members of Congress have pushed hard against the Trump administration’s imposition of new tariffs against imports. Already, as construction costs skyrocket because of the steel/aluminum tariffs, building projects across the land have slowed or been shut down. Farm owners are glad that Trump is giving them a $12 billion bailout for lost soybean and other target crops, but that is both a band aid and hardly a long-term strategy to hold the line. There are powerful Republican and Democratic leaders who strongly oppose what Trump believes is a winning strategy.

To underscore the issues with China, apparently the number one focus of the Trump trade war, Professor Wang continues to explain a majority economic view of that trade struggle with these ten salient points:

1. Although China, as a developing country, has higher tariffs on U.S. goods than the U.S. does on Chinese goods, its tariffs are still lower than those of many other developing countries, including India. Since China’s accession to the World Trade Organization in 2001, it has consistently lowered its trade barriers. China attracts U.S. exporters, who know a good deal when they see it: According to China’s Ministry of Commerce data published last year, 56% of U.S. soybeans, 26% of Boeing airplanes and 17% of American-made automobiles are sold in China.

2. As for goods coming into the U.S., American importers know a good deal when they see it too. No one is forcing them to buy Chinese goods. Inexpensive Chinese imports have helped the U.S. middle class, which has experienced slow income growth for years, to buy more with the same income.

3. It isn’t Chinese barriers but U.S. export controls that limit our economic exchange. China’s trade advantage lies in its cheaper labor costs, and the United States’ advantage lies in capital and land. China exports labor-intensive products to the U.S., the U.S. exports technology products and agricultural products to China. However, U.S. export policy is stricter than Europe’s (especially Germany’s) and Japan’s, determining what and how much can be exported. Without export prohibitions on high-tech products such as aircraft engines, navigation systems, lasers and fiber optics, the U.S.-China deficit would decrease.

4. Trade deficit numbers can be deceiving. Take the Apple iPhone. When they arrive in the U.S. from China where they are assembled, their high cost adds significantly to the trade imbalance in China’s favor. But Chinese workers and factories only receive 5% of the value of an iPhone (mainly labor costs), while Apple’s design, brand and marketing account for nearly 60% of its value. China doesn’t even provide parts for the iPhone; those come from the global supply chain and the benefit goes to the suppliers, not to China. By one calculation, an iPhone’s estimated ‘factory cost’ — $240 — exaggerates the value of China’s exports to the U.S. because the Chinese keep less than $9 per phone.

5. When American protectionists talk about the trade deficit with China, they deliberately ignore the U.S. surplus in ‘service trade’ — such sectors as travel, education, banking and insurance. According to Chinese statistics, in 2017 that imbalance was as high as $54.1 billion, and it has risen steeply for a decade.

6. Another thing protectionists deliberately ignore is that the sales of U.S. companies in China have surpassed $500 billion. These firms are making huge profits from the fast-growing Chinese market, and their success adds to the export of U.S. components and intellectual property rights to China.

7. As for intellectual property, Trump constantly accuses China of stealing U.S. technology and knocking off its goods. Although China established intellectual property protections late — in the 1990s — those laws are working. In 2017, China’s external payment of intellectual property fees reached $28.6 billion, 15 times more than when it joined WTO in 2001. U.S. intellectual property owners are the biggest beneficiaries.

8. Accusing Chinese firms of forced technology transfers is another outdated charge. No laws or regulations compel such transfers; joint ventures are based on deal-by-deal negotiations and some U.S. companies are willing to transfer technology for Chinese market access. General Motors’ and Ford’s joint ventures, for example, have made them two of the largest automobile manufacturers in China.

9. President Trump wants to stop ‘Made in China 2025,’ the state-subsidized plan to modernize Chinese industries, and he charges China with ‘state capitalism.’ However, Chinese subsidies are not out of line with WTO regulations, and they are available to foreign-funded enterprises too. And the United States engages in similar protectionism: Subsidies and defense spending nurtured the internet, semiconductors, nuclear power plants and military-civilian space technology.

10. China’s trade practices are generally in compliance with WTO rules. Like the U.S., China is subject to a biennial WTO review. Since 2001, China has been accused 40 times and the U.S., 80 times in WTO disputes. When judgments go against China, it corrects its course. The United States has obeyed the WTO much less often.

In the end, trade wars can decimate currency values, massively increase costs to consumers and foment lay-offs and lost jobs in rather significant numbers. Not only are there retaliations from the “other country,” but the self-inflicted wounds are usually much, much worse. With enough pressure from tariffs, we just might be seeing the nascent signs of an approaching overall recession. The anticipatory numbers reviewed by economists already suggest falling business confidence, less investment in capital and a slowing of corporate expansion plans. The economy is beginning nervous quivering. If these wars continue for much longer, the negative consequences begin to kick in and create chain reactions to who knows where.

I’m Peter Dekom, and it quite bizarre that a Republican president is stepping away from free trade and imposing massive government regulatory tariffs in a clearly misdirected attempt to fix a trade imbalance.