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Failing to understand the trade war with China

"Trade has never been a one-sided affair."

 

The signing of a truce in the trade war between the US and China dubbed as “Phase One” has elicited some kind of perplexing relief. This observation is not unusual, for it seems the US has not really managed to escape from the doctrine enunciated by the 17th century British economist David Ricardo who laid down the “comparative advantage theory” that he who can produce more at a lower cost is likely to emerge victorious. At the outset, US President Trump has expressed irritation about the trade imbalance making him the top honcho of the real estate dealers to win the presidency.

If translated to trade, countries that buy more, or should we say import more, are likely to incur trade deficit. In that, one could see that the trade between the US and China revolves on the idea that the US is buying more while China buys less and the negotiation is to rebalance the trade which, strictly speaking, is contrary to the US ideological doctrine of free trade. Nonetheless, an agreement was reached between US trade negotiators Robert Lighthizer and treasury secretary Robert Mnuchin with vice Premier Liu He representing China.

As we all know, China enjoyed a tremendous trade surplus of $419.2 billion in 2018. US imports from China totalled $539.5 billion while China imported only about $179.3 billion for the same period.

Indeed, looking from within this framework, one could not help but prejudge China as taking advantage of the US. It is on this basis why the US-China trade agreement was signed on Jan. 15 with China promising to buy up to $200 billion worth of goods.

The agreement could compel China to reduce the trade deficit, which is rather considered a tall order. Others are less optimistic, such that the problem of trade deficit that saddles the US economy is not only with China but with many countries, foretelling that it is actually the US that has now become dependent on other countries for economic survival. While US’ trade deficit with China represents 47.9 percent as of 2018, it equally suffers the same malaise with 9.3 percent trade deficit with Mexico, 7.9 percent with Germany, 7.8 percent Japan, 5.5 percent Ireland, 4.6 percent Vietnam, 3.6 percent Italy, 3.1 percent Malaysia, 2.7 percent India, and 3 percent from Canada.

Theoretically, China’s trade surplus with the US may considerably shrink but it does not mean it will weaken China’s overall export performance. Despite the acrimonious charges and counter charges, China’s growth remains steady and this is principally attributed to its unstoppable trade growth with other countries. As some would put it, there will only be a shift in the equilibrium in the trade pattern but objectively may not necessarily favor the US. This is shown by a steady economic growth of 6.1 percent in 2018. Others say it is an attribute of the resiliency of China’s economy due to its size and volume of exports.

However, many overlooked that trade has never been a one-sided affair. To begin with, the US completely forgot that it is contributory to the economic success of China; telling the world then that for a penny, Chinese workers will do everything for you. China’s opening up in 1978 resulted in a mad scramble of US companies all wanting to cash in on the cheap labor China can offer. It was as if a tornado passed to uproot almost all the factories, and instantly, was relocated to China with their corporate owners seeking more profit than ever. Today, the era of outsourcing and production relocation may have receded, but many of those factories simply relocated elsewhere while the US continues to suffer from the depletion of factories, flight of skilled workers, and trade deficit but constantly putting plasma to its much dehydrated economy by its unmitigated revaluation of the dollar that equivocally buries its economy deeper in debt.

The US refuses to concede that tariff is an imposition on its consumers. It begins by exacting tariff from its own importers only to pass them on to their buyers representing the consumers. To be precise, the demand for imports is based on the same old Ricardian theory that it is much better for countries to import than produce them at higher cost. The viability of this theory has been augmented because of free trade, viz. elimination of tariff barriers and the fad for multilateralism. Taken in this context, it is much cheaper to import from countries that could produce them at cheaper cost and to offset it by concentrating on the production of high-value goods.

China retaliated by imposing tariff on US agricultural exports. It hit US famers. The US had to subsidize its farmers for more than $30 billion, which is more of politics than economic solution of just allowing the free market forces to play. Bluntly stated, there are now few products where the US remains competitive in the export market. The US tried to artificially resuscitate their declining productivity and increased unemployment by revaluing the value of the dollar, unmindful that it could lead to a debt trap of raising the cost of living and wages to mire them deeper in trade deficit. The US could not compete with China because most of its exports can be manufactured and produced elsewhere, notwithstanding that many countries are now engaged in the export of manufactured goods at cheaper prices.

On the other hand, US farmers have not much choice because for years they have been exporting their agricultural products to China, they continued to rely heavily on the volume of Chinese imports. Today, US farmers cannot go on in receiving retaliatory tariff without hurting their own exports. Besides, it is difficult to find a new market substitute for Chinese imports. Moreover, other countries like Brazil, Argentina and Russia are ready to fill in the vacuum that will be vacated by the US exports. Once the supply chain is broken, other countries will easily fill in the gaps which will be a disaster to US farmers who mostly voted for Trump in the last election.

The US failed to understand and anticipate the motive why China has poured in so much effort and resources to carry out its Belt and Road Initiative. It failed to see that the emphasis is to promote the integration of China’s economy with the rest of its neighbors in North and Central Asia and onward to the Mediterranean. The opening of the oil pipeline between Russia and China that stretches 3,000 kilometers from the Russian Siberian gas fields to China’s coal mining north at a cost $400 billion to build is another dimension of the BRI. The new oil route will greatly ease the pressure for oil tankers passing through the South China Sea. Russian’s Gazprom expects the natural gas pipeline (LNG) to initially supply 4.6 billion cubic meters (BCM) of gas in 2020 before ramping up to its full capacity of 38 BCM by 2025.

We could see that the ultimate goal is to integrate the economies of China, Russia and Central Asia. Their full economic development could reduce the US to an insignificant partner in trading. For then China, Russia and the whole of Central Asia will emerge as the biggest trading partners constituting more than 50 percent of the world’s goods which could increase further to 65 percent once the BRI is completed to connect Vladivostok and Shanghai, all the way to any of the major capitals in Europe. The US by then will be geographically isolated, both in distance and cost of shipping. The two oceans of the Pacific in the east and the Atlantic in the West will serve as wedge working against US economic interest with Asia and Europe becoming less dependent on US for trade.

The full integration of the economies of China, Russia and Central Asia as gateway to Europe will entirely change the dimension of global geopolitics. The old Silk Road that used to transport goods in the ancient times will be revived not necessarily by China but by countries where the so-called ancient trade caravan made their stop-over, starting in Beijing on to Xingjian, and onward to Azerbaijan, Iran, Turkey, Serbia and Greece. China, Russia, and even India and Pakistan will benefit from the enhanced trade as serving as their lifeline to economic connectivity. By then, that would be the fulfillment of what President Xi Jinping envisions as “mankind rebuilding a community with shared future based on cooperation and multilateralism” in contrast to ruinous competition and arbitrariness of the US.

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Topics: United States , China , Robert Mnuchin , Robert Lighthizer , Donald Trump
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