A potential US-China trade war appears to be "put on hold" and exactly that's what US Treasury Secretary Steven Mnuchin told a TV channel on Sunday, May 20.
Why did President Trump suddenly back away from, at least temporarily, threatening trade war with China? Many observers firmly believe that North Korea is the material factor. He wants to maximise his chance of success with North Korea. But Trump has now already cancelled his meeting with the North Korean Leader Kim Jong-un. However, the 'mini-breakthrough' is still on; hence, a temporary pause in the USA's drive to deter China acquiring technological parity with it or even overtake it. The basic fundamentals have not changed at all on both sides. But factoring in North Korea into this picture must have given Trump a new dimension to go beyond his zero-sum bilateral prism to see a more complex multi-dimensional world. How long that realisation will last with him is a matter of conjecture.
The US has provided a document with detailed list of its demands to China to reduce its trade deficits with that country and that document remains in place despite the truce.The list of demands in fact goes far beyond reducing trade deficits, the US also wants China to curtail the "Made in China by 2025" programme and to end forced technology transfer from US firms including ending Beijing's funding for special industries deemed to be strategically important and to enhance China's technological capability. The document that the US presented is not only rather very aggressive in terms of the timeline but also will result in massive structural changes throughout the Chinese economic system and the economy. No wonder, the USA has not won any major concession to their very aggressive demands. President Xi Jinping has, instead, declared that his country would further wide open the door and emphasised China's determination to become even more technologically advanced and innovative country.
The US trade deficits, including trade deficits with China, are a reflection of its low savings rates. It is a macroeconomic problem and needs a solution at the macroeconomic level. The issue of US' current account deficits is a multilateral issue, and it can not be fixed bilaterally. Attempts to settle the issue bilaterally with China will just shift US imports to other high-cost countries. This will have negative consequences for US consumers and are definitely not going to solve the current account deficits problem, rather it may worsen it. The crux of the problem lies in very low saving rate leading to widening gap between saving and investment. If such a low saving rate continues, the US trade deficits will continue to rise and the issue will persist.
Furthermore, many economists have pointed out that Trump's tariffs will only protect a small minority of import-competing industries while it will penalise a large array of exporting industries, in particular, intermediate inputs-exporting industries involved in exporting to China which accounts for one hundred billion dollars a year. The US ban on Chinese telecommunication group ZTE from buying US technology inputs will cost US$2.3 billion worth of exports to China from US companies such as Intel.
Trump is pursuing his trade agenda with China under the cloak of national security. In essence, his trade agenda is more guided by neo-mercantilist thinking to protect a section of his electoral base over the other interest groups in the country. From the historical perspective we know the consequences of pursuing such a policy.
Trump's very aggressive trade posturing is nothing new or unique if we look at the contemporary economic history of the USA. President Ronald Reagan, during his Presidency in the 1980s, was even more aggressive than President Donald Trump now. Reagan raised tariffs and introduced import restricting measures on a very wide range of goods from a wide range of industries such as cars, steel, electronics, textiles and many other industries. Under the Reagan Administration, the US also manipulated the loopholes in the General Agreement on Tariffs and Trade (GATT) Rules to restrict imports. Those manipulations did not violate the letter but definitely violated the spirit of GAAT. The Reagan administration forced Japan to accept "voluntary export restrains" (VER) on car exports. This was possible because there were no provisions in the GATT Rules for a country restricting exports while there were rules relating to restricting imports. VER has exactly same economic effects as a quota restriction, on which there are rules in the Agreement. The voluntary restraints were never voluntary, they were always forced on a country. President Reagan also imposed 100 per cent tariffs on selected Japanese electronic goods on the charges of dumping those goods in the US market. However, Trump's approach is unilateralism while that of Reagan's was bilateralism. Trump's unilateralism will create a more hostile retaliatory response from the trading partners.
But as for Trump's Tariffs, there is more to this than meets the eye. The US-China trade tensions have primarily arose out of the US feeling of threat from China's ambitious "Made in China, 2025" industrial plan. The plan has been undertaken to bolster its technology sector which will enable it to graduate to become an advanced economy. The execution of the plan will also make China the major technology player in the world. For all practical purposes, China is already a technological power and a competitor. This is a game changer in the global context. China's rise as the new competitor inevitably draws ire from the existing competitor, the USA. China's methods to catch up with other technologically advanced countries are no different from what it has done historically when it tried to catch up with others in other fields. One of the common themes in US complaints that runs against China is that it violates Intellectual Property Rights (IPRs). US criticism of China's intellectual property abuse is very much like the UK complaints against it during its own industrial revolution in the second half of the 19th century. China is exactly in the same position in relation to the USA now as it was with Britain, the technological leader of the time. Given that advances in knowledge is a cumulative process over time, the USA eventually overtook Britain in technological innovation and that's what is likely to happen with China overtaking the USA in its technological advances.
Many technological advances that the USA now boasts of, have had their origin in China long back in history. Who is thieving on whom (if that at all happens), is a matter of perception if we take a broader perspective on the intellectual property right. This is possibly the most odious monopoly to legally earn economic rent and thrive on it. However, there now exists a global multilateral framework (WTO and IPO) for protecting intellectual property rights. If the USA has any concern on that issue, it should follow through it within that framework rather than making accusations.
Historical experiences of countries differ and that make countries to pursue their own model of economic development. Hence, it is desirable that any trade regime must recognise that. China's historical experience from the 18th century to 1949, the year when the country was liberated from the foreign economic and political domination, is very different from that of the USA. That very trajectory of history makes China very sensitive about foreign economic domination let alone dictating trade terms. Or what type of economic growth model China should follow. China's phenomenal economic growth owes its success not only to the economic liberalisation process which has opened up the economy to the rest of the world but also to its very unconventional and innovative industry policy. China's current drive to push the frontiers of technological advances is a natural corollary of its monumental economic success and its desire to achieve the status of an advanced economy. The US push to redesign China's industry policy is not going to work. It is better the USA comes to terms with the fact that China would very soon rival it in technology and innovation.
Muhammad Mahmood is an independent economic and political analyst. [email protected]
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