With the U.S. election campaign starting, one of the recurring themes has been the “damaging’’ U.S.-China trade deficit. Reflections !

25 May

With the U.S. election campaign starting, one of the recurring themes has been the “damaging’’ U.S.-China trade deficit. Among the first trade missions to China was that carried out by the World Trade Center Association’s founder Mr Guy Tozzoli, who led a trade delegation to China in 1973. Following upon that over the next 50 years, trade between the U.S. and China rapidly developed into a major and mutually beneficial relationship – until Donald Trump started a trade war several years back.

It has been stressed many times that trade is beneficial not only for consumers, who get access to less costly goods, but also for businesses of all kinds and in all sorts of ways that may not be obvious at first glance. Although this is well known and universally understood, politicians again and again call into question established, smoothly functioning trade relations, proposing laws that would result in damaging constraints and even sanctions.

Recently the U.S. Republican Senator Josh Hawley formally introduced a bill into the Senate calling for the re-ordering of the long running trade relations between the two countries, including the major agreement that they committed themselves to 23 years ago. The bill, if approved, would essentially undermine current trade relations between the two countries and impose a significant increase in the tariffs on all imports from China. In addition, the bill would give the President full authority to unilaterally impose any further trade restrictions on Chinese products and services that he might deem appropriate.

It should be obvious that quite a few people in Washington are out of touch with reality when they call for these measures. So, let us have a look at some of what would happen and who would be the biggest losers should such legislation pass.

The U.S. has indisputably benefited greatly from trade and investment flows with China, for the combination of bilateral trade, investment, and supply chain integration has supported economic growth, consumer choice, and job creation. In 2019, exports to China supported 1.2 million jobs in the U.S., and as of 2018, 197,000 people in the U.S. were directly employed by Chinese multinational firms. U.S. companies invested $105 billion in China in 2019, and the profits from these investments and the contribution they make to the competitiveness of U.S. businesses help support the U.S. economy through research and development (R&D), domestic investment, and dividend payments. With China forecast to drive around one-third of global growth over the next decade, maintaining close trade relations with China is increasingly important for U.S. businesses’ global success.

One need not be an economist to see that any further trade-war moves will cause significant losses, to U.S. producers and consumers alike. In this globalized world, trade relations are intertwined in innumerable ways and in any number of sectors, not least because some countries produce products that others do not. In economics, the term “competitive advantage” is often used to describe this. It refers to each country’s advantage over others in certain fields. The ever-greater complexity of development, design and production of goods has only reinforced establishing and cultivating trade relations ensuring such competitive advantages.

Thus, when the U.S. wants to put additional restrictions on goods produced in China, one can reasonably say that they are shooting themselves in the foot. In the field of solar panels, for instance, the metals used in the panels are produced in the U.S., but the panels are assembled in China. If the U.S. puts higher tariffs on goods from China, when the finished panels return to the U.S., their price will reflect the newly imposed import tariff. The price increase will make the Chinese finished products less attractive to the U.S. consumer, thus shrinking the market for the Chinese producers.

The Chinese can then be counted on to respond in ways detrimental to U.S. producers. In the end, not only will such price rises increase the overall cost of living for the people of the United States, they will also contribute to that dreaded economic devil, inflation.

Another fact that people tend to forget is that much of U.S. industry began disappearing several decades ago, when companies began outsourcing their production of goods to China and to countries in Southeast Asia and Latin America with low wages. This has continued apace. One of the outstanding examples of this has been the textile industry. Today, whenever you go shopping in the United States, it is almost impossible to find clothes labeled, “Made in U.S.A.”. Given the colossal number of U.S. consumer good coming from China, it is obvious that the American consumers will pay a higher price on all sorts of products if the Hawley bill is adopted by the Senate. These days, with inflation high, further measures that add to the cost of goods from the United States’ major source of these goods will only fuel higher inflation.

When Donald Trump started the trade war with China, he and his entourage were obviously incapable of imagining that it could hurt the U.S. economy. Yet, at the time, a considerable number of economists and financial analysts of all persuasions warned against such a move. In the end, not only did it failed to achieve the major policy goals outlined by the administration, it reduced U.S. economic growth and employment, resulting in an estimated peak loss of 245,000 jobs.

Currently, tariff rates remain at a multi-decade high despite both countries reaching a phase-one trade agreement in early 2020. While the agreement made important progress on long standing trade barriers in agriculture, financial services, and intellectual property protection, it failed to address a range of administration concerns over Chinese state-owned enterprises, distorting subsidies, data and cybersecurity, and various areas of market access. Although the trade deficit with China did narrow in 2019, this was offset by an increased trade deficit with the rest of the world, leaving the overall U.S. trade deficit broadly unchanged.

Every year since 2020, legislators have introduced any number of bills along the lines of the one Senator Josh Hawley is pushing, aiming to reduce trade between the U.S. and China, but such efforts have had no effect on the volume of trade between the two countries. On the contrary, trade has been moving in the opposite direction: in short, it has never been so high.

And recently, after Sen. Hawley introduced this bill, the U.S. House of Representatives passed “The People’s Republic of China is Not a Developing Country Act”. This bill aims at stripping China of its developing country status and its preferential treatment in the World Trade Organisation. The bill is obviously symbolic: any move to remove this status must go through the organs of the WTO. In short, no country can unilaterally decide to change the status of another country.

As the campaigns heat up, the President and his men often publicly say that they wish to improve U.S.-China relations. Yet the signal coming from the Senate and the House of Representatives is diverges markedly from such public discourse. Facing the challenge of curbing inflation (which is reckoned to be considerably higher than the officially stated rate) and so maintaining the people’s purchasing power, the Administration needs to avoid any measures that will result in the price increase that Sen. Hawley’s bill would trigger.

In other words, the Administration will be up against a major current in the Congress regarding a major issue.

Stay tuned.