Tuesday, February 19, 2019

Trade war against China – 11 myths and delusions

There won’t be any winner in the trade war.

Image Credit: Signs of The Times

Many people are ardently supporting Trump’s trade war, driven by a combination of anger, fear, hubris and confusion. While there’s no doubt that globalization has inflicted misery upon many Americans, there are numerous myths and delusions surrounding the clamor for tariffs and trade wars, especially against China. Let’s take a look at some of the popular ones.

We are losing $500 billion every year to China

This is based on the fact that we have a trade deficit in goods for about $500B. However, it doesn’t include services, where we have a surplus with China. Count that in, the total trade deficit drops to $380B. But that’s only mainland China. Add Hong Kong, the number drops to $350B.

Then there’s the global supply chain. China imports a lot of natural resources and components from other countries to manufacture and assemble the finished goods. Subtract those costs, the real trade deficit drops to about $200B.

China is ripping us off!

As I described in another article, U.S. oligarchs and corporations decided to move American jobs abroad. Also, U.S. consumers and businesses benefit from inexpensive Chinese goods and labor. So, let’s not blame China for the lost manufacturing jobs.

They don’t buy our products

GM sells more cars in China than in the U.S.; and Apple sells more iPhones in China than in the U.S. For semiconductor giant, Qualcomm, 60% of their revenues come from China. In fact, most major U.S. corporations consider China as their #1 or #2 market. So, yes, China buys a lot of American goods, but a lot of them happen to be made in China. Similarly, corporations such as Starbucks profit enormously from their thousands of branches in China.

Chinese products are crap

Well, if you pay someone $1 an hour, don’t expect amazing products that will last for a lifetime. Also, Chinese corporations are working their way up the value chain. Chinese smartphones are already #1 in large consumer markets such as India; and, within five years, Chinese electric cars will be globally popular as well.

Everything in China is made by slave labor

Western corporations like Nike, Apple and Walmart can easily get rid of sweatshops by agreeing to pay a little more and setting guidelines for working conditions, but they don’t and won’t. Also, China is quickly adopting hi-tech manufacturing, and many of the low-end factories are being shifted to Vietnam, Indonesia etc.

We want Fair Trade and China must lower their tariffs

It’s not as if the only thing that stands in the way of U.S. progress is China’s tariffs. Consider that we imported 8 million cars last year. Maybe we should buy American goods, before we demand that others buy American products.Also, even if China eliminates their tariffs on our exports, U.S. corporations will find that it’s still cheaper to manufacture goods in China, rather than making them here and shipping them over.

Let’s not forget that the US already has a lot of protectionist tariffs, quotas, barriers and subsidies for various products and business sectors. Every government in the world has to cater to its people and special interest groups.

Finally, since WWII, the U.S. has enjoyed an extraordinary privilege of being able to easily print the global reserve currency and wantonly borrow from the rest of the world. For a true “level playing field,” all currencies must be equal, which Americans won’t easily accept.

They operate at losses and dump products

There are some state-operated Chinese entities that keep operating while losing money and simply rolling over their debt. China allows that to create employment for its people and also, sometimes, to capture the global market. However, U.S. corporations such as Amazon, Uber, Netflix and others do the same, with the only difference being that the U.S. corporations are subsidized by commercial banks and the Federal Reserve Bank.

They steal our IP

Most of these accusations are unwarranted. Yes, China required transfer of technology in many industries, but it was a voluntary, consensual business transaction. Driven by greed to conquer the Chinese consumer market, western corporations obliged. Also, arrogance made the West assume that Chinese copycats will never be good enough.

There are definitely problems with Chinese espionage and those must be opposed and stopped.

But they’re commies!

In spite of China’s “communist” party, CCP, what they have is a unique mix of socialism, capitalism and Confucianism. The private sector is vibrant, the middle class is booming (120 million), there are more than two million millionaires and, in 2017, two new billionaires were created every week in China. China is not your textbook “communist” country.

While the Chinese government is certainly authoritarian, relative to western democracies, it has accomplished an economic miracle over the last four decades that’s unprecedented in human history. 800 million people were lifted out of poverty and the GDP grew 40-fold in 40 years. That’s why 84% of Chinese trust their government and 68% say that the government is the best institution to lead the country to a better future.

Tariffs will bring back jobs

Tariffs can bring back jobs if they are large and long-lasting. However, Trump’s 10% or 25% tariff on Chinese goods won’t create enough incentive for most manufacturers to start building products in the U.S. Moreover, Chinese Yuan has already fallen 10%, thus largely neutralizing the tariffs.

Considering that every major business/lobbying group, corporation and economist is against tariffs and trade wars, it’s highly unlikely that jobs are going return from Asia, Mexico and elsewhere.

Tariffs and retaliatory tariffs can also lead to a big loss of jobs or even a recession. There have already been endless stream of stories about layoffs and lost sales.

While it’s true that some Japanese and German automakers who want to avoid confrontations may build new assembly plants in the U.S., others may be forced to relocate some existing factories from the U.S. to Europe and China to avoid the cross-border tariffs.

We will win the trade war!

China is the world’s #1 exporter, #2 importer and #1 trading country. Last year, China’s total global trade was over $4 trillion, of which only 17% was U.S.-China trade.

Yes, we buy more from China and thus can impose more tariffs on them than vice versa, but they have many arrows in the quiver – for example, boycotting or disrupting U.S. corporations in China, devaluing Yuan, selling US treasuries etc.

There are many more reasons, as I explained in another article, why it won’t be easy for us to win the trade war.

Conclusion

There won’t be any winner in the trade war. To make things worse, Trump’s goals and the “mad man” strategy are confusing and chaotic, and he doesn’t have any support from the business and political establishments. Perhaps if the U.S. and EU act in unison, they can convince China to open up their economy more in certain sectors. At the same time, the West should be mindful of history – the Opium Wars and the following Century of Humiliation are etched in the Chinese national psyche. So, let’s get rid of the zero-sum mentality, drop the aggressive posture, come up with tangible goals, and negotiate with respect and a smile.

 

 

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