By EI SUN OH
May 15, 2019
THE world was mesmerized by the sudden imposition by the Trump administration of higher tariffs (import duties) on goods exported from China and imported into the United States. The new tariffs, which were raised from a previous 10 percent to 25 percent, were slapped on $200 billion worth of China goods. And this happened during a time that many considered to be the final phase of the Sino-American trade negotiations.
The crux of the most recent round of the Sino-American trade dispute concerns the trade imbalance between the US and China, with the former piling up trade deficits and the latter trade surpluses over the years. In other words, China exports more goods to the US than the US to China. As I explained earlier, modern countries prefer importing as little as possible from other countries and exporting as much as possible. For the longest time, especially after World War 2, a triumphant US was essentially both the factory and the supermarket to the world. Once upon a time, the US produced most of the manufactured goods and grew most of the agricultural crops of the world, as its industrial and agricultural scales and technologies overshadowed the rest of the world.
But then at the same time, American society also acquired a more “liberal” mindset. Liberalism here does not necessarily refer to traditional notions of abstract democratic ideals, but rather to a more socialist or at least social democratic notions. When translated to public policy formulation and implementation, this means, for example, more and more stringent labor-friendly conditions and environmentally protective regulations. The typical American factories gradually came to realize that their regulatory compliance costs became higher. And higher costs would of course translate into higher selling prices, making US manufactured goods no longer as competitive.
Businesses are of course mindful of their reduced profits. And what they considered to be choking regulations occurred at a time when an emerging Southeast Asia and a reforming and opening-up China were thirsty for foreign capital. So at least two rather “natural” things happened. First, more and more American factories decided to relocate to Southeast Asia and China (at first more the former, later more the latter), producing goods there and importing them back to the US. Second, a string of local manufacturers also gradually sprung up in China, producing goods for export, especially to the US, which were then retailed under major American brand names in a business practice that came to be known as original equipment manufacturing. The US then was bent on promoting free trade around the world, so imposed little to no tariffs on these imported goods.
Undeniably, this caused some economic anxiety on the US’ part. Many factories across the vaunted Rust Belt stretching from New York and Pennsylvania to Ohio and Illinois, were downsized or closed altogether, generating countless job losses. But at the same time, the outsourcing of manufacturing away from the US to China (to a large extent) and Southeast Asia (to a lesser extent) benefited the average American consumers, as they could enjoy cheaper household products, electronics and other consumer items. It was in a sense truly a win-win situation for all.
Over time, however, the trade imbalance between the US and China grew, as the US consumer appetite for imported products continued to grow and China was of course also happy to expand its manufacturing base. China with its huge population also imported a lot of agricultural items from the US, from corn and soy to beef and pork. But the net result is still a trade deficit for the US and a trade surplus for China, and a growing one at that. For President Donald Trump, who won the presidential election at the back of Rust Belt votes, this was simply unacceptable. In fact, almost all sorts of trade imbalances with the US at the suffering end are unacceptable to the Trump administration. One of the first official acts of Trump after he assumed the presidency was to pull out of the previously much championed (by the Obama administration) Trans-Pacific Partnership (TPP) which was supposed to be a “free trade plus” agreement exuding world-class business practices. Thereafter, Trump instigated trade wars against European countries over steel and aluminum productions, and Japan over car manufacturing.
But of course, the next big trade-war target for the Trump administration was China, with which the US incurs the largest trade deficit. Starting a year ago, Trump launched one salvo after another, through his beloved Twitter messages and official pronouncements alike, trying to push China to the trade negotiating table on an almost monthly basis. At one point, threats were made to impose the present 25 percent tariffs that were averted after a dinner between Trump and President Xi Jinping of China in Argentina late last year. Then this latest tariff imposition was simply announced and implemented a few days later.
At the heart of the latest trade negotiation disagreements is apparently the US demands from China, among others, for stiffer intellectual-property protection and detestation from forced technology transfer, as well as reduction and removal of other — or what the US side considers to be — unfair trade practices, such as extensive state subsidies for certain manufacturing sectors. The Chinese side apparently views these and other demands from the US — to the extent of amending China’s relevant domestic laws — to be unacceptable and tantamount to signing on to an unequal treaty, or at least doing so would create widespread domestic perception to that extent.
As yet it is unclear what sort of retaliatory actions the Chinese side would roll out, as it said it would, against this latest tariff imposition. Of course, this trade spat between the world’s two leading superpowers has had a spillover effect on the functioning of the world economy and financial markets alike, with many stock indices from around the world tumbling one after another. The trade negotiations are apparently still ongoing, as they could not be left “hanging” otherwise.
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