11/01/2019 No. 147
 
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Are Trump's trade wars good, and easy to win?
By Sheng-Wei Wang
November 1, 2018


Sheng-Wei Wand makes a critical examination of the current US-China trade war from multiple angles.

US President Donald Trump described China as a strategic “competitor” in his national security strategy released in December 2017. He considered the US-China economic relationship being “not very fair for the US,” and claimed that the post-War international order and system created by the US could not meet its own interests, but provided space for the development of emerging economies.

In 2017 China exported $500 billion to, and imported $130 billion of goods from the US. To balance the trade, Trump decided to launch trade wars with China through tariffs. In July he imposed 25 percent tariffs on $50 billion of Chinese goods to be exported to the US; China retaliated reciprocally. Then on September 17, he imposed 10 percent tariffs on $200 billion of Chinese goods effective from September 24, which will increase to 25 percent by the end of 2018, thus killed any chance of new talks taking place. He further threatened to slap tariffs on $267 billion more after Beijing quickly fought back by imposing 5-10 percent tariffs on another $60 billion of US goods. Trump’s unprecedented comprehensive offensive trade war against China is a sign that the US is about to break with China.

Trump said “Trade wars are good, and easy to win.” But can the US really benefit from this trade war and curb China’s development? Here are some reality checks:

1. Almost every kind of imported Chinese goods will face tariff penalties and Americans may soon feel the pinch from head to toe as a rising cost of living, including paying yearly an extra $4.5 billion for imported furniture supplies and $1.2 billion for travel baggage sets.

2. The Fed economists warned that tariffs will push up the price of imported goods, but also increase the cost of US exported goods and will thus lower competitiveness. A trade war through tariffs is an oversimplified idea; it will simultaneously lead to a reduction in imports and exports, and the final trade balance could remain essentially unchanged.

3. US retailers warned that not all production lines can be replaced or created outside of China. Trade wars may lead to a large-scale reduction of the US domestic market supply.

4. Yale senior faculty Stephen Roach said that the real root of the US-China trade imbalance is Americans’ low savings rate. The trades are driven by market forces and are mutually beneficial – China needs a trade surplus and Americans need $500 billion of goods to make ends meet; in turn, the US borrows China’s surplus to fund its government operations. Trade frictions are a wake-up call for both sides showing how inseparable the two countries are. It is better for both sides to cool down and return to the negotiation table.

5. Production costs are higher in the US due to workers' wages being 2.6 times those in China. Ford will not be profitable if it builds a Focus Active production line in the US, and had to stop making these cars in China due to the added 25 percent tariff. The prices of Apple’s iPhones will increase by 20 percent, if they are made in the US. After adding 25 percent tariff, Apple’s iPhones will not be able to compete with the local brands in the mainland markets.

6. For export, the US only includes direct sales from the US homeland, not foreign subsidiary sales from China. Apple’s $45 billion of annual sales from China are overlooked in the US narrative. However, the manufacturing of an iPhone 7 costs $237 in China (China’s share is only $9, mainly for assembly labor; the remaining $228 is parts from different countries in the productive chain), which is counted as coming 100 percent from China. By that count, US imports of the iPhone 7 contributed about $15.7 billion to a year's trade deficit with China while Apple made a huge profit (iPhone 7’s retail price is $649; http://www.chinausfriendship.com/article1.asp?mn=639).

7. China's major impact is on US companies inside China. If China stops Apple’s operations in China, Apple will lose the above $45 billion business from China and China will lose jobs. A trade war is a huge gamble for both sides.

8. Trade wars will also make American companies outside China lose Chinese market share and suffer enormously, including Boeing’s potential loss of Chinese orders of 7,690 new aircraft in the next 20 years totaling $1.2 trillion.

9. The direct impact of the US-China trade wars on the Chinese economy may seem limited (0.2-0.8 percent of GDP), but it may soon prompt Chinese exporters to abandon the US market. The forecasted 2018 mainland GDP growth is basically the same as 2017’s 6.5 percent, but the trade war may have a deeper impact on China’s business confidence. The Chinese are worried that economic tension would turn into antagonism and jeopardize the US-China relationship.

10. The recent severe US sanction of ZTE is a wake-up call for China to grow its own core semiconductor chip technology. It may accelerate China's attempts to become self-sufficient in more high-tech products. And it will certainly pressure China to build more political and economic spheres of influence to counter the US unilateralism.

As this trade war drags on, while Trump also engages in trade wars with other countries and threatens to withdraw from the WTO, China continues to open up, reform and court friends worldwide. The world economic order is quietly but rapidly changing. If the two most powerful countries in the world are decoupled and isolated from each other, eventually they will become mutually hostile. What will the world be like? Can the world avoid negative impact arising from the hostility between these two countries?

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Sheng-Wei Wang is an independent scholar and freelance writer. She has a Ph.D. in Theoretical Chemical Physics from the University of Southern California. In 2006 she founded the China-U.S. Friendship Exchange Inc., which seeks to promote understanding and cooperation between China and the United States. Her book: China's Ascendancy: Opportunity or Threat? is on China's growing influence around the world and its relationship with the U.S. Her latest Chinese book is 《郑和发现美洲之新解》and forthcoming English book is 1423 & 1433: the Years Chinese Sailors Explored the Central Mississippi Valley.
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