The US-China Trade War: Conflict Unfolded

Opium, banana, milk — no, not my shopping list. These are the names of some of the ‘trade wars’ that have scourged this planet in the last two centuries. The end of the second decade saw the addition of two more names to this list — the ‘US-China Trade War’ and the ‘Japan- South Korean trade dispute’. While the latter is still ongoing, the former may be showing new signs of revival ever since the signing of the Phase One of the Trade Deal on January 15th.

So, what incited this vehement confrontation between two of the largest economies of the world?

If one has to sit down and scrutinize the various components of this conflict, then a number of factors attribute to the heightening friction between these two nations. Growing trade deficits, accusations of espionage against the Chinese Communist Party, theft of intellectual property and forced transfer of American technology to China can be the key takeaways from this situation.

America’s trade with China constituted of the following items:

Exports- Soybeans, Civilian Aircraft, Cotton, Vehicles, Electronic Circuits

Imports- Computers, Cell phones, Toys, Apparel, Sporting Goods

The imports often took place in forms that the US manufacturers would send the raw materials to China where they would be assembled into finished products under low costs and then sold in USA. What the data says for the last three years can be summarized as:

Pegging of the yuan exchange rate:

Another factor which deserves some light is Chinese pegging of the yuan exchange rate.

China has a fixed exchange rate. In 1994, yuan to the US $ was 8.28. In 2005, due to pressure from its trading partners, yuan was appreciated to 2.1% of the $; further allowing it to be ‘managed float’ against a basket of currencies. Over the years it has only appreciated. Currently, 1 USD equals 7.11 Chinese yuan.

So what is the scenario that we’re looking at?

This kind of deficiency is not the result of miscalculated trade in a single fiscal year, but has been building over the span of several decades. Chinese produced consumer goods have been dominating the US markets at cheap rates over the years. It has the two comparative advantages to pull off such competitive pricing — lower standard of living or cheap labour, and consistent control in its influence over the yuan exchange rate. Moreover, to keep its export prices consistently low, China maintains large holdings of the US Treasury bonds. It heavily invests in these bonds and focuses on export-led growth to generate jobs. The US debt to China amounts nearly $1.9 trillion.

It is one of the largest lending nations to the US.

Theft of Intellectual Property:

According to public records, Chinese IP theft has caused the US $225 to $600 billion a year. The nation has been held in sheer contempt and accused of selling IP rights as a voluntary transaction to gain market access. 1 out of 5 American companies have complained of IP theft by China. The ramification brought forward by modern media has stressed on the fact that China’s inability to promote innovation at home and secure itself as independent of outside knowledge has resulted in its slackened IP rights system.

In 2019, public records show the arrest and expulsion of two Chinese diplomats and a former CIA and Defense Intelligence Agency official who allegedly drove on to a military base in Virginia. They were accused of espionage charges linked to China. From time to time, US has accused Beijing of stealing tech and military secrets, like the ones on Lockheed Martin’s stealth F-35 and F-22 jets.

But amidst these panoramic brouhahas arises a vital question. Is this the US’s desperate attempt at curbing China’s economic popularism? It’s hard to forget how the United States’ ‘imitation game’ ravaged throughout the 19th century and aided in its escalation up the value chain. It was then protected by its weak IP rights only to be elaborately strengthened later when its innovative capacity grew.

Following China’s entry in the WTO in 2001, it had to revise its laws to comply with international standards. The nation’s new Foreign Investment Law provides more flexibility for foreign investors and outlaws the practice of forced technology transfer. Post the December G20 summit in Buenos Aires, the government set out 38 punishments for IP violators, including denial of access to funding.

In spite of this, IP cases have involved major companies like Apple, IBM and GE, locking in various other corporate targets.

Forced transfer of American technology to China:

Investopedia describes the term ‘Forced Technology Transfer’ (FTT) as ‘a practice in which the domestic government forces foreign businesses to share their tech in exchange for market access.’ Fun fact: it states that the practice is ‘common in China’.

But how does China carry this out?

For starters, the FDI laws in China are still partially closed. The only way for foreign companies to operate is through joint ventures. When the ventures partner up with other indigenous companies, they do not let the foreign company own a majority stake. They then force these companies to share their sensitive, private, technology in order to compete with others.

Under the ‘Made in China’ program, China has created a ten-year plan, targeting ten strategic advanced technology manufacturing industries in order to dominate fields like robotics, aircraft, maritime vessel, electric cars, etc. If we rewind to the part where we discussed trade deficits, we’ll find that these are the exact items that the Chinese import from the US. The US auto companies can’t enter the market unless they partner up with a Chinese joint venture. In the aviation sector, China uses its purchasing power to pressure technology transfer in exchange for sale of aircraft and aircraft components to Chinese state-owned enterprises that dominate the purchase of planes in China. An additional mechanism used is the disclosure of sensitive technical information in exchange for the much-needed administrative approval to produce such goods.

Remember the ban of Huawei?

President Trump had claimed that the move had nothing to do with the trade war, rather it was more due to ‘security concerns’ — especially to the military.

In 2018, US passed a bill preventing the federal government and its agencies from doing business with the Chinese tech giant.

In 2019, the company with several dozen subsidiaries and affiliates, was added to the US’s ‘entity list’, severely restricting US companies’ ability to do business with one of the world’s largest telecom equipment firms. Following this move, Google suspended its services from Huawei cell phones.

If cynics are to evaluate this situation, this step significantly enhanced Trump’s deal of making America ‘great again’. He was quoted saying,

“We’re going to do our own business. You know, the old-fashioned way?”

After criticism of his Section 301 trade actions against China, the US, along with the EU and Japan announced an alliance to take on China more aggressively over trade issues.

The tit-for-tat tariffs:

In 2018, Trump slammed tariffs on the import of solar panels, washing machines, steel and aluminium, etc from China. He also declared tariffs on goods worth billions of dollars as a response to theft of US IP. China retaliated with tariffs on around 128 US products (cars, pork, soybeans, etc). By August, each side had implemented 25% tariffs on $16 billion worth of goods. As December set in, the situation eased with diplomacy at work. Both parties agreed to begin negotiations with structural changes in progress. I guess, no one but President Donald Trump could be happier as he took to Twitter, saying:

“Farmers will be a BIG and FAST beneficiary of our deal with China. They intend to start purchasing agricultural products immediately. We make the finest and cleanest products in the world, and that is what China wants. Farmers, I LOVE YOU!”

[Imagine being a farmer in the US and having to read that.]

But unlike the Chinese toys, the trade war lasted longer. In July 2019, China announced an accelerated decrease in holdings of US Treasury holdings, targeting 25% of its current holdings of $1.1 trillion. Further that month, the IMF found the $ to be overvalued and the yuan correctly valued, with analysts deeming that market forces had caused it to lose value. The Central Bank of China allowed the Renminbi to fall by 2%, which resulted in scathing accusations from the US Department of Treasury, declaring China as a ‘currency manipulator’. As the year proceeded, the rage of the war seemed to subside when both sides decided on delaying tariffs. But negotiations tend to take a sour turn when the POTUS himself bluffs about ‘China calling him’, on worldly acknowledged events like the G7 summit. Trump claimed that China had been ‘hurt’ and understood that getting ‘back to the table’ was a good idea. According to his aides, the call didn’t occur and he was just trying to project optimism.

Was this America’s insecurity camouflaged as arrogance?

With attempts of pulling one last stunt at victory, the US, citing human rights issue, put 20 Chinese public security bureaus and 8 high-tech companies like HikVision, SenseTime and Megvii under the ‘Export Administration Regulations’ blacklist.

Post December 2019, as the American manufacturing sector fell into its deepest slump in over a decade, it appeared that the two nations could finally see eye-to-eye. On January 15th, China’s Vice-Premier Liu He and US President Donald Trump signed the phase one of the US-China trade deal in Washington DC. The ‘Economic and Trade Agreement between the United States of America and the People’s Republic of China’ came into effect from 14th February, 2020. This was not based on intermediation from any intergovernmental organisation but purely on bilateral mechanisms.

As a result of Trump’s advocacy of tariffs, the US agriculture industry was expected to have the worst hit. Nevertheless, the agro-based department became the most profitable in 5 years. This happened despite records showing that the rainfall recorded was down and the farmers’ earning was supposed to be $5 billion less. Studies had also shown that over 80% of the Iowa, Illinois and Minnesota farmers faced a 20% drop in their net income from February to June, 2018. But the farmers came out with monumental support for Trump and his tariffs.

As critics go, China had hoped that inflicting economic costs on US farmers would pressurize Trump to end the Trade War. These were the same farmers who had voted overwhelmingly for Trump in the 2016 elections.

But China’s aim to destroy this pillar of support backfired embarrassingly.

The administration stirred the sector with a market facilitation program (farm bailout) worth $12 billion in 2018 and around $16 billion in 2019 to ease trade losses. Reports have said that most farmers were prepared to sacrifice their short-term income based on the belief that things would look brighter in the long run.

However, 11% of the US population is employed in agriculture. So how was the assistance carried out?

Erin J. Belasco and Vincent Smith from the American Enterprise Institute said that because the bailout money was distributed based on acreage and not farmers’ need, about half of the money went to the largest 10% of operations. This way the administration made sure that the farmers benefited according to the amount of produce they generated.

Surveys had been conducted, showing that a large number of farmers had been dissatisfied by China’s erratic buying behaviour. Their demand for commodities like beef and corn had been irritatingly varied. One Illinois farmer said:

“The Chinese do not play by the rules. They cancel shipment orders that are not in their favour. They continue to steal our patents. Only president Trump has tried to stop these unfair trade practices.”

Notwithstanding the face of uncertainty, America has rightfully diagnosed that in the broader picture, the problem will not be an uncertain demand. The slapping of tariffs was making the US vulnerable to competition from Brazil and European countries. As an Illinois farmer has fittingly said,

“We are not the only game in town.”

The Aftermath

As accurate as estimates can go, the conflict resulted in losses amounting to tens of billions of dollars for both US and China. It was declared to be a ‘lose-lose’ situation. As of 2019, the approximations stood at:

However, according to the UN Trade and Investment body, India gained $755 million from the war in commodities like chemicals, metals and ore, etc. due to trade diversion.

The scenario due to the COVID-19 pandemic:

As Donald Trump threatened Beijing on mishandling the situation and accused the WHO on covering up the potential outbreak of the disease, stock market indices, namely, Nikkei in Japan, DowJones in the US, FTSE in London, along with the Chinese, Hong Kong and South Korean markets saw a downfall globally. While world leaders gear up to provoke a ‘blame game’ against China, investors fear a potentially larger trade war.

Around 12th May, Trump denied any thoughts on re-opening negotiations with China regarding the trade deal. On 21st May, the US Senate passed a bill to delist the Chinese firms Alibaba Group Holding Ltd. and Baidu Inc. from the US stock exchange. The bill, introduced by Senator John Kennedy from Louisiana, may be the start of a long series of similar attempts.

To the victor belong the spoils?

With various nations striving to return to normalcy and investigations begin regarding the origination of the virus, things may start to look dim for Asia’s largest economy. If prophecies can be relied upon, the world has got its scapegoat. As the US charge with an insatiable fury, how long will it take before the other nations join in to make it a ‘Global Trade War’? Or will they remain mere spectators? Can India endure as a bystander amidst its increasing friendship with the West? Will there be a winner or will the non-allied scavenge the spoils of the war?

Too many questions linger over this hapless year. But whatever these ‘economic superpowers’ decide, they’ll have to remember one thing —

“They’re not the only game in town.”

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