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Wang Wen: A US-China trade war would cause huge damage and benefit nobody

2017-03-28

By Wang Wen    Source: Financial Times    Published: 2017-3-27


Trump needs to see that automation, not China, is main reason for loss of US jobs


 

 

A decade ago, an American mother, Sara Bongiorini, published a book called A Year Without ‘Made-in-China’. It chronicled her family’s experiment with a year-long “boycott” of Chinese products. The book describes daily inconveniences and problems: she could not even find a non-Chinese-made candle for her husband’s birthday.


Her four-year-old boy, Wes, rebelled against his mother’s boycott, demanding his favorite Chinese-made toys. Ms Bongiorni concluded that without products “Made in China” she and her family would face a mounting cost-of-living. The problems became so great that in the following decade she lost her enthusiasm to conduct a second trial of the boycott experiment.


Ten years later, Chinese products are found in more American homes than ever before and the two economies have grown increasingly interdependent. Bilateral trade volumes reached $519bn in 2016, meaning that China and the US are now each other’s second-largest trading partner. Over the past decade, the goods and services China has provided for the US increased by 98 per cent and 132 per cent respectively.


But today, President Donald Trump and his team express the intention to launch a trade war with China, with the goal of increasing employment in the US.


We find irony here, because many have noticed how Mr Trump’s suits and ties, his daughter Ivanka’s line of shoes, the red caps his supporters wear and even the US flags they wave, are all actually made in China.


Some have even joked that it was in Yiwu, a city in southeast China and an important export hub, where people first successfully predicted Mr Trump’s general election victory after noting that orders for Trump’s campaign products greatly outnumbered those for Hillary Clinton, his main challenger.


Without a doubt, the significant economic and trade ties that have evolved and underpin US-China relations will not be easily severed, regardless of Mr Trump and his team’s rhetoric.


Indeed, trade between the US and China has created substantial benefits for Americans. Statistics available from the US Bureau of Economic Analysis (BEA) indicate that the top American export categories to China in 2015 are generally high value-added, bringing substantial profits back to the US.


Today, a large number of new US jobs are created by exports to China. An Oxford Economics report demonstrates US-China trade has created 2.6m jobs for the US, equivalent to 4 per cent of the votes cast for Mr Trump in the general election. The economic contribution of bilateral trade in the US has reached $216bn, accounting for 1.2 per cent of US GDP in 2015.


At the same time, China has consistently made new investments in the US, and now holds over $1tn in US Treasury bonds (5.5 per cent of the total amount of T-bonds). In stark contrast to this is the US’s lavish expenditure on its defence budget and huge national debt. In Afghanistan and Iraq alone, the US government has spent more than $1.6tn of taxpayer money. China has helped the US maintain its economic and financial stability over more than a decade of war and overspending.


To be frank, the US economy cannot afford the cost of unemployment and price increases for millions of Americans who now benefit from US-China economic ties, and who would lose their jobs and livelihoods as the inevitable consequence of a trade war.


In the future, trade and economic exchange with China can create great value for American consumers. Around $233.8bn worth of consumer goods (excluding food and cars) were imported from China to the US in 2015. According to Oxford Economics, US-China trade helps each American family save $850 every year. Thus, any economic sanctions the US may levy against China would undermine its own economy by hurting consumers at home.


Furthermore, for high-tech and high value-added American enterprises, China is an enormous and fast-growing market. An Economist Intelligence Unit (EIU) report shows that the Chinese population with more than $10,000 of disposable income has reached 132m, and this figure is estimated to hit 480m by 2030.


Ultimately, we must ask ourselves who would suffer more in a US-China trade war? Some have said that China might lose more in the short term, but in the long run, because of China’s economic resilience and high potential for growth and development, the US will suffer the worst outcome.


In fact, there is some evidence to support this point of view. Thanks to the US blockade on chip exports to China, China has independently developed a chip industry using its own intellectual property, thus lowering China’s dependence on imports, causing the market share for the US chip industry to shrink.


So, what sort of China does the US prefer? A China with an open economy, or one forced into protectionism?


We must also take into account that the most systemically significant economic cycle in the world economy today exists between the US and China: while US consumers buy Chinese products, China has more foreign exchange reserves that it uses to buy a large amount of US T-bonds.


By investing in China’s manufacturing and capital markets, US multinational companies and investors earn profits and bring them back to the US at an average yield many times greater than US T-bonds. If China is forced to act as a protectionist this positive cycle will break down, fundamentally harming the US. This is a bottom line Mr Trump must be mindful of.


The fundamental reason for team Mr Trump’s tough stance and rhetoric is that his administration has lost its focus on the US’s real unemployment problem and its root causes.


Fundamentally, it is a mistake to blame US manufacturing job losses on Chinese products. In fact, these job losses are triggered by evolving technologies, such as artificial intelligence, automated and electronic manufacturing and management. All these technological advancements substantially increase efficiency, productivity and have replaced manufacturing sector jobs.


In 1999, the average labour needed for producing a car was 0.1, but by 2014 this figure was reduced to just 0.07, implying that machines and robots are taking jobs away from the automobile industry. Traditional employment-absorbing sectors, such as automobiles, machinery and chemical industries, are growing slowly, or even declining in the US.


Even if these industries were to leave China, their final destinations are not necessarily in the US, and are more likely to end up in other countries. If Mr Trump simply adopts protectionist measures and blames China without considering the influence of technological advancement, he will not only obscure the facts, but also hurt the wellbeing of the American people.


But the question remains, how can the US-China trade deficit be reduced? Rather than launching a trade war against Chinese exports, we may look at America’s exports to China for a solution. The US has long imposed strict high-tech export controls for China.


Nevertheless, China’s high-tech market is fast expanding. China’s import demand for civil aviation, machine tools, integrated circuits and other high-end products will reach $600bn by 2020, which is approximately twice the amount of the US-China trade deficit in 2015. It is estimated that if the US eases its high-tech export restrictions on China, China will import as much as $60bn of these products from the US. Facing this huge and rapidly growing market, why doesn’t the US loosen controls and expand high-tech exports to China?


It is time for Mr Trump and his team to make a choice. Protectionist actions and tight controls over exports in a zero-sum game will get both China and the US into trouble. The other choice is to adopt a more positive export policy towards China that is conducive to achieving a win-win outcome for both parties, and maintaining the beneficial economic cycle shared between the world’s two largest economies.


China has contributed greatly to globalisation alongside the US. But today, while China still strongly reaffirms globalisation, some remarks and potential policies of the Trump administration deviate from the irreversible trend of globalisation which was set in place by previous US administrations. Again, this will not help Mr Trump’s goal to “Make America Great Again”, and will only push the great country into troubled waters.


In conclusion, I hope wise Americans see the harm that a US-China trade war will cause, and at the same time join me to oppose such a war.


The author is a professor and executive dean of Chongyang Institute for Financial Studies at Renmin University of China. His latest book is The Anxieties of The US.


Key Words: Chinese products   boycott   trade   Wang Wen  

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