Trade has become a major component of any economy and economies are using trade as an instrument to realize not only their political-economic and socioeconomic objectives, but also to serve strategic objectives. It is quite evident from the statistics, about trade, which reveals that the size of the trade has swelled enormously in last three decades. It is because more countries are embracing free trade as a strategy because they believe that trade benefits all trading countries (Hayami). The perception that trade benefits all are based on the Ricardian concept of comparative advantage, according to which an economy produces that goods or services that have low opportunity cost and these goods and services are sold in international markets (Winters 9).
As the perception regarding trade became positive, the size of trade increased, and it gave birth to various regional and global organizations and institutions, such as the World Trade Organization (WTO). These organizations/institutions devised policies to ensure that trade, among countries, remains fair and advantageous for all parties. For instance, the WTO allows countries to take countervailing measures against those trading countries that give subsidy to particular industries and or sectors of the economy. However, it is also the fact that these loopholes are exploited by trading countries. In fact, countries accuse one another of exploiting contradictions in the international trade structure and system. For instance, United States accuses China of devaluating its currency, intellectual property theft and of other unfair trade practices (Krueger 56).
China and United States’ economies are the largest economies in the world. United States economy is the largest economy, regarding nominal GDP, whereas China’s economy is the second largest, as per the same standard. Regarding Purchasing Power Parity rate China has the largest GDP closely followed by the United States. These two countries are also major trading partners, and as per statistics, the size of trade between the economies is $578.2 billion. (2016) (United States Trade Representative).
From the size of the trade, it is not very difficult to infer that trade between the United States and China influence world economy and affect the pattern of trade. Therefore, the trade between the two economies is an intriguing subject and change in trade policy, by any of these two trading countries, influence global financial and goods markets (The Economist).
Since the Great Recession, the economy is once again on the central stage in both China and United States. In fact, both presidential candidates, Donald Trump and Hillary Clinton, strongly disparaged trade agreements and policies. Donald Trump promised that if he came to power, he would re-negotiate North Atlantic Free Trade Agreement and re-consider China’s status of the Most Favorite Nation. After becoming president, Donald Trump gave the task to his team of economists to identify unfair trade practices by China (The Economist).
The United States have been accusing China of unfair trade practices for a long period. The previous American president called out a deliberate devaluation of Yuan as an unfair trade practice. The United States asserts that devaluation of the currency, by the labor-intensive economy of China, gives us an unfair advantage and facilitates China’s economy to produce goods and services at low cost. In addition to the devaluation of the currency, US also accuses China of theft of Intellectual property (United States Trade Representative).
The Chinese economy is a manufacturing economy, which relies on the low-cost production of goods. However, it also intends to modernize its economy at a rapid pace, as it believes that without modernization of its industry, it would not be able to compete with its rival economies. This policy, of China, is not new but rather very old. The Chinese leader, Deng Xiaoping, introduced reforms (controlled market economy) in China, which primary objective was to modernize industry and to increase the pace of economic progress. Evidence suggests China is still pursuing these objectives; however, it has developed various strategies and instruments to realize these objectives. For instance, China has devised policies to attract foreign investment (FDI inflows). Foreign investors bring not only capital, but also technology and expertise to host countries (The Economist).
Similarly, China has also devised a policy to encourage FDI outflows. The objective of FDI outflows is to get access to new technology and expand understanding regarding contemporary management. However, developed countries, such as the United States, are apprehensive of this strategy and policy of China. In fact, the current administration considers this strategy, of China, as an instrument to steal technology and to augment its influence over American corporate and industrial systems (The Economist).
The United States intends to punish China for Intellectual Property theft and for attempting to control or influence United States’ corporate and industrial system. For that purpose, Trump Administration has slapped China with $50 billion tariffs on the goods, which it considers are based on the technology stolen from the United States. The Administration has also indicated that it would punish China with more such actions if China did not change its policy and did not shun unfair trade practices (The Economist).
United States has also lodged complaints against China at WTO, in which the United States has asserted that China is bending and breaking laws about intellectual property. In addition to that, the United States also accuses that Chinese companies press American companies to handover technology to China. However, this pressing of United States’ companies involves financial incentives (which are legal). Furthermore, United States accuse China is devising such partnership contracts, which ease the process of transfer of technology. In a nutshell, US accuses China of rigging the corporate and economic system against American companies and stealing technology through various means and tactics. (United States Trade Representative)
To steal information, US claims, China invests in the American economy. If this accusation were proved correct, then the method of investment, an entire world, would change drastically. It would badly shake financial markets and economic systems, causing financial and economic chaos in the short run (Winters 30).
In international economics, countries mount pressure on other countries for trade concessions. It is quite apparent that the trade deficit, of US with China, has grown abnormally. According to the statistics, American exports were $169.8 billion, whereas Americans imports, from China, were about $478.8 in the year 2016. This trade deficit is huge and as per some economists the largest in the history. The size of deficit makes the United States very apprehensive and compels it to not only take retaliatory measures but also move towards protectionist policies (The Economist).
Hong, Zhao. “These charts show the complexity of the US-China relationship.” Digital Image. CGTN. CGTN, 8 April 2017. Web. 21 April 2018.
Different studies have different inference regarding trade deficit (Hong). Some studies even suggest that trade deficits are healthy for the economy; however, evidence favoring such inference is very small. The majority of studies have concluded that the trade deficit hurts the economy in the long run. It is because when population spends more on imports than on local products, de-industrialization starts to occur in an economy, as it has happened in the United States (flight of capital) (Hayami 344).
Depreciation is another issue/challenge associated with the trade deficit. As exports fall, the local currency devalues, which also has a benefit. The benefit is that devaluation of currency makes goods and services more competitive in international market. For instance, China deliberately keeps the value of its currency lower than the actual value, which allows its products to be more competitive in international markets.
Hong, Zhao. “These charts show the complexity of the US-China relationship.” Digital Image. CGTN. CGTN, 8 April 2017. Web. 21 April 2018.
In addition to the positive effect on the competitiveness of goods and services, trade deficit also attracts foreign direct investment. However, foreign direct investment has its pros and cons. As per most studies, the association of FDI with economic growth and improvement in the quality of the economy is ambiguous. Also, when the size of foreign investment crosses certain thresholds, it started to undermine sovereignty (Krueger 81).
From the systematic scrutiny of evidence and literature suggests that the United States intend to use tariffs and such other tactics to pressure China and reduce the size of the trade deficit, which is a great concern.
Some economists are of the view that trade war may benefit United States, as it would mount pressure n those countries, which are unfairly benefitting from unfair trade. This is because American markets are too large and lucrative to lose, which will force them to amend their policy regarding trade with United States. The argument, by this school of thought, has an economic weight; China enjoys trade surplus with United States, which benefits its economy enormously. In order to stop trade-profit to evaporate entirely, China will be ready to offer concessions and may work with United States to make US-China trade more balanced. However, there are number of economists, who do not agree with rationale that trade would mount pressure on China and such other countries, which enjoy trade surplus against United States.
In case of China, their argument is that Chinese economy is no more extraordinarily depend on export for growth. The size of consumption, within China, has increased evidently, which is a major contributor to the growth of Chinese economy. In addition, Chinese sell their products all around the world, which is why the strategy may not produce desired results. Furthermore, American strategy is perplexing for its own companies and firms, which is it would not be effective (O’Hara).
Work Cited
Hayami, Yujiro. “Trade benefits to all: a design of the beef import liberalization in Japan.” American Journal of Agricultural Economics 61.2 (1979): 342-347. Document.
Hong, Zhao. “These charts show the complexity of the US-China relationship.” CGTN. CGTN, 8 April 2017. Web. 21 April 2018. https://news.cgtn.com/news/3d517a4e334d7a4d/share_p.html.
Krueger, Anne. The WTO as an International Onization. Chicago: University of Chicago Press, 2000.
O’Hara, Mark. “Who Would Benefit from a Trade War?” Market Realist. Market Realist, 27 March 2018. Web. 21 April 2018. https://marketrealist.com/2018/03/who-would-benefit-from-a-trade-war.
The Economist. “America’s trade strategy has many risks and few upsides.” The Economist. The Economist, 28 March 2018. Web. 14 April 2018. https://www.economist.com/news/finance-and-economics/21739726-it-undermining-rules-based-trade-order-and-could-start-series.
United States Trade Representative. “The People’s Republic of China.” United States Trade Representative. United States Trade Representative, 31 December 2016. Web. 14 April 2018. https://ustr.gov/countries-regions/china-mongolia-taiwan/peoples-republic-china#.
Winters, Alan L. “Trade liberalisation and economic performance: an overview.” The Economic Journal 114.493 (2004): 1-37. Document.
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