USA-China trade war: Who will have the last laugh?

NS Venkataraman

CHENNAI, India, 14 September 2019

A detailed and well-researched book analysing the US-China trade conflict and assessing who will blink first has been released. It is titled USA China trade war – Who will have the last laugh? *

Excerpts from this interesting book read as follows:

US fears China overtaking it

China, especially under Deng Xiaoping, managed to make the US believe that it would gain if it would allow China to grow.

Once China exceeded the US GDP in 2015 and Donald Trump became US President, the view by the US changed.

The US now sees China as a threat to its global supremacy, and wants to prevent China at any cost from beating the US in the global context.

Has China forced the trade war?

China claims that it is not responsible for the trade war, and that it has been only pursuing normal and well-accepted trading practices. China says that its exports to the US have substantially increased because US consumers found it attractive to buy the Chinese products.

China further says that US President Trump is unable to persuade US consumers not to buy products from China, and therefore he is trying to artificially increase the landed price of Chinese products by disproportionately increasing the import tariffs, to dissuade US consumers from buying Chinese products.

China terms such practice as unacceptable and contrary to world marketing tradition and practices.

In several observations and comments, China has expressed its outrage at the unfolding events of the trade war and the determination of the US President to show China “its place”.

Accusing the US of “trade bullying practices”, China has said that such tactics would not work on China.

China says that the US too would suffer severely due to a counter-productive trade war. China pointed out that the US stock market has declined sharply after the commencement of the trade war.

Has US imposed trade war?

The US says that it has not imposed any trade war on China, but only selectively imposed additional tariffs on products that the US imports from China. It is doing so only to protect the interests of the US economy and industry, which is a legitimate objective.

The US further accuses China of dishonest practices like stealing technology from the US, currency manipulation, and spying in the US by sending Chinese students to US universities.

The US government says that its decision to label China as a currency manipulator came after China allowed the yuan to weaken past the symbolic 7-per-dollar level. This has raised questions about how tightly-managed the Chinese currency is, and its true value.

The People’s Bank of China (PBOC) allows the yuan to trade in a 2% range around a mid-point that it fixes against the dollar each day. That mid-point is based on the yuan’s movement in the previous session, and moves in currencies of China’s main trading partners.

China’s central bank rarely intervenes directly in foreign exchange markets, but usually operates through state-owned banks, in addition to using money market operations and its hefty foreign exchange reserves.

The PBOC is also believed to influence offshore markets in various ways, including scheduled and off-cycle sales of yuan-denominated bills in Hong Kong, which traders say can soak up liquidity and stem speculative short-selling of the currency.

Level of trade between US and China

In 2018, China was the largest goods trading partner of the US, with two-way trade totaling 659.8 billion USD.

Goods exports from the US totaled 120.3 billion USD and imports totaled 539.5 billion USD.

The US goods trade deficit with China was 419.2 billion USD.

Trade in services with China (exports and imports) totaled an estimated 72.3 billion USD in 2018. (Source : US Government website)

Will the two countries reconcile?

In the past, both China and the US have demonstrated the capacity for pulling back from the brink.

However, it is doubtful whether it would be possible at the present time, with the US seeming to be determined to teach China a lesson and not lose global supremacy status, and China determined not to give up its ambition for global supremacy.

China’s investment in emerging technologies

China is rapidly emerging as a technology superpower. This will have far-reaching implications for the world.

China has invested billions of dollars in recent years to develop civilian and military applications of emerging technologies such as 5G, semiconductors, microchips, artificial intelligence (AI), and quantum computing to transform China from an assembly line of low-tech manufactured goods to a pre-eminent economic and technological power manufacturing high-tech goods.

China has made an early start in setting up the 5G infrastructure, and decided to roll out this technology from 2020, the second country after South Korea. In AI, China has progressed in facial and image recognition, and manufacturing drones and robots. On the military side, China is researching air, land, sea, and undersea autonomous and semi-autonomous vehicles, which can assist in reconnaissance and attacks on enemy aircraft and vessels. China’s army is trying to use advances in quantum radar and sensing to gain advantages in stealth technology. Its navy is trying to develop a quantum compass for its submarines, which would not require satellite-based navigation.

Though China has made impressive progress in exploiting several technology applications, claims being made in some international media that China will be the world leader in these technologies in a few years appears to be exaggerated and premature. Large Chinese investments have not always translated into technological successes adequately so far.

Since the 1990s, China has made numerous efforts to design and fabricate its own chips, investing billions of dollars in several companies but mostly not succeeding.

China imports about 80% of its microchip requirement. In 2017, it spent $260 billion on imports of semiconductors and chips, more than its imports of crude oil. China is aggressively continuing with its chip-making efforts, trying to acquire foreign technologies through outright purchase, joint venture, stealth, and local innovation. It is believed that China will take several years to reach the current levels of chip specialisation in the West.

In AI, a lot of credit for China’s successes goes to American and other non-Chinese researchers and companies. According to a Tsinghua University study, more than half of China’s AI papers were international joint publications. All the software development of Chinese drone maker DJI is performed at DJI’s American office. China’s strength is mainly in AI applications, and it still has a long way to go in core technologies of AI, such as hardware and algorithm development.

In quantum computing also, many problems remain unresolved, such as mastering materials use, and quantum chip design and manufacturing. Also the development of a functional quantum computer remains several years away.

From here on, progress in these technologies will be slowed down by a number of factors.

The US has started denying access to leading Chinese companies in its market, imposed restraints on Chinese students studying robotics, aerospace, semiconductors, and quantum computing in US universities, and is urging its allies and friends not to allow Chinese companies in their countries for national security reasons.

Visible impact of tariff war on China

The toll of US tariffs on China’s exports, and consequently on the Chinese economy is becoming more visible.

Although exports to the US account for just a small share of the overall GDP of China, the uncertainty has bruised corporate confidence.

Factory prices in China have veered into deflation, a bad sign for industrial profits.

For example, a quarter of the Chinese production capacity used by global sportswear brands is lying idle, according to an industry source, as the trade war pushes the biggest labels out of the Chinese factories. The exodus is forcing plants to offer discounts of 10% to local companies like Xtep International Holdings Ltd.

The sportswear label, based in the southern province of Fujian, is one of a handful of Chinese brands competing with the likes of Nike Inc. and Adidas AG.

Idle capacity in a country that is long been the workshop to the world underscores the blow of the trade war imposed on Chinese manufacturers, who are also grappling with an economy that is expanding at its slowest pace in three decades.

There are growing signs that the global supply chain that has been in place for decades — and powered by China’s economic rise — is being transformed.

Economists at Morgan Stanley, a bank, now forecast that Chinese growth will fall to 5.8% in 2020; previously they had expected 6.3%. (This forecast is conditional on the new American tariffs being implemented and lasting for four to six months. If not, the bank expects growth of 6% in 2020.)

In the past, whenever growth looked set to slow sharply, Chinese companies could count on a stimulus package from the Government of China to revive it.

But this time, the Government of China have been much more restrained in its response, partly because of concern about adding to China’s hefty debt burden.

In August, 2019, the central bank in China had a chance to lower funding costs for banks, but it refrained.

Aggressive approach of US

Trade conflict with the US is a new and important sustainability challenge for China.

There is no doubt that the US is pursuing a containment strategy vis-à-vis China.

From an ever-escalating tariff war and tough trade policy by blacklisting leading Chinese technology companies, to US Vice-President Mike Pence’s declaration of a new cold war, the US political establishment has swung dramatically from viewing China as an opportunity to regarding it as an existential threat.

China’s restrained approach

China indicated that it would not immediately retaliate against the latest US tariff increase in equal measure, emphasizing the need to discuss ways to de-escalate the trade war between the world’s two largest economies.

“China has ample means for retaliation, but thinks the question that should be discussed now is about removing the new tariffs to prevent escalation of the trade war,” Chinese Ministry of Commerce spokesman Gao Feng told reporters in China.

In the month of September 2019, China has spared some US goods from extra tariff. Exemptions apply to the round of tariffs China imposed on US goods starting last July in retaliation for higher US levies.

China announced a range of US goods to be exempted from 25 percent extra tariffs put in place earlier, as China seeks to ease the impact from the trade war without lifting charges on major agricultural items such as soybeans and pork.

Pharmaceuticals and lubricant oil are among exclusions to levies on imports announced by the Ministry of Finance on its website.

Further rounds of Chinese exemptions will be announced in due course, the ministry said.

Resilience of Chinese economy and tenacity of government of China

The Chinese economy is huge — 13.6 million USD — 13.2 times the size that it was in 1998.

Annual economic growth rate of around 6.2% largely remains on track. While it may marginally fall in the light of the trade war, it is unlikely to go down to an alarmingly low level in view of Chinese internal resilience.

It will be unrealistic for the US to expect that China will fundamentally change its economic model even in the medium term.

Since 2009, China has been trying hard to rejig its export-dependent economy to one more dependent on domestic consumption to halt the slowdown.

In China, domestic consumption is poised to play a bigger role in driving economic growth, as it contributes around 60 percent to economic expansion in the recent months, which Chinese officials consider to be encouraging.

The fact remains that China has come a long way, being able to deal with challenges that come its way.

Who will have the last laugh?

With the US presidential election not far away, a change in approach by the US is possible. However, the basic fact that the US would not like to surrender its world supremacy status to China, will persist whoever may be the next President of the US after the election.

China has a totalitarian regime, with the present President of China considering himself to be a life-long president.

However, unlike the US, there is no transparency in Chinese governance and politics. In a totalitarian regime, it may well be possible that a new president may forcibly take over in the event of social unrest and economic slowdown, and conflicts taking place. It is not possible all the time to suppress dissent, even in the totalitarian regime . Things may change in China too and new leadership may take over in future. One never knows.

Considering the strengths and weaknesses of the US and China, and the ground reality that both these countries have to necessarily play a mutually-beneficial role in the long run in order to sustain their own economies, one may tend to wonder at this stage as to who will have the last laugh.

As of today, looking at the overall scenario and taking a holistic view, it appears that China is in a weaker stage compared to the US, as China still needs time to go up to a higher level to effectively challenge the US to reach world supremacy. Therefore, it is likely that China will bend a little more and yield to US pressure to some extent and seek compromise.

But the subtle trade war in various forms will continue. The world will not see the end of trade war too soon.

World is watching without clue

The world is watching how China and the US will deal with their trade issues. How they do so could well determine the future of global trade relations and the overall global geo-political scenario.

USA-China trade war – Who will have the last laugh? authored by Swaminathan Venkataraman, Director of Nandini Consultancy in Singapore. The book is published by Nandini Consultancy Centre, operating in Chennai and Singapore, NS Venkataram, Founder/Director.

About the author

NS Venkataraman is a chemical engineer as well as a social activist in Chennai, India. He is the founder trustee of Nandini Voice for the Deprived, a Chennai-based not-for-profit organisation serving the cause of the deprived and down-trodden, and working for probity in public life.

More articles by NS Venkataraman on Tibet Sun.