It had to happen. It was predictable, and everyone saw it coming. Therefore it should not be a surprise that there is an impending trade war with China. Let’s discuss and document some of the issues.
China has grown stronger, and this is good. What is not good is their increasingly aggressive trade and military stances in the world. Their military buildup in the disputed South China Sea islands has antagonized all their neighbours and has destabilized the region. Using Chinese Coast Guard vessels to hassle indigenous Philippine fishermen, in their own waters, is not friendly. There are kidnappings of Chinese businessmen from Thailand, which is completely out of China’s jurisdiction. There are also Chinese influence and incursions into foreign politics that many countries such as Australia, find distasteful.
I have also not mentioned China’s human rights abuses, in Xinjiang as well as China internal. Human rights lawyers get the shaft in China. China has the right to treat their own people as they see fit, or so they say to the rest of the world.
China’s Trade Strategy
China employs many strategies, but the ones that really madden the US and EU are:
- Force foreign companies to have a Chinese joint venture partner, then force foreign companies to share their technology. This is forced technology transfer
- Theft of technology: cyber or otherwise. This spy-type acquisition method is as old as the hills but still works. Chinese agents, posing as Americans, get jobs in US high tech companies, steal the tech and send it back to China.
- Acquisition of US and EU companies using Chinese state funds: International companies can buy companies in other countries, and this is Ok. However all large Chinese companies are aligned in an intimate way with the Chinese government and have access to state-run funding. This gives them a huge competitive advantage in finding sources. Once acquired, Chinese companies can take their newly bought tech and give it to the Chinese government
- forcing foreign companies to license their technology in China at below-market rates. I have not heard of this specifically.
- dumping Chinese products into the world market at below cost pricing. China has huge state-owned factories that employ huge numbers of people. These factories need to keep running in order to provide these people with work. Rather than do economic reform and retire these factories, China would rather keep these factories running and sell the output on the world market at below cost. While somewhat good for Chinese workers, foreign companies in their countries cannot compete with such low prices and go bankrupt. This affects huge number of workers in their countries, breeding significant resentment.
- Disregard of intellectual property rights: China is really skilled at making fake goods. They take designs from foreign companies, manufactures fakes and sells them worldwide but more to the third world. Chinese courts are loath to stop he practice, and only to make a token gesture. Foreign companies use China to manufacture their goods at lower cost, but risk losing their competitive edge to unscrupulous Chinese factories that are backed by the Chinese government.
- Outright blocking companies from providing a service in China: Almost all the large US social media companies such as Facebook, Snapchat, Google, Youtube are all banned in China. This is to ensure that Chinese domestic companies have an advantage. Foreign companies see this as a protected market, while Chinese companies are allowed into foreign markets.
- China blocks Taiwan’s access to everything: This means that Taiwan has no access to the World Health Organization WHO, the UN and other international organizations. China has also threatened to invade Taiwan by force. This has forced Taiwan to purchase more military equipment, further destabilizing the region. Taiwan has aligned with the US for protection. To deny Taiwan the ability to join the world is simply not right, and denies Taiwan the ability to contribute to worldwide knowledge. They are smart, they have knowledge, they want to but cannot contribute.
- China’s large companies are obviously controlled by the Chinese government: In times of crisis, Western companies must stand on their own and fend for themselves. In China’s case this is clearly not true. The recent cases of Anbang Insurance, Hainan Airline clearly show this. In Anbang’s case state-owned banks lent them huge amounts of capital, which Anbang used to buy a lot of foreign companies. When they could not pay back these loans, China took over the company, put in their own leader and arrested the Anbang head. In HNA’s case they forced the company to start liquidating assets. These are not companies with an arms-length relationship to the Chinese government. China is clearly not a free domestic market, but a state controlled one. China has told the WTO that they are working towards a free market system, which it is clearly not.
- Data Localization Rules: China mandates that all data on Chinese residents need to be housed physically in China. But Russia and the US also have this rule.
Trump Plans Stiff Trade Tariffs and Other Penalties on China
“Unfortunately, there are actors who fail to pay due respect for the obligations they have voluntarily signed up for,” Mr. Wong said. “When economies large or small are able to flout the rules, cheat their trading partners, force intellectual property transfer, protect national champions, steal trade secrets and use market-distorting subsidies, it undermines the integrity of the entire rules-based system.”
Deputy Assistant Secretary of State Alex Wong, US Government
source
That being said, China can and will retaliate, even if it cuts off its own nose. Otherwise China will lose face.
China has very little arable land as compared to its population size. It needs to import grain and other agricultural products from somewhere, be it the US, EU, Australia or Russia. As China has reversed market reform, their economy is still geared towards export. The Chinese economy will take a hit, for sure, but so will the US economy. Eventually, and hopefully, trade sanctions might be the external stimulus needed to push China into restarting market reforms. This would benefit Chinese citizens by making Chinese products better quality, as well as make Chinese factories more competitive.
Mr. Navarro cast the tariffs as part of a seminal shift in how the United States views China. Rather than trying to draw it into the rules-based international economic order — a policy that dates back to Richard M. Nixon and Henry A. Kissinger — the United States now regards China as a strategic competitor, bent on eroding American security and prosperity. source: Trump Hits China With Stiff Trade Measurese
In the past, the Chinese government has succeeded in blunting American complaints about its trade policies — and over the giant trade imbalance between the two countries — by enlisting the support of big business in the United States to head off calls for punitive measures while making relatively small concessions and dangling the prospect of further action. source: Trump’s Trade Threats Put China’s Leader on the Spot
Addendum 2018 Mar 23
And when Beijing wants to retaliate, it has a record of using those buyers, nudged by nationalism and propaganda, to exact a painful toll on rivals. China has done so in recent years to the Philippines, Japan and South Korea, with Chinese consumers participating in boycotts of foreign-made cars, cosmetics and tourist destinations that have inflicted financial suffering on those Beijing wants to punish.
Now, China is also prepared to wage a “people’s war” against the U.S., the nationalist Global Times, a Communist Party imprint, said in an editorial.
…Academics call such conduct “reactionary consumer ethnocentrism,” and Ms. Xia was hardly alone. A study published last year by a Newcastle University Business School researcher showed that such “tendencies were found to be above average amongst urban Chinese consumers,” who love imported goods but “appear to react to political or social events.”
source: Beijing warns of ‘people’s war’ against U.S.: Chinese consumers now global superpower
Addendum: 2018 Mar 24
When we think of China, we often think of the world’s factory and the explosion of cheap goods flooding into world markets. But that’s not necessarily the case any more. All those cheap TVs and T-shirts aren’t necessarily made in China anymore. Much of that lower-end manufacturing is now done other countries, such as Vietnam….
China has moved away from manufacturing cheap junk so it can work higher up the value chain, she said. But, that means more investment, a more integrated supply chain and more reliance on higher-value customers. As such, it may make China more vulnerable to the consequences of a trade war. So, is the rhetoric out of both Beijing and Washington noise or reality?