21/04/2017 – Independent / Trends in Trade / USA / China

Trading Blows

Having built a presidential campaign based on making America great again, Donald Trump is now in a position to implement such intentions. One of the President’s targets is China, and its perceived threat to the US economy and jobs. Fran Roberts reports on the turbulent history of Sino-American relations and how the world’s two superpowers have come to teeter on the edge of a trade war.

 

Few would counter that America and China have experienced a rocky relationship throughout history – the world’s two nation’s have jostled for supremacy as ideological opposites for decades, and severed ties completely in 1949. And while there have undoubtedly been challenges since dialogue between the two countries was reopened in 1972, the current posturing by both a tribalist Trump and an increasingly autocratic Xi Jinping could unravel all that has been achieved in the intervening 45 years.

 

One factor driving the hostile rhetoric coming from the US is China’s economic growth. Since the financial crisis, China’s economy has fared much better than that of the US. Although obviously coming from a much lower base, China’s GDP grew by 6.7 per cent in 2016, compared to America’s 1.6-per-cent expansion – its weakest performance for five years. “Chinese policymakers will take heart from the new economic growth data. Despite the overall slow-down in 2016, economic growth during the last quarter rebounded significantly,” informs Professor Kamel Mellahi at Warwick Business School, who added: “Although the Chinese economy has picked up again, there is no ground for exuberance. The Chinese economy is subject to massive uncertainties that could have a significant impact on its growth in 2017.” Indeed, one major uncertainty is whether China’s difficult relationship with the US will escalate into a trade war or whether their differences can be successfully resolved. 

 

Certainly, America’s new President feels that China’s growth has come at the detriment of his own country’s. In a speech in April 2016, the then President-Elect announced that trade enforcement with China would be at the centre of his plan. “This alone could return millions of jobs into our economy,” he told the Detroit Economic Club. “China is responsible for nearly half of our entire trade deficit. They break the rules in every way imaginable. China engages in illegal export subsidies, prohibited currency manipulation, and rampant theft of intellectual property. They also have no real environmental or labour protections, further undercutting American workers.”

 

“Holding back the tide”

 

Whilst it is true that some of China’s labour practices are questionable, the causes of US economic slowdown are more nuanced than simply scapegoating a rival. “The current thinking by President Trump seems to be framed by the belief that trade barriers are a solution to job losses, particularly in the so-called rust-belt that was one of his key constituencies,” observes Professor Nigel Driffield, also at the Warwick Business School. “Protectionism is akin to holding back the tide – one can do this for a while, but in the long-term it is not sustainable. The seeming increase in ‘populist’ policies that are linked to trade protectionism are an anathema to economists.” 

 

Despite remaining the world’s second largest manufacturer and a leader in higher-value industries such as automobiles, aerospace, machinery, telecommunications and chemicals, the US did lose about 5.6 million manufacturing jobs from 2000-2010. However, according to a study by the Center for Business & Economic Research at Ball State University, some 85 per cent of those job losses can actually be attributed to technological change –largely automation – rather than international trade. That shift may quicken under more powerful protectionist policies, as companies switch from humans to machines in order to counter rising labour costs. According to a study by Oxford University in 2013, 47 per cent of US jobs are at risk of being replaced

by robots.

 

While the war of words continues, it seems clear that the economies of China and the US are so entwined that neither side can afford a split. And despite the bluster coming from the US leader, this fact has not entirely been lost on him. In a recent letter to the Chinese premier, Trump stated that he “looks forward to working with President Xi to develop a constructive relationship that benefits both the United States and China”. Chinese Foreign Ministry spokesman Lu Kang also signalled Beijing’s willingness to find a solution, stating that co-operation between the two countries was the only option. “China is looking for a compromise solution, arguing that more can be gained by the two countries working together than by engaging in a trade war,” explains Prof. Mellahi. “But while China looks like it’s striving for peace, it does not want to look weak. The rhetoric coming out of China is clear – China does not want a trade war, but if a trade war is forced on China, China will not capitulate to US pressure.” Only time will tell how this will play out – however, as President Xi commented, “No one will emerge as a winner in a trade war.”

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