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The truth about US–China trade

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US President Donald Trump, surrounded by business leaders and administration officials, prepares to sign a memorandum on intellectual property tariffs on high-tech goods from China, at the White House in Washington, United States, 22 March 2018. (Photo: Reuters/Jonathan Ernst).

In Brief

The Trump administration is fighting a trade war with the whole world, and especially with China. The President has slapped tariffs on Chinese goods, railing about the US–China trade deficit.

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Last year, China exported goods and services worth roughly US$500 billion to the United States, and the United States sent back exports worth US$130 billion. The President calls this US$370 billion deficit thievery, but most economists don’t see its harm to the United States. Indeed, despite what the President says, trade between the United States and China is free and fair.

Although as a developing country China has higher tariffs on US goods than the United States does on Chinese goods, its tariffs are still lower than those of many other developing countries, including India’s. Since China’s accession to the World Trade Organization (WTO) in 2001, it has consistently lowered its trade barriers.

China has been the fastest growing market for US exports, and US exporters are not stupid: they know a good deal when they see it. According to data from China’s Ministry of Commerce published last year, 56 per cent of US soybeans, 26 per cent of Boeing airplanes and 17 per cent of American-made automobiles are sold in China.

As for goods coming into the United States, US importers are not stupid either. No one is forcing them to buy Chinese goods. Inexpensive Chinese imports have helped the US middle class, which has experienced slow income growth for years, to buy more with the same nominal income.

It isn’t Chinese barriers but US export controls that limit the two countries’ economic exchange. China’s trade advantage lies in its cheaper labour costs, and the United States’ advantage lies in its capital and land. China exports labour-intensive products to the United States, while the United States exports technology products and agricultural products to China. But US export policy is stricter than Europe’s (especially Germany’s) and Japan’s in determining what and how much technology can be exported. Without export prohibitions on 20 high-tech products such as aircraft and aircraft engines, navigation systems, lasers and fibre optics, China would be buying a higher volume of US goods and the US–China deficit would decrease.

Trade deficit numbers can also be deceiving. Take the Apple iPhone as an example. When iPhones arrive in the United States from China where they are assembled, their high cost adds significantly to the trade imbalance in China’s favour. But Chinese workers and factories only receive 5 per cent of the value of an iPhone (mainly labour costs), while Apple’s design, brand and marketing account for nearly 60 per cent of its value.

China doesn’t even provide parts for the iPhone: those come from the global supply chain and the benefit goes to the suppliers, not to China. By one calculation, an iPhone’s estimated ‘factory cost’ (US$240) exaggerates the value of China’s exports to the United States because the Chinese keep less than US$9 per phone.

When protectionists in the United States talk about the trade deficit with China, they deliberately ignore the US surplus in ‘service trade’, including in such sectors as travel, education, banking, insurance and royalty payments. According to Chinese statistics, in 2017 that imbalance was as high as US$54.1 billion, and it has risen steeply for a decade.

Another thing US protectionists deliberately ignore is that the total value of US companies’ sales in China has surpassed US$500 billion. These firms are making huge profits from the fast-growing Chinese market, and their success adds to the export of US components and intellectual property rights to China.

As for intellectual property, Trump constantly accuses China of stealing US technology and knocking off its goods. Although China established intellectual property protections relatively late (in the 1990s), those laws are working. In 2017, China’s external payment of intellectual property fees reached US$28.6 billion, 15 times more than when it joined the WTO in 2001. And US intellectual property owners are the biggest beneficiaries.

Accusing Chinese firms of forced technology transfers is another outdated charge. No laws or regulations compel such transfers. Joint ventures are based on deal-by-deal negotiations and some US companies are willing to transfer technology for Chinese market access. General Motors’ and Ford’s joint ventures, for example, have made them two of the largest automobile manufacturers in China.

President Trump wants to stop ‘Made in China 2025’, the state-subsidised plan to modernise Chinese industries, and he charges China with ‘state capitalism’. But Chinese subsidies are not out of line with WTO regulations, and they are available to foreign-funded enterprises too.

Not to mention that the United States engaged in similar protectionism in the past: US subsidies and defence spending nurtured the internet, semiconductors, nuclear power plants and military–civilian space technology.

China’s trade practices are generally in compliance with WTO rules. Like the United States, China is subject to a biennial WTO review. Since 2001, China has been accused 40 times and the United States 80 times in WTO disputes. When judgements go against China, it corrects its course. The United States has obeyed the WTO much less often.

China doesn’t want to fight Trump’s escalating trade war, but it will defend itself. At the same time, it is reaching out to other foreign investors to counterbalance US actions. The United States may lose investment opportunities if the Trump administration persists.

Worse, the President’s actions recall the 1930s when the US Congress passed the protectionist Smoot–Hawley Tariff Act. The result was a worldwide trade war, a currency war and finally World War II. The American people should remember that history and oppose Trump’s trade war on China.

Wang Yong is a professor in the School of International Studies, Peking University and a non-resident Senior Fellow at the Center for China and Globalization, a private think-tank in Beijing.

A version of this article originally appeared here in the Los Angeles Times.

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