Move U.S. Trade Rep­re­sen­ta­tive Robert Lighthizer on Au­gust 18 for­mally launched a Sec­tion 301 in­ves­ti­ga­tion into al­leged in­tel­lec­tual prop­erty prac­tices by China under a rarely used 1974 trade law, trig­ger­ing con­cerns that Wash­ing­ton may uni­lat­er­ally impo

Beijing Review - - Business - Copy­edited by Chris Sur­tees Com­ments to yulin­tao@bjre­view.com

The Sec­tion 301 in­ves­ti­ga­tion will inevitably cause trade fric­tion between China and the United States, which can lead to sev­eral neg­a­tive con­se­quences such as dam­age to the United States’ wealth-cre­ation and debt-pay­ing abil­ity.

In the first place, trade fric­tion will harm the out­put of U.S. high value-added prod­ucts and re­sult in shrink­age of its for­eign trade. It may even ac­cel­er­ate the fre­quency of in­ter­est rate rises of the U.S. dol­lar, hin­der­ing U.S. ex­ports and then its eco­nomic growth.

Surely, U.S. trade re­stric­tions can block China’s ex­ports. How­ever, the in­ter­na­tional divi­sion of la­bor and frag­men­ta­tion of pro­duc­tion have al­ready be­come a new and in­evitable trend. In this ar­range­ment, China is cur­rently at the low end of global sup­ply chains, while most of the added value is still ob­tained by the United States and other de­vel­oped coun­tries. As a re­sult, trade bar­ri­ers would only do more harm to the in­ter­ests of up­stream sup­pli­ers and down­stream dis­trib­u­tors, dam­ag­ing the pro­duc­tion and ex­port of high value-added prod­ucts from the United States.

Trade con­flict will also ham­per U.S. eco­nomic and trade ex­changes with China, its largest trad­ing part­ner. In the mean­time, as China has been speed­ing up ef­forts in en­gag­ing in eco­nomic co­op­er­a­tion with other BRICS coun­tries and pro­mot­ing the Re­gional Com­pre­hen­sive Eco­nomic Part­ner­ship and the Belt and Road Ini­tia­tive, its mar­kets will open wider to rel­e­vant economies. There­fore, de­te­ri­o­rat­ing trade re­la­tions between China and the U.S. will di­min­ish U. S. ex­ports to China and China’s direct in­vest­ment in the United States.

In the mean­time, U.S. mon­e­tary pol­icy has to make changes along with the trade fric­tion, curbing its ex­ports fur­ther. The per unit la­bor costs of China’s man­u­fac­tur­ing in­dus­try are a lot lower than those of the United States. Even if the U.S. re­stricts cer­tain im­ports from China, its own la­bor force might lack the will­ing­ness to pro­duce those prod­ucts, un­less Wash­ing­ton pro­vides tax in­cen­tives and sub­si­dies. Lim­it­ing in­ex­pen­sive prod­ucts from China would lead to rises in lo­cal con­sumer prices, jack­ing up U.S. in­fla­tion. Under th­ese cir­cum­stances, the Fed­eral Re­serve will un­avoid­ably raise in­ter­est rates of the U.S. cur­rency, which is not good news for U.S. ex­ports.

In the past three decades, the United States has de­vel­oped the habit of deficit spend­ing. There are deficits in both gov­ern­ment bud­gets and for­eign trade. The func­tion­ing of the coun­try de­pends largely on for­eign debt. The con­stant pres­sure from not mak­ing ends meet has sucked the coun­try into a debt trap. Al­though it has trans­ferred some risks to cred­i­tor na­tions by tak­ing ad­van­tage of the dol­lar’s sta­tus as an in­ter­na­tional re­serve cur­rency, its weak re­pay­ment abil­ity is not get­ting any bet­ter.

Trade fric­tion will pose a threat to the U.S. abil­ity to cre­ate wealth and pay back debt. A large amount of debt is a stum­bling block for eco­nomic de­vel­op­ment. In 2016, the to­tal debt of the U.S. ac­counted for 252.8 per­cent of its GDP. The fed­eral gov­ern­ment debt is high and keeps go­ing up. There’s not much ma­neu­ver­ing room in this re­spect. The pat­tern of us­ing debt to drive up growth is un­sus­tain­able. What’s more, a weaker abil­ity to cre­ate wealth caused by trade fric­tions will make it hard to roll over debt, which means it’s get­ting harder to re­pay debt with new loans.

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