Trade con­flict: Speak­ing truth from facts

China Daily (Latin America Weekly) - - Views - The au­thor is chief econ­o­mist at the Academy of China Open Econ­omy Stud­ies of Univer­sity of In­ter­na­tional Busi­ness and Eco­nom­ics.

US Pres­i­dent Don­ald Trump’s uni­lat­eral and high-handed ac­tions have soured China-US re­la­tions and al­most ig­nited a trade war. On Tues­day, the Trump ad­min­is­tra­tion an­nounced 25 per­cent tar­iffs on about $50 bil­lion worth of Chi­nese ex­ports to the US. This is in ad­di­tion to the high tar­iffs he has al­ready an­nounced on Chi­nese im­ports un­der Sec­tion 301 of the Trade act of 1974.

First, Trump wants to pun­ish China for the so-called dam­age caused by its al­leged theft of US in­tel­lec­tual prop­erty and forced tech­nol­ogy trans­fers. Sec­ond, his aim is to ham­per China’s ef­forts to up­grade its man­u­fac­tur­ing sec­tor. And third, it seems the US wants to shift the global value chain from China since the tar­iffs cover many typ­i­cal global value chain goods such as elec­tron­ics, telecom­mu­ni­ca­tions, ma­chin­ery, and trans­porta­tion equip­ment.

In re­sponse, China an­nounced sim­i­lar tar­iffs on some 106 US items worth $50 bil­lion.

The US has re­sorted to the beg­gar-thy-neigh­bor pol­icy, and now it wants to pun­ish China for re­spond­ing to its ac­tion. And on Thurs­day, Trump in­structed the US Trade Rep­re­sen­ta­tive to con­sider an ad­di­tional $100 bil­lion tar­iffs on Chi­nese im­ports.

The two coun­tries’ ac­tions con­form to the game the­ory, in which two par­ties are forced to fol­low each other’s ac­tions. The cur­rent sit­u­a­tion re­minds one of the ir­re­spon­si­ble gov­ern­ment ac­tions lead­ing to the Great De­pres­sion in the 1930s. I be­lieve mis­in­for­ma­tion has played a big role in cre­at­ing this lose-lose sit­u­a­tion. I say “mis­in­for­ma­tion” be­cause the US pub­lic has been mis­led by perceptions, not by truth, about China’s in­vest­ment en­vi­ron­ment. The fact is, China’s in­vest­ment en­vi­ron­ment is not un­fa­vor­able to the US com­pa­nies, though im­prove­ments can be made.

Is China an im­por­tant coun­try for US di­rect in­vest­ment abroad? Con­sid­er­ing the size of US di­rect in­vest­ment in China, the an­swer is “not so im­por­tant”, be­cause US di­rect in­vest­ment in China lags be­hind that in coun­tries such as the Nether­lands, the United King­dom, Lux­em­bourg, Ire­land and even Ja­pan. By the end of 2016, US to­tal di­rect in­vest­ment in China was only $93 bil­lion, sim­i­lar to that in Mex­ico, with about 67,000 US com­pa­nies in op­er­a­tion, while in the Nether­lands and Ire­land, cu­mu­la­tive US di­rect in­vest­ment amounted to $847 bil­lion and $387 bil­lion. China is only the 15th largest re­cip­i­ent of US di­rect in­vest­ment.

US com­pa­nies pre­fer to in­vest in Euro­pean coun­tries and other economies rather than in China, per­haps be­cause Amer­i­can in­vestors are wary of China’s eco­nomic sys­tem. Which, to say the least, is un­founded, es­pe­cially be­cause US di­rect in­vest­ment in China has out­per­formed those in other coun­tries. Ac­cord­ing to US Bureau of Eco­nomic Anal­y­sis data, the to­tal sales of the US com­pa­nies op­er­at­ing in China amounted to $356 bil­lion in 2015, and iron­i­cally the fig­ure was more than the US trade deficit of $335 bil­lion with China that year.

What im­pli­ca­tions does this fig­ure have? Al­though the US com­pa­nies in­vest rel­a­tively less in China than in the Nether­lands, Lux­em­bourg, Ja­pan, Aus­tralia and Mex­ico, they have sold more goods in China than in those seem­ingly more fa­vor­able economies. China is the 15th largest re­cip­i­ent of US di­rect in­vest­ment, but it is the 6th most fa­vor­able lo­ca­tion for the US in­vestors — af­ter the UK, Canada, Sin­ga­pore, Ire­land and Ger­many. In terms of value added pro­duced by the US com­pa­nies, China’s in­vest­ment en­vi­ron­ment is highly com­pet­i­tive, as the US com­pa­nies pro­duced $68 bil­lion value-added in China in 2015. This would put China along­side the UK, Canada and Ger­many — the four high­est value-added pro­duc­ing coun­tries for the US com­pa­nies.

Be­sides, if China is a coun­try where in­tel­lec­tual prop­erty theft is com­mon and if the US com­pa­nies were un­able to pro­tect their trade se­crets with­out the US gov­ern­ment’s in­ter­ven­tions, they should have ceased their re­search and de­vel­op­ment ac­tiv­i­ties in China long ago.

But what is the truth? The US com­pa­nies, not sur­pris­ingly, have per­formed more R&D ac­tiv­i­ties in China than in those coun­tries highly val­ued by the US pub­lic and of­fi­cials, such as the Nether­lands, Lux­em­bourg, Ire­land, Aus­tralia, France, Sin­ga­pore and Ja­pan. In 2015, the R&D ac­tiv­i­ties of the US com­pa­nies in China were worth $31 bil­lion (sim­i­lar to the top three coun­tries — Ger­many, the UK and Canada).

If you look at the av­er­age sales of per dol­lar of in­vest­ment (equiv­a­lent to av­er­age re­turn of in­vest­ment in eco­nom­ics), the US com­pa­nies in China are most suc­cess­ful — com­pared with all those economies fa­vored by the US pub­lic and of­fi­cials — with 1 dol­lar of in­vest­ment gen­er­at­ing up to $4.7 in sales in 2014 and $4.2 in 2015. The cor­re­spond­ing fig­ure for the UK was only $0.99, Canada $1.6, Ire­land $1.1 and Lux­em­bourg $0.12.

Now let us look at the prof­itabil­ity rank­ing of the US com­pa­nies in China rel­a­tive to other lo­ca­tions. Tak­ing net in­come from each dol­lar in­vested as a mea­sure of prof­itabil­ity, in 2014 the US com­pa­nies en­joyed the high­est prof­itabil­ity in Ire­land for their in­vest­ment — each dol­lar in­vested could gen­er­ate $0.42 in profit. And sec­ond on the list was China, with a rate of re­turn at $0.35 per dol­lar in­vested — sig­nif­i­cantly higher than Canada at $0.19, the UK at $0.13, the Nether­lands at $0.20 and Ja­pan at $0.19.

And what about the ef­fec­tive­ness of value added and in­vest­ment in­come gen­er­ated by the US com­pa­nies for each in­vested dol­lar? The US com­pa­nies gen­er­ated an av­er­age of $0.92 value added for each dol­lar in­vested in China, while the av­er­age of seven ma­jor economies — Canada, the UK, Ire­land, the Nether­lands, Ger­many, France and Ja­pan — was only $0.41.

Be­sides, the US com­pa­nies re­ceived the high­est in­vest­ment in­come from each dol­lar in­vested in China in 2014 — an av­er­age of $0.15, that is, 200 per­cent more than that in Ger­many and 67 per­cent more than in Ja­pan.

What about R&D ac­tiv­i­ties? The lat­est fig­ures show that an av­er­age of $0.08 for each in­vested dol­lar was used for R&D ac­tiv­i­ties in Ger­many, while the cor­re­spond­ing fig­ure for China was $0.04. Com­par­ing these num­bers with those in other fa­vored economies, we see a strik­ing dif­fer­ence. In the UK and the Nether­lands, only $0.01 and $0.002 of each in­vested dol­lar was com­mit­ted to R&D ac­tiv­i­ties, while in Lux­em­bourg, one of the most fa­vored economies for US di­rect in­vest­ment, an av­er­age of $0.0004 of each in­vested dol­lar was al­lo­cated to R&D ac­tiv­i­ties.

Two main con­clu­sions can be drawn from these facts. First, the US com­pa­nies op­er­at­ing in China have per­formed bet­ter than in those economies fa­vored by the US of­fi­cials and pub­lic. In terms of sales, net in­come, value added, in­vest­ment in­come and R&D ac­tiv­i­ties, the out­stand­ing per­for­mance of the US com­pa­nies in China give the lie to the ac­cu­sa­tions of some US of­fi­cials that China’s so-called un­fair prac­tices have in­flicted sub­stan­tial dam­age to US busi­ness in­ter­ests, and there­fore tar­iffs on $50 bil­lion of Chi­nese im­ports should be im­posed.

Sec­ond, with its mar­ket size and vast pool of skilled la­bor, China is a mar­ket char­ac­ter­ized by a high rate of re­turn for in­vest­ment. China’s mar­ket is a boon rather a curse for the US in­vestors as it pro­vides highly prof­itable op­por­tu­ni­ties for the US com­pa­nies.

To quote Adam Smith from The Wealth of Na­tions: “Man is an an­i­mal that makes bar­gains: no other an­i­mal does this — no dog ex­changes bones with an­other.” And therein lies the an­swer to the US rid­dle.


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