China Daily Global Edition (USA)
US TARIFFS THREATEN ECONOMIC INTERDEPENDENCE
Trade row forces Chinese importers to look to South America
The Peak Pegasus, a bulk cargo ship carrying 70,000 metric tons of US-grown soybeans, was closely watched by millions of people on Sina Weibo on July 6 as it raced to the Chinese port of Dalian before China’s 25 percent retaliatory tariffs took effect that day.
It failed to meet the deadline. The ship then remained at sea for a month, at a cost of $12,500 a day, before finally docking at the port in Liaoning province on Aug 11 and unloading its cargo the next morning.
Bringing in the shipment of soybeans worth more than $20 million incurred additional tariffs of about $6 million.
On July 6, China placed extra tariffs on $34 billion worth of US exports, including soybeans, in response to US President Donald Trump’s decision to slap 25 percent punitive tariffs on $34 billion worth of Chinese exports to the US the same day.
US tariffs on another $16 bil- lion worth of Chinese exports are due to take effect on Thursday, and China has promised to respond in kind.
Trump has also threatened to impose new tariffs on all $505 billion worth of Chinese exports to the US.
China is the world’s largest soybean importer and about 60 percent of US soybean exports go to the country. The US is the second-largest soybean exporter to China after Brazil. Last year, China bought $12.7 billion worth of US soybeans, mainly to produce cooking oil and animal feed.
The trade dispute has forced more Chinese importers to increasingly turn to exporters in South America, including Brazil, Argentina and Uruguay.
“As the largest importer of US soybeans, China is a vital and robust market we cannot afford to lose,” Davie Stephens, vice-president of the American Soybean Association and a Kentucky soybean grower, said in a statement in response to Trump’s tariffs.
Stephens said soy growers and the rural community will see the effects of the trade dispute for years to come.
Statistics from the US Department of Agriculture show that China is the largest export market for US agricultural products. Total US agricultural shipments to the country reached $23.8 billion last year, accounting for 17 percent of the US total.
With exports increasing by 700 percent from 2000 to 2017, the fastrising living standards in China and the switch to a consumption-based economy were an attractive proposition for US farmers and ranchers — a prospect now endangered by the tit-for-tat tariffs.
On Aug 9, Han Jun, vice-minister of agriculture and rural affairs, described China and the US as “strongly complementary in agricultural trade”, but he warned that Trump’s trade war may force China to look for alternative partners, and once that is done, US farmers may find it hard to regain their market share in China.
China-US economic interdependence stretches far beyond agriculture to almost every sector of the economy.
Last year, Boeing forecast that Chinese airlines would buy 7,240 commercial jets worth $1.1 trillion in the next two decades.
China has announced retaliatory tariffs on small planes, not on large Boeing jets. But as the trade war escalates, such immunity may not last. A deteriorating trade relationship between the two countries could spell opportunities for Airbus, Boeing’s major rival in the Chinese market.
China is Boeing’s largest commercial market, with one in four planes delivered to Chinese customers. The International Air Transport Association has predicted that by 2024, China will replace the US as the world’s largest aviation market by passenger numbers.
China and the US have seen their economies become increasingly interdependent since the late 1970s when China began its reform and opening-up drive. A rapidly growing export-oriented economy, fueled partly by foreign direct investment, has provided cheap Chinese exports to US consumers.
General Motors sold more than 4 million vehicles in China last year, more than the 3 million it sold in the US.
China’s accession to the World Trade Organization in 2001 accelerated its integration with the world economy, making the country a vital part of global supply chains, including for many US companies.
By the end of last year, the cumulative value of US foreign direct investment transactions in China had passed $256 billion, and the cumulative value of Chinese FDI in the US, a relatively recent phenomenon, reached $140 billion, according to the Rhodium Group in New York, which tracks two-way investment.
Bilateral trade in goods between the two countries has expanded more than 200-fold since 1979, reaching $636 billion last year, with a $375 billion surplus in China’s favor. But the US ran a $38.5 billion surplus in services trade with China in 2017, and that figure is expected to rise rapidly as China further opens up its financial services sector.
A study by Oxford Economics last year found that China-US trade supports 2.6 million jobs in the US, and trade with China saves an average family in the US $850 a year.
Historian Niall Ferguson and economist Moritz Schularick have used “Chimerica” to describe the two economies, due to their close links.
Stephen Roach, a senior fellow at Yale University’s Jackson Institute for Global Affairs, said the ChinaUS relationship remains heavily co-dependent. China needs US consumers and businesses to support the external demand that underpins the world’s most powerful export machine.
The US depends on China to provide low-cost imports that enable income-constrained consumers to make ends meet. It also relies on China as its third-largest and most rapidly growing export market as well as being a major lender of its surplus savings to help fund its large and growing government budget deficit, according to Roach, a former chairman of Morgan Stanley Asia and former chief economist at Morgan Stanley.
Savings problem
“Over time, I suspect that this co-dependency will diminish as Chinese rebalancing shifts the structure of demand away from exports toward internal private consumption,” he said.
Roach said that as China then shifts from surplus savings to savings absorption, it will have less excess savings to lend to the US — a potentially problematic outcome in light of a savings problem in the US that is likely to go from bad to worse as federal budget deficits expand sharply in the years ahead.
“This ‘asymmetrical rebalancing’ — with China saving less and the US squandering the opportunity to rebuild savings — was always the greatest risk of codependency,” said Roach, author of the 2014 book Unbalanced: The Codependency of America and China.
China’s economic rebalancing started after the global financial crisis in 2008 to avoid the so-called middle-income trap and to shift its economy from a model driven by exports and debt-fueled investment to a more sustainable model driven by domestic consumption, innovation and moving up the global supply chain.
This has been a remarkable success as the consumption, services and technology sectors have become new engines for China’s economic growth.
A report by consultants McKinsey in May said that from high-tech unicorns to specialty chemicals, China’s economy is moving swiftly beyond its lower-margin roots. (Unicorn is a term used to denote a startup company whose valuation exceeds $1 billion).
The report said China’s e-commerce market has come from almost nowhere to become the largest in the world, accounting for more than 40 percent of global transactions in the sector. China’s mobile payments are 11 times the value of those in the US thanks to consumers’ early embrace of the technology.
China has also impressed the world with its rapid infrastructure development, from high-speed railways to airports, bridges, highways and subway systems.
The rapid progress has made China not only a trade partner but also increasingly a competitor to the US and other advanced economies. The growing economic relationship has also resulted in more friction.
For years, China and the US engaged in dialogue, such as the annual Strategic & Economic Dialogue and the Joint Commission on Commerce and Trade, to address each other’s concerns, from government subsidies and intellectual property rights protection to restrictions on high-tech exports and investment.
Trump, however, has torn up that script. Instead of engaging in dialogue, he has initiated and threatened tariffs on China and the rest of the world, including using the outdated Section 301 of the US Trade Act of 1974 — which authorizes the president to take action, including retaliation, against foreign governments in certain cases — and national security as excuses.
Simon Lester, a researcher at the Cato Institute who worked as a legal affairs officer at the Appellate Body Secretariat of the World Trade Organization, said the US will lose any case against the Section 301 tariffs, but litigation might take years.
“I think he (Trump) genuinely believes that bilateral trade deficits are bad. He is not the only one. He is just the loudest voice,” Lester said.
Henry Levine, a senior adviser at consulting firm Albright Stonebridge Group and former US deputy assistant secretary of commerce, said Trump’s decision to impose punitive tariffs on China reflects two of his deeply held, long-term beliefs. These are that trade is a zero-sum game and that other countries have for decades been taking advantage of the US by running trade surpluses with it and depending on it for security guarantees without paying their fair share.
Most economists disagree with Trump’s view on trade deficits, and Lester said he could line up 1,000 economists to explain why it is misguided. The US has been running a trade deficit every year since 1976, a deficit caused largely by US fiscal policy, the low domestic savings rate and the role of the dollar as a global reserve currency.
The country’s trade deficit with China is misleading to the public, as China has become a multinational assembly line. The often-cited example is the iPhone, which has components from around the world. China adds about $10 in labor costs, but this is calculated as more than $300 in Chinese exports by US Customs.
This saw the iPhone alone contribute $15.7 billion, or 4.4 percent, of the US trade deficit with China last year, according to a Reuters report.
Such complicated global supply chains led Mary Lovely, an economist at the Peterson Institute for International Economics, to conclude that Trump’s Section 301 tariffs against China actually disadvantage US producers and harm US allies in East Asia.
David Dollar, a senior fellow at the Brookings Institution and a former US Treasury emissary in Beijing, echoed the view, saying, “As the US imposes tariffs (on China), half of that pain will be felt by other countries”. He added that the collateral damage will include US firms that produce and operate in China.
Trump has always blamed China for the loss of US jobs, but most economists believe that it is automation, rather than China or Mexico, that are responsible for US job losses.
Under the administration of Barack Obama, Beijing and Washington engaged in negotiations for a Bilateral Investment Treaty, which was expected to help increase their economic interdependence in the 21st century.
About 150,000 US jobs are now supported by Chinese investment, according to the Rhodium Group.
The Bilateral Investment Treaty talks have stalled under the Trump administration despite the business community’s argument that it is one of the Trump-favored bilateral deals that is good for the US.
The Trump administration has supported tighter restrictions on Chinese investment in the US, especially in the technology sector. The Foreign Investment Risk Review Modernization Act, or FIRRMA, which passed both chambers of Congress, was signed by Trump on Aug 13 as part of the National Defense Authorization Act.
While FIRRMA does not claim to specifically target Chinese investment, Chinese FDI in the tech sector is expected to face the toughest scrutiny under the new law.
Economic benefits
The US National Security Strategy released in December labeled China, along with Russia, as a revisionist power and strategic competitor to the US.
Gary Hufbauer, a nonresident senior fellow at the Peterson Institute, said analysis by himself and his colleagues shows that economic interdependence has been very beneficial for the US. But he said that as long as Trump is president, there will be less interdependence of trade and investment.
“This is highly regrettable, and will cost both countries in terms of innovation and economic performance,” said Hufbauer, a former deputy assistant secretary for international trade and investment policy at the US Treasury Department.
In 2014, Hufbauer and his colleagues Fred Bergsten and Sean Miner coauthored the book Bridging the Pacific: Toward Free Trade and Investment Between China and the United States, in which they argue that both countries will benefit enormously from free-trade and investment accords.
Douglas Paal, vice-president for studies at the Carnegie Endowment for International Peace, said the goal of many in the US administration and Congress is to reduce or even try to eliminate economic interdependency.
“It’s called ‘delinking’ the two economies. I don’t think either government realizes what the price of this might be,” Paal said.
In recent articles, Roach, from Yale University, has refuted US attacks on China’s industrial policy, arguing that many industrialized nations have, or had, such policies.
He also dismissed the notion that foreign companies are forced to transfer their intellectual property rights in forming joint ventures in China.
“Yes, as we joined with our partners in creating China’s first investment bank, we shared our business practices, proprietary products and distribution systems. Yet, contrary to the assertions of the USTR (US Trade Representative), we were hardly forced into these arrangements,” he said, citing his experience of forming Morgan Stanley’s joint venture with China Construction Bank to establish China International Capital Corp in 1995.
Roach said the two governments should cease and desist on tariffs. “Tariffs are bad — there is no such thing as a good trade war,” he said, rebutting a Trump tweet earlier that said “a trade war is good and easy to win”.
Roach said the two countries should focus on building a more robust WTO framework to handle trade disputes within the structure of the rules-based system that both have long supported.
He warned that over time, there is a risk that perception becomes reality — that the US starts to believe that China is stealing proprietary technologies, and China believes that the US is attempting to contain its peaceful rise.
“The longer the current dispute festers, the greater the chance those beliefs become deeply ingrained in the collective conscience of both nations. The urgency to resolve the current tensions cannot be emphasized enough,” Roach said.