Expanded China-U.S. Trade Is Beneficial to Both Countries
Since China implemented its reform and opening up in the late 1970s, trade exchanges between China and the U. S. have become increasingly frequent. As the two largest economies in the world, trade between China and the U. S. not only benefits people from the two countries, but also serves as the momentum driving the world’s economic growth.
However, since U.S. President Donald Trump took office in January, he has issued a series of executive orders, on issues including limiting the number of immigrants and refugees arriving in the U.S. from some Muslim-majority countries, building a U.s.-mexico border wall, withdrawing the U.S. from the Trans-pacific Partnership (TPP), issuing tax cut plans, increasing fiscal investments, and implementing trade protectionist policies such as import restrictions and a border tax. These moves have generated widespread worry about a possible trade war between China and the U.S.
Slow Growth of the U.S. Economy and the Strong U.S. Dollar
The slow recovery of the U. S. economy and the strong U. S. dollar will increase the possibility of trade frictions between China and the U. S. According to research on China-u. S. trade frictions and U. S. GDP, as well as the U. S. dollar exchange rates, for the past two decades, there is an evident negative correlation between the U. S. GDP growth rate and the number of anti-dumping measures the U. S. has launched against China. Every one-percent decrease in the U. S. GDP growth rate leads to a 0.15-percent increase in the number of U. S. anti-dumping measures towards China. Besides, a positive correlation can be found between the actual exchange rate fluctuation of the yuan and the U. S. dollar and the number of anti-dumping investigations that the U. S. launched against China. Devaluation of the yuan against the U. S. dollar largely increases U. S. anti-dumping investigations against China.
In terms of U. S. GDP growth, although a number of favorable factors for economic recovery, such as manufacturing revival and employment growth, have emerged, the U. S. economic growth rate in 2016 slowed to 1.6 percent, far below the 2.6 percent seen in 2015. According to forecasts from authoritative organizations including the International Monetary Fund, the World Bank, and the Federal Reserve System, the 2017 GDP growth rate of the U. S. will not surpass 2.3 percent, even with the proactive fiscal policy advocated by the Trump administration. This growth rate is far below 4 percent, a GDP growth goal proposed by the Trump administration to “bring back jobs and growth.”
In terms of the exchange rates of the U. S. dollar, according to the Federal Reserve’s rate-setting meeting in December 2016, the Fed will probably raise interest rates three times in 2017. Considering U. S. economic growth and its employment competitiveness, the Fed will possibly not raise interest rates in the first half of 2017, as it did in 2016. However, the increased expectation for U. S. inflation will put more pressure on the Fed to raise interest rates. It is expected that the Fed will raise interest rates two or three times in 2017 and a strengthening of the U. S. dollar will become increasingly possible. Compared with a strong U. S. dollar, it is likely that the yuan will devalue.
Thus, in view of their relations with U.S. economic growth and exchange rates of the U.S. dollar, China-u.s. trade frictions will probably witness a marked increase in 2017, because the U.S. 2017 GDP growth rate will be far below the projected goal of four percent, and a strong U.S. dollar caused by the Fed’s measures to raise interest rates will put more pressure on U.S. exports and employment.
China-u.s. Trade Frictions Are Rooted in the U.S. Ignoring WTO Rules
Since the 2008 global financial crisis, trade protectionism has been gradually rising in the U. S. The Obama administration launched the National Export Initiatives, aiming to remove trade barriers abroad for American export enterprises. The Trump administration has also adopted policies to stimulate America’s manufacturing, reduce costs for enterprises, and increase employment. According to the Agreement on Subsidies and Countervailing Measures under the WTO framework, the definition of the term “subsidy” contains three basic elements: (i) a financial contribution (ii) by a government or any public body within the territory of a Member (iii) which provides a benefit specifically to an enterprise or industry or group of enterprises or industries. This kind of specific subsidy is subject to countervailing measures. Quite a few American industrial policies, especially those on cutting costs and getting bank loans, have violated the agreement.
Trump’s tax plan contains a new border adjustment tax proposal. Trump believes that while an individual income tax system is used in the U. S., a value added tax system is used in many other countries, which has provided an unfair preferential tax rate of 15 to 25 percent to countries exporting to the U. S. To make up for America’s trade loss, improve its trade environment, substantially reduce the U. S trade deficit, and bring back U. S. manufacturing, the new proposal aims for a 20-percent border tax on imported goods to the U. S. and at the same time, tax exemption for U. S. exports. This tariff policy, which acts totally differently on imports and exports, violates the most-favored-nation treatment principle within the WTO framework.
The Office of the U. S. Trade Representative has recently released the 2017 Trade Policy Agenda. While the document states that the U. S. will keep its identity as a WTO member, it emphasizes that the U. S. will not abide by the WTO rules all the time. It is fair to say that the major reason for China-u. S. trade frictions lies in the U. S. placing its own interests above international rules.
U.S. Economic Recovery and Employment Growth Cannot Be Achieved without China
Unemployment problems in the U. S. have little to do with China-u. S. trade. Looking at the China-u. S. bilateral trade structure, the U. S. mainly exports capital-intensive and technology-intensive products to China, while China mainly exports labor-intensive products to the U. S. In general, the bilateral trade structure is of a complementary type. Since the 2008 worldwide financial crisis, U. S. GDP growth has gradually slipped to its lowest rate since World War II. Due to high labor costs, many labor-intensive industries such as textiles in the U. S. have gradually shifted to a number of Asian countries, resulting in the disappearance of some low-end jobs. The Obama administration advocated replacing human workers with smart factories in high-end manufacturing, which failed to boost demand for a low-end labor force and led to an even more alarming structural unemployment situation in the U. S. On the contrary, China-u. S. trade eases the U. S. employment situation. According to the U. S.- China Business Council, China-u. S. trade has created 2.6 million jobs for the U. S., and Chinese enterprises operating in the U. S. have created nearly 100,000 local jobs.
China and the U. S. have even more room for cooperation on infrastructure investment. For a long time, a massive budget deficit and current-account deficit, and huge individual consumption, have been the major drivers for U. S. economic growth. Now, the Trump administration is trying to change this development pattern. Through tax cuts of US$137 billion and government input of US$550 billion, the Trump administration hopes to encourage more private sector participation in infrastructure investment, so as to improve the U. S. transit network and benefit local enterprises. However, recent news has shown that President Trump is considering postponing the infrastructure construction plan until 2018, because government revenue currently cannot cover this massive spending plan. At present, China is quite competitive in terms of infrastructure financing capacity and construction efficiency, and has accumulated abundant experience in railway and highway construction, which are exactly what Trump needs in order to carry out his infrastructure construction plan.
The U. S. has obtained more development opportunities in its service trade with China. China is an international trade power not only in goods, but also in services. The country is an important export market for U. S. services. By now, the China-u. S. service trade volume has exceeded US$100 billion, accounting for six percent of the total volume of U. S. service trade exports. Since 2002, the U. S. has been witnessing a favorable balance of service trade towards China, although China enjoys a large favorable balance of goods trade towards the U. S. Besides, the U. S. deficit of goods trade towards China is directly related to its export control on advanced technologies. Frequently using national security as an excuse, the U. S. has forbidden the exporting of advanced technologies and equipment to China. The transport services and intellectual-property-based services trades, which have taken up a large proportion of the U. S.’ favorable balance in its service trade with China, are closely related to the goods trade between the two countries.
In conclusion, the space for China-u. S. cooperation in the economic and trade fields is quite extensive. Expanding trade and economic cooperation with China will be conducive to U. S. economic recovery and employment growth.