Article Type : Research Article
Authors : Puslecki ZW
Keywords : USA; China; Protectionism; International business; Supply chains; Trade war
The main aim of this paper is presentation the
increase of protectionism between the United States and China and modern
international business. The main objective of the research task is to give a
comprehensive analysis of current trends in foreign trade theory and policy and
in particularly the models of foreign trade policy, trade interests indicated
by export orientation and import sensitivity, protectionist pressures in
different political system, the level of protectionist pressures, new
tendencies in international business, reasons for the USA to implement tariff
sanctions. China will be significantly hurt by tariff trade war in all
indicators, including welfare, gross domestic product (GDP), manufacturing
employment and trade. However, it is pointed out that although there will be
definite impacts on China, the costs should be maintainable and will not
severely damage the Chinese economy. In regard to the United States, the
simulation produced results that described, the US will gain on welfare, GDP
and non-manufacturing production, but hurt employment and trade.
Both structural and
micro-political economy analyses of foreign trade policy have missed the impact
of changing ideas about protectionism and relatively unchanging institutions
designed to handle domestic producer complaints. The political consensus on the
supply of the trade policy and protectionism has changed over the time. During
economic depression protectionism played important roles in the politics of
political parties and increased the importance of bilateral agreements and
regional agreements. This point of view is very important for the theory and
practice of the contemporary international business also between USA and China.
The necessity for companies to organize their supply chains across different
countries has led to a demand for the regional agreements that cover more than
preferential tariffs. The harmonization of standards and rules on investment,
intellectual property and services has become a standard part of new trade
agreements. The differences among companies which are involved in trade are
also important for the future development. The concept that arises from the
trade is that even if many companies are indirectly involved into the
trade-related activities, only relatively few of them are exporting or
importing. Accordingly, these companies tend to be larger and more productive
than others. Such companies also have a role in technology advancement and the
diffusion of know-how through supply chains. It should be emphasised also that
free trade in itself is not responsible for economic growth, but more
significant are the determining macroeconomic stability and increasing
investment. The international trade in the XXI century has been strongly
affected by the force of the domestic interests like in the USA under President
Donald Trump’s administration with the principle America First. The changes are
visible in the growing importance of international trade to national economies
and domestic groups within those economies, in the closer linkages between
trade and other international issues. Realistic point of view is the essential
trends in the global trade regime during this time. The growing interdependence
has led to increased competitiveness and greater inclinations to resort to
strategic trade policy.
The main objective of the
research task is to give a comprehensive analysis of the potential implications
increase of protectionism between the United States and China for international
business. China will be significantly hurt by tariff trade war in all
indicators, including welfare, gross domestic product (GDP), manufacturing
employment and trade. However, it is pointed out that although there will be
definite impacts on China, the costs should be maintainable and will not
severely damage the Chinese economy. In regard to the United States, the
simulation produced results that described, the US will gain on welfare, GDP
and non- manufacturing production, but hurt employment and trade. The analysis
problems were solved with the use of both quantitative and qualitative research
methods. The main research method applied in this analysis, was a method of
scientific study used for splitting the whole (of individual items, their sets,
phenomena) by means of logical abstraction. It was also used the analogy
(comparative) method, which consists in finding similarities and differences
between the items under study, the documentation method and statistical
methods. It were applied the descriptive method, as well as methods of
descriptive statistics and forecasting. Additionally, it were used the methods
of deductive and inductive forecasting.
What indicates the
importance and innovativeness of the research is presentation the potential
implications increase of protectionism between the United States and China for
international business. First of all it must underline that in the new
theoretical terms in the demand for trade policy very important is factor
specificity. Some factors are stuck in their present uses; therefore, factor
returns are not equalized throughout a region’s economy, but are industry
specific. Trade policy coalitions should form along the lines of exporting
versus import-competing industries. It must be emphasis that on a theoretical
level, understanding the choice of trade policies between liberalism and
protectionism is very important. Question is how can we recognize the type of
power, the type of rule? First of all, we should investigate what level of
resources a given government is going to achieve. If an authoritarian
government is more or less corrupted than a democratic one, it will be creating
the income, to a bigger or lesser degree, through protectionism. It will also
appropriate some part of that income. Secondly, a given type of government may
remain under the influence of different pressure groups. If an authoritarian
government is trying, to some extent, to subordinate special pressure groups
including the regulated labor sector, it will be, to some extent, generating
incomes through protection and it will be turning over some part of them to
those special pressure groups. It should be pointed out that there exists a
close relation between democracy and an economic growth, There are well known
examples of open societies that stimulate the economic growth. This is true
mainly in case of highly developed and strongly urbanized countries. In the
countries with a developed democracy, the pressure groups have a bigger
opportunity for acting. The research shows that the presence of trade unions
helps to accelerate the economic reforms. The benefits resulting from
liberalization of the international trade are bigger when the trade unions
exist in the sector of the economy under protection. The growth of import
abilities leads to the decrease of wage pressures, and when the trade unions agree
to that, such a situation allows for a better allocation of labor force in the
economy. This is true both in the case of active and passive trade unions,
although the effects are better in case of active trade unions. The growing
interdependence have led to increased competitiveness and greater temptations
to resort to strategic trade policy. Trade policy takes on additional
importance in economic battle of the valiant liberal reformers, fighting
against self-dealing rent seekers profiting from inconsistencies of the
transition economy. Many of the client policies that shelter rent seekers are
impossible to maintain in the face of competition in the international
business. On the other hand, high tariff walls, export licensing, and
artificial exchange rates provide numerous sources of rents for business people
who are trying to promote their own loyalties. The reduction or the elimination
of trade restrictions stimulates significantly the growth of the world trade
exchange, while the foreign trade, in turn, is an important factor of the
economic growth of individual countries. However it should be stressed that
free trade in itself is not responsible for economic growth, but more
significant are the determining macroeconomic stability and increasing investment.
It must be underline that if trade during the rise of global supply chains is
perceived by a majority of voters as causing unemployment and/or increasing
inequality, governments could refrain from pursuing further trade opening and
may even be tempted by protectionism. Another possibility would be for
governments to use more intensively public policies for protectionist purposes.
With regard to trade negotiations, focusing exclusively on the efficiency
effect of trade opening may no longer be possible. Distribution and
labor-market effects will also need to be considered and accompanying measures
may need to be proposed in order to win the support of a majority of voters for
open trade by bilateral agreement especially in the conditions of the rise a global
supply chains. During the rise of global supply chains the development of
various firm models has made it possible to explore the effects of differences
in firms on the political economy of trade. It must be underline that trade
opening has two opposing effects on domestic firms within the same industry.
First, the cost of exporting decreases, which allows more firms to export and
increases the sales of established exporters. Secondly, competition increases,
which harms domestic firms. Which of these channels dominates for an individual
firm depends on firm characteristics, such as size. As a result, lobbying
competition arises not only between sectors but also within sectors in which
some firms benefit and some lose due to trade. This effect might especially
arise in the context of fixed costs because they rise entry costs and thereby
shield existing producers or exporters from competition.
Current
trends in the international business and global politics provide evidence that
emerging markets have now arrived at the world economy, at last, bringing with
it new patterns of uneven development, inequality and injustice. Its newly
confident elites, now fully engaged in global circuits of trade, investment and
finance, and in global governance too, appear to have left behind their
previous role. It is clear that emerging economies have suffered less and
recovered more quickly. Besides, it now seems that the patterns of political
impact not in the sense of immediate crisis measures but of long-term huge
shifts may be equally significant and unexpected.
Traditionally, political economy models of trade
policy have tenden to focus on the demand for protection, with factor
endowments driving political reactions to exposure to international trade. Such
model simply assumed that adversely affected economic agents would organize to
seek protection, which would be afforded to them by their elected
representatives in the political system. The supply side for trade policy was
either ignored or underspecified in most model [1]. In the new model of the
foreign trade policy theory interesting are the reviews about the demand for trade
policy in terms of the theoretical importance of factor specificity [2-6].
Factor specificity refers to the ease with which factors (land, labour, and
capital) can move from one sector to another in an economy. The two dominant
approaches to explaining the demand side of trade policy used radically
different assumptions about the specificity of factors. The Heckscher-Ohlin
model, used in his seminal contribution “Commers and Coalitions”, assumes very
low-factor specificity [7-10]. The low specificity of factors means that factor
returns are equalized throughout a region’s economy. Producers should export
goods that intensively use their abundant factors and import goods that
intensively use their scarce factors, with the result that owners of abundant
factors will favour free trade and owners of scarce factors will favour
protectionism. Trade policy coalitions will therefore be organized along factor
or class lines. On the other hand, the Ricardo-Viner assumes that some factors
are stuck in their present uses; therefore, factor returns are not equalized
throughout a region’s economy, but are industry specific. Trade policy
coalitions should form along the lines of exporting versus import-competing
industries. Neither of these models explains how preferences over trade
policies are actually translated into political action. In a discussion of the
endogenous tariff literature, notes that the mobility costs of the
specific-factors model may be a result of productivity differentials, labour
union activity, or individual preferences for membership in a given
geographical area, industry, or firm (i.e., some form of solidarity). In all of
these cases, one can derive a link to preferences for tariff policy, “but
without additional information on why the specific-factor model is chosen, it
does not tell us much about political organisation”. One can begin to
understand this process by assuming that rational individuals make cost/benefit
calculations. The Heckscher-Ohlin and Ricardo-Viner models tell us the benefits
that individuals hope to receive, but the costs of collective action also
intervene as they organize to achieve those benefits in the political system.
Argued that small groups with specialized interests are easier to organize and
more effective in securing economic rents than large groups with diffuse
interests [11,12]. Small groups are better able to control free riders than
large groups, and groups with specific or homogenous interests can more easily
coordinate and target their activities than groups with diffuse or heterogenous
interests [13-26]. This approach is thought to explain the success of
agricultural producer groups in developed countries in organizing for
protection as well as the inability of agricultural producer group to organize
in developing countries [27-29]. However, points out that we should not assume
that organized interests will be equally responsive to all issues.
Institutionalized interaction among actors may help to explain systematic
patterns of action, especially as institutions created for specific historical
purposes may outlive those purposes. Suggest that if a particular group has
paid the fixed costs of establishing collective action and developed well-worn
channels of access to public officials, it may defend its trade policy preferences
even when the stakes are low because the marginal costs of action are low [30].
It may be the case that “a much more affected but inchoate group does nothing
because the start-up costs of organization are too daunting”. Past strength of
an organization should therefore be an important intervening variable
predicting group action on trade policy. Further, argues, once these
institutions exist, supply-side interventions may also affect their usefulness
as some are deemed legitimate or illegitimate aggregators of interest. Thus, we
must examine the way in which economic institutions and political institutions
interact. Most economic models simply assume that a model of the economy is a
model of the demand side for trade policy, suggests that we must elaborate the
mechanism by which demand is articulated to the suppliers of trade policy. For
a good overview of this argument, especially as it pertains to agriculture. If
the political systems rewards small sectoral groups, than individuals will not
pay the costs of organizing large intersectoral coalitions. If the political
system rewards large mass movements (i.e., majoritarianism), than individuals
will have to pay the costs of organizing large intersectoral coalitions in
order to achieve any benefits. Collective action costs and political
institutions are interactive with factor specify. They suggest that
Heckscher-Ohlin framework requires low factor specify, low collective action
costs, and domestic political institutions that favour mass movements. The
Ricardo-Viner framework used by the endogenous tariff literature requires that
factors are specific, collection action costs are high, and institutions are
less majoritarian, with changes in any of these three variables also affecting
the type of coalitions that form. In the state as a rational dictator model,
the state may be seen as either pursuing “good government” goals along a social
welfare function or intervening in the economy for their own self- interested
model of the state views politicians as offering preferential trade policy to
economic actors in exchange for political support [31,32]. On the other hand,
pluralist theory typically view the state as a neutral aggregator of demands
from groups in society. The supply of trade policy is then determined by the
balance of power on any given issue. The supply side of trade policy is
relatively undeveloped theoretically, and yet a crucial part of the equation. A
variety of different characteristics of the political system are posited to
affect the supply of trade protectionism, such as politicians incentives to
cultivate personal votes, the size of electoral districts, party fragmentation,
federalism, presidential versus parliamentary systems, and so on. On a
theoretical level, understanding the choice of trade policies in countries is
very important. A survey of economists in 1984 suggested that one of the few
things they agreed on was that, under most conditions, tariffs, and quotas
reduce the general welfare. The stubbornness of protectionism in the face of
international and academic pressure against it has led economists to seek
explanations. These explanations range from the simple ignorance of politicians
to arguments about the rationality of protection for “infant industries” and
“optimal tariff levels” in developing states. Faced either this frustrating
question, scholars have increasingly turned to political answers in order to
explain the choice of what would seem to be an “irrational” policy [33].
It is important to
indicate, that the role of trade unions in different political systems may be,
to a high degree, different. In authoritarian systems it is, as a rule, smaller
than in democratic systems. It would seem that if protectionist pressure on the
part of trade unions is weaker, the situation for economic growth is much
better. Following that line of reasoning we could come to conclusion that the
authoritarian system is better for the effectiveness of the labor market. The
examples of Chile, South Korea, Singapore and Turkiye from the seventies and
early eighties could confirm that point of view. In many cases during those two
decades the authoritarian regimes persecuted trade unions and put restrictions
on basic labor rights. During that period of oppression, South Korea, Singapore
and Turkiye experienced a spectacular growth in the sector of processing
industry and in the growth of demand for labor. Growing profits and the demand
for labor in a processing industry, caused a general growth of prosperity of
the employed. Although similar results were not noted immediately during the
authoritarian phase of development in Chile, a number of observers express the
opinion that the reforms introduced at that time helped to reorganize Chilean
economy in the nineties. The application of democratic rules, on the other
hand, may lead to lower productivity of labor force. In a number of years
different democracies had to use significant financial resources for the
employment of those who belonged to trade unions. A different point of view
says that government legislation concerning the labor market may be applied
more effectively in an authoritarian system than in a democratic one. The
authoritarian regimes often make use of individual interests of given circles.
In most democratic countries there is no broad enough basis that would allow to
use labor market policy for gaining the support from pressure groups, the
urbanized labor marked elite included. The major difference between
authoritarian and democratic regimes lies in the level of the outside
influence. In a well function democracy, the outside opinions are also taken
into account and there occur some limitations which come from the outside,
which restricts the achievements of given groups of interest. In a
dictatorship, a government cares only that those groups are not too strong.
There is, however, a number of democracies among the industrialized countries
where an effective labor market exists. There is also a number of democracies
with effective labor market policy among the developing countries. Similarly,
in the countries in which the transformation from the authoritarian regime
towards a democracy is taking place, avoiding unfavourable phenomena on a labor
market is often a priority. For example, the Chilean government moved towards
democracy and to free trade unions without home income growth. The end of
oppression in South Korea, in 1987, started the partnership relations in full
of conflicts industry [34]. It is worth considering which of the two points of
view presented above should be given support, that is, which of them is the
proper one. The analysis of that problem may be based on the Grossman and
Helpman model this model describes economic development on the basis of two
sectors - urbanized, regulated processing sector, and rural, unregulated
agricultural sector. The protection of the labor market, especially of minimum
wages, is usually applied in order to bring the benefits for the employees of
the regulated sector, since the sector of unregulated employees does not come
under the legislation concerning the labor market. The sector of regulated
employees, and also the owners, demand from the government that it leads an
economic policy that is favourable to them. The employed demand high minimum
wages, while capitalists demand high profits. Both groups demand the
restrictions on the degree of economy openness. In a closed economy, higher
market minimum wages and higher profits are usually connected with higher
prices for home consumers, and this is not easy when those consumers are free
to buy the substitutes in form of imported goods. Thus, incomes in an economy
may be created by protection and later divided among the employees of the
regulated sector and the capitalists, although sometimes the government itself
takes a part of those incomes [34]. A government conducting an economic policy
takes into account a number of factors. Firstly, it has to decide the degree of
obtaining the resources, that is, how much from those resources it wants to
obtain. Hence the importance of investments and of future economic growth, and
also of defining the possibilities for keeping the power it is currently
holding. Secondly, the government should define the scale of support from each
of the pressure groups that can influence the situation. The position and
importance of each group for the development of political processes should be
considered. For example, in the country where the regulated labor market is
divided, and politically weak, only the capitalists may have a deciding voice
in political processes. And the contrary also happens - in the societies where
the labor market is organized, it may play the important role in mobilizing
voters. How can we recognize the type of power, the type of rule? First of all,
we should investigate what level of resources a given government is going to
achieve. If an authoritarian government is more or less corrupted than a
democratic one, it will be creating the income, to a bigger or lesser degree,
through protectionism. It will also appropriate some part of that income.
Secondly, a given type of government may remain under the influence of
different pressure groups. If an authoritarian government is trying, to some
extent, to subordinate special pressure groups including the regulated labor
sector, it will be, to some extent, generating incomes through protection and
it will be turning over some part of them to those special pressure groups.
The above arguments show
that the policy is defined by political factors (including the type of the
government and the burdens resulting from obligations towards employees and
capitalists), and by economic factors (wages, prices, the structure of
production and consumption). On the basis of the present discussion, we can
present two equations, one pertaining to the level of protection, and the
second pertaining to the national economy and deformation of wages.
1)
2)
The level of protection (
Countries and producers
increasingly specialize in certain stages of production depending on their
particular comparative advantage [35,36]. It is importance and magnitude of
this development for foreign trade policy. It is also important to underline
that transport and energy costs, for instance, are reasons why supply chains
remain more regional than global. Increasing returns together with capital and
labor migration and transport costs into one model [37]. Model has become a
workhorse of economic geography and international trade. The model is too
complex to explain here but the reasons for that complexity are clear to see –
when everything becomes "endogenous" small initial differences can
make for big effects. To minimize transport costs, for example, firms want to
locate near consumers but consumers want to locate near work. Thus, there are
multiple equilibria and at a tipping point the location decisions of a single
firm or consumer can snowball into big effects. A related trend also is the new
form of regionalism that is sometimes referred as integration process
development [38]. It must be emphasized that openness to trade in China is
associated with higher incomes and growth and there are the need for new approaches
to trade cooperation in light of the forces that are currently re-shaping
international business. A major factor, was the even more remarkable
transformation of China, as market reforms opened up its economy to foreign
trade and investment, and unleashed an unprecedented growth dynamic that has
continued, with only minor slowdowns. In the new circumstances for the
development of the global economy and the global trade, People Republic of
China seems to be a production superpower, able to change the world trade and
influence on the rise of global supply chains. In many areas it possesses
comparative advantages. China may continue their development to specialize in
electronics and increasingly in services. It must be underline also the major
trend in international trade which is the rise of a number of emerging
economies and the associated increase in their shares in world trade.
Especially China but also India and Brazil have transformed the balance of
power in the multilateral trading system. Between 1980 and 2011, for example,
China’s share in world merchandise exports and imports increased tenfold,
making the country the largest exporter of the world [39]. The
industrialization and spectacular growth of emerging economies, together with
the fast expansion of services trade and of FDI, are inextricably related to
the next intensive growth of production. The focus here will be on how the rise
of global supply chains has had an impact on the political economy of trade and
countries motivations for bilateral cooperating on trade policies [40]. There
is both theory and evidence suggesting that participation in global supply
chains tends to strengthen anti-protectionist forces. The main impact, has been
on unilateral tariff reductions (mostly among developing countries) and the
proliferation of preferential trade agreements (PTAs) and bilateral investment
treaties [41]. A considerable amount of trade opening has thus taken place
outside the WTO. The internationalization of supply chains was very important
for fast economic development and industrialization of developing countries.
Before the emergence of supply chains – and the information and communication
technology (ICT) revolution that underpinned it – industrialization involved
building a strong industrial base often behind the protection of tariffs and
other NTMs [42]. The unbundling of global production made it possible for
countries to industrialize by joining international supply chains. This process
also changed the political economy of trade policy, creating in many developing
countries a strong incentive to undertake unilateral tariff reductions.
The US claims, that the Chinese state-owned enterprises with characteristic communist party's directed planned economy and crony capitalism princelings gain the most benefits in most activities including the Belt and Road Initiative and Made in China 2025. The US, Japan, Canada, Mexico, the EU countries do not recognize China as a market economy, alleging market distortions. Irwin Stelzer, the economist, states that China's centrally directed economy with its goal to preserve communist party control of the politics and economy is relevant to the US trade policy. Aaron Friedberg, the political scientist and the former White House national security officer has also said the communist party regime has expanded its use of state- directed, market-distorting, mercantilist policies, especially since 2008. The 2018 Congressional hearing “U.S. Tools to Address Chinese Market Distortions” discussed how “the Party leads everything” doctrine makes China’s economy hard for the trading rules to deal with and results in many US businesses bowing to pressure even though their decisions may jeopardize the future of their companies and the US economy as a whole. The structural problem of the Chinese Communist Party is the fundamental opposition to the free-market capitalism and fair competition and it is claimed by the US as the root of the US–China economic tensions. China is a totalitarian mercantilist regime in a state of an economic war with the West. Trade war by China against the United States has been going on for years”. China declared trade war on the US 18 years ago in control and command economies like China, a telephone call in the middle of the night from a monopoly commissar is all that it takes to get a business to do something. China is totalitarian regime and states China's unfair trade (Figure 1).
Figure 1: The rapidly increasing US trade imbalance with China.
The rapidly increasing US
trade imbalance with China policies are kind of economic aggression and a
direct result of its autocracy. The economic security is the national security
and discusses trade in a broader geopolitical arena.
President Trump in his 2018 U.N. speech stated
the following: “China's market distortions and the way they deal cannot be
tolerated”, while also saying “socialism or communism... produces suffering,
corruption... leads to expansion, incursion, and oppression. All nations of the
world should resist socialism and the misery that it brings to everyone”, which
was seen as also targeting China. The White House criticizes China's
market-distorting policies within China and around the globe. Both in the USTR
White House report and Congressional report, Vice President Mike Pence's in his
China-focused speech claims the forced installation of communist party
committees and communist board members in all companies, state-owned,
non-state-owned, and joint venture foreign companies, to implement its
policies, influence and even form veto power in hiring, selecting leadership,
and investment decision-making and can be inconsistent with market signals.
China has chosen economic aggression, which has in turn emboldened its growing
military. The administration’s demands challenge all the core elements of
China’s economic system and its links to the constitution of the communist
party. China claims, that for a long time the US government has brazenly
preached unilateralism, protectionism and economic hegemony, made false accusations
against many countries and regions, particularly towards China, intimidated
other countries through economic measures such as imposing tariffs, and
attempted to impose its own interests on China through extreme pressure. China
had stolen the US intellectual property and bullied its way into acquiring
critical US advances in technology. Tariffs aren’t an end goal, but an
important tool to end trade practices that kill American jobs and drive down
American pay. Many countries and companies have accused Chinese spies and
hackers of stealing technological and scientific secrets through the planting
of software bugs and by infiltrating to industries, institutions, and
universities. China was also accused it benefited itself from stealing foreign
designs, flouting of product copyrights and a two-speed patent system that
discriminates against foreign companies with unreasonably longer times. Chinese
intelligence service was accused of assisting Chinese companies by stealing
company secrets. Chinese hackers had consistently stolen trade secrets from the
US defense contractors. Chinese cyber theft of intellectual property is the
greatest transfer of wealth in history. Chinese spies have gone after private
defense contractors and subcontractors, national laboratories, public research
universities, think tanks and the American government itself. Chinese agents
have gone after the United States’ most significant weapons, such as the F-35
Lightning, the Aegis Combat System and the Patriot missile system; illegally exported
unmanned, underwater vehicles and thermal-imaging cameras; and stolen documents
related to the B-52 bomber, the Delta IV rocket, the F-15 fighter and even the
Space Shuttle. US opened a formal investigation into attacks on the
intellectual property of the US and its allies, which cost the US alone an
estimated $225–600 billion a year.
China and the United States are engaged in a trade war as each country continues to dispute tariffs placed on goods traded between them. The economic disputes occurred before China's entry to the World Trade Organization. In April 2018, the United States filed a request for consultation to the World Trade Organization in regard to concerns that China was violating intellectual property rights. In adding various tariffs, the US administration is relying partly on Section 301 of the Trade Act of 1974 to prevent what it calls unfair trade practices and theft of intellectual property. This gives the president the authority to unilaterally impose fines or other penalties on a trading partner if it is deemed to be unfairly harming the US business interests, especially if it violated international trade agreements. In August 2017, the US opened a formal investigation into attacks on the intellectual property of the US and its allies. The result is that the US believes Chinese laws undermine intellectual property rights by forcing foreign companies to engage in joint ventures with Chinese companies, which then gives the Chinese companies access and permission to use, improve, copy or steal foreign technologies. The US also raises concerns that China fails to recognize legitimate patents and copyrights, and discriminates against foreign imported technology, and that China has instituted numerous non- tariff barriers which have insulated sectors of the Chinese economy from international competition. Thus, the trade war is seen as largely focused on intellectual property in China, especially regarding technology. China’s technological progress is coming from terrific entrepreneurs who are getting the benefit of huge government investment in basic science. It’s coming from an educational system that’s privileging excellence, concentrating on science and technology. That’s where their leadership in some technologies is coming from, not from taking a stake in some US company. China declared that its attitude toward the protection of intellectual property rights is clear and firm, and it has continuously strengthened protection at the legislative, law enforcement and judicial levels, and achieved remarkable results. The US claims that China requires technology transfer through foreign direct investment (FDI) regime and required joint ventures: in many cases, technology transfers are effectively required by China's Foreign Direct Investment (FDI) regime, which closes off important sectors of the economy to foreign firms. In order to gain access to these sectors, China forces foreign companies to enter into joint ventures with Chinese entities they do not have any connection. A number of experts have focused on what they claim is China's “theft” of intellectual property, and that it forces the US companies that want to do business there into transferring its confidential technology and trade secrets before having access to their market. Although that kind of transfer is disallowed by the WTO, the negotiations are usually conducted in secret to avoid penalties. The Commission on the Theft of American Intellectual Property states just agreeing to manufacture in China opens yourself to theft or forced technology transfer. It requires the US response based on “strength and leverage”. In 2018 the American Chamber of Commerce in China learned that over half its members thought that “leakage of intellectual property” was an important concern when doing business there. Similarly, the EU Chamber of Commerce has also complained that European companies wanting access to the Chinese market often had to agree to transfer vital technology. China claims that the technical cooperation and other economic and trade cooperation between Chinese and foreign enterprises are completely based on the voluntary principle of contractual behaviour, and both companies have obtained practical benefits, and over the years, American companies in China have received huge returns through technology transfer and licensing, and are the biggest beneficiaries of technical cooperation. In June 2016, as presidential candidate, Donald Trump vowed to cancel international trade deals and go on an offensive against Chinese economic practices, describing his promise as a reaction against "a leadership class that worships globalism". Less than a year after he took office, the United States, European Union and Japan, agreed to work within the World Trade Organization (WTO) and other multilateral groups to eliminate unfair subsidies by countries, which create non-competitive conditions through state-owned enterprises, “forced” technology transfers and local content requirements. In April 2018, President Donald Trump denied that the dispute was actually a trade war, saying that war was lost many years ago by the foolish, or incompetent, people who represented the US. He added also that in the 2018 year USA have a trade deficit of $500 billion a year, with intellectual property (IP) theft of another $300 billion. And that US cannot let this continue (Figure 2).
Figure 2: US Trade Representative.
The US trade deficit (in
billions, goods and services) by country in 2017 In January 2018, President
Donald Trump underlined he wanted the United States to have a good relationship
with China, but insisted that it treat the United States fairly. In his State
of the Union Address a few weeks later, mentioned that America has also finally
turned the page on decades of unfair trade deals that sacrificed prosperity and
shipped away companies, jobs, and Nation’s wealth. The era of economic
surrender is over. From this time America expect trading relationships to be
fair and to be reciprocal. United States will work to fix bad trade deals and
negotiate new ones and US government will protect American workers and American
intellectual property, through strong enforcement of US trade rules. A number
of government and industry experts have offered their own rationales about why
the tariffs are, or are not, appropriate: John Ferriola, the CEO and President
of Nucor, America's largest steel producer and its largest metal recycler,
claimed that tariffs were not unfair, but were “simply levelling the playing
field”. He explained, that not only the European Union, but most countries in
the world, have a 25 percent or greater VAT, on products going into their
countries from the United States. So if the US impose a 25% tariff, all doing
is treating them exactly as they treat the US. Analyst Zachary Karabell claimed
that the administration's desire to reject long-standing trade consensus in
favour of a more nationalist approach will not succeed. A set of very public
and punitive tariffs will not reverse what has already been transferred and
will not do much to address the challenge of China today, which is no longer a
manufacturing neophyte. Peter Navarro, White House Office of Trade and
Manufacturing Policy Director, gave a number of the administration’s
explanations for the tariffs, among them are that they are “purely defensive
measures”. He claims that the cumulative trillions of dollars Americans
transfer overseas as a result of yearly deficits, are then used by those
countries to buy America’s assets, as opposed to investing that money in the
US. The US Trade Representative Robert Lighthizer, after a seven-month
investigation into China and intellectual property, explained that the value of
the tariffs imposed was based on the US estimates of the actual economic damage
caused by China's alleged IP theft and the forced transfer of technology to
Chinese companies. In response, Chinese Premier Li Keqiang promised in March
2018 to henceforth protect the rights of foreigners investing in its economy,
followed in April by an announcement by China that it would eliminate laws that
required global automakers and shipbuilders to work through state-owned
partners. President of China Xi Jinping reiterated those pledges, affirming a
desire to increase imports, lower foreign-ownership limits on manufacturing and
expand protection to intellectual property, all central issues in Trump's
complaints about their trade imbalance. Trump thanked Xi for his “kind words on
tariffs and automobile barriers” and “his enlightenment” on intellectual
property and technology transfers. It is claimed that China has instituted an
array of non-tariff barriers meant that some critical sectors of the Chinese economy
remained relatively insulated from international competition. China has
controlled imports by having different standards for private, foreign companies
than for Chinese State Owned companies: Lee G. Branstetter, a professor of
economics and public policy at Carnegie Mellon University, listed some of the
ways that China has misappropriated foreign technology. In a report issued
March 22, 2018, the US cited numerous instances of forced technology transfer
and the failure of companies and the government to protect the US intellectual
property from infringement or theft. Soon after the report came out, the US
announced plans to impose tariffs on up to $60 billion worth of Chinese exports
to the United States and tighten the rules governing Chinese investment in the
United States. Amid doubts over the costs of the US comprehensive strength and
leverage, alleged security implications, China's allegedly terrible human
rights records, the Clinton administration in 2000 approved China's entry to
the World Trade Organization. However, the US claims that China has failed to
fulfil its promise for reforms and requirements to be a WTO member, further
claiming that flaws in the rules of the current trading system lets China limit
imports with high tariffs and discriminatory regulations, subsidize exports
with an inexpensive currency and generous credit through state controlled
banks, bully foreign investors, pirate western intellectual property, which
allegedly gives it trade advantages. The US claims that the WTO for a long time
didn't punish China’s “cheating”. The threatened tariff increase on the
additional $200 billion in Chinese goods by the US, and the retaliatory
increase in tariffs on American goods, was postponed in early December 2018.
During the 2018 G20 Buenos Aires summit, Donald Trump and Xi Jinping agreed to
delay their planned increases in tariffs for 90 days, starting on December 1,
to allow time for the two countries to negotiate their trade disputes.
According to the Trump’s administration, if at the end of [90 days], the
parties are unable to reach an agreement, the 10 percent tariffs will be raised
to 25 percent. The US Trade Representative's office confirms the hard deadline
for China's structural changes is March 1, 2019. If China fails to do reform which
supposed done years ago, the 25% tariffs on $200 billion of Chinese goods will
be imposed since 12:01 a.m. Eastern Time Zone on March 2, 2019 scheduled date
of a tariff rate increase on $200 billion worth of Chinese goods to 12:01 a.m.
EST (0501 GMT) on March 2, 2019. China had agreed to purchase “a very
substantial” amount of soy beans and other agricultural, energy, industrial,
and other products from the US. China had agreed to reduce the 40% tariff on
cars coming into China from the US, although Beijing had not confirmed that by
December 4, 2018. Chinese government was considering a reduction in the auto
tariff but provided no specifics. Two leaders had agreed to immediately begin
negotiations on structural changes with respect to forced technology transfer,
intellectual property protection, non-tariff barriers, cyber intrusions and
cyber theft, services and agriculture. Two heads of state reached consensus to
halt the mutual increase of new tariffs” and the country would increase its
purchases from the US to “gradually ease the imbalance in two-way trade”. The
official announcement from Beijing did not confirm the plan for such purchases,
but said that both leaders were striving for a mutually-beneficial agreement.
On October 17, 2018, the United States announced its withdrawal from the
Universal Postal Union, in order to renegotiate international shipping rates
for mail and small packages. China had been paying lower rates because it was
considered a developing nation; the United States seeks to charge the same
rates for all countries. The withdrawal can be rescinded if an agreement is
found within one year.
Higher tariffs against
China's alleged taking advantage of the US. It was opinion that Democrats,
Republicans, Americans of ever political ideology, every region in the country
should support these actions. In the meanwhile, he warns Trump administration
not to let China play them and President Trump should not back off his pledges
to punish Beijing. Most Democratic senators, including Committee ranking
members Bob Menendez (Foreign Relations), Sherrod Brown (Banking), and Ron
Wyden (Finance), claimed that Americans confront rampant theft of the US
intellectual property, forced data storage localization policies, agricultural
policies that disadvantage American farmers, dumping shoddy goods, restrictions
on market access for the US service providers and manufacturers, and
mercantilist industrial policies that have cost the US workers their jobs. They
ask sanction on Chinese companies, such as ZTE, that has allegedly sold
sensitive the US technologies to Iran and North Korea and repeatedly made false
statements. Democrats call on putting American workers, farmers, businesses,
innovation and national security ahead of China and remain steadfast in
enforcing America's laws for claimed predatory and abusive behaviours. Ahead of
the G-20 negotiation, the Senators ask the administration to stand tougher for
pushing real meaningful structural reforms in China. China is a more real
threat to American manufacturing and high-tech industries, claiming that
regarding espionage. There’s no country that's even close to China. China is
claimed to be responsible for 50~80% of cross-border intellectual property
theft worldwide, and over 90% of cyber-enabled economic espionage in the US.
The US must take strong, smart and strategic action against China’s brazenly
unfair trade policies must do much more to fight for American workers and
products far more is need to confront the full range of China’s bad behaviour.
Beijing’s regulatory barriers, localization requirements, labor abuses,
anti-competitive policy and many other unfair trade practices require a full
and comprehensive response must show the moral courage to use its economic
leverage to not only guarantee free trade for American products in Chinese markets,
but also to advance human rights in China and Tibet. A brief reduction in the
trade deficit was do nothing to solve the main challenges of the trade
relationship and called for “targeted sanctions” on Chinese companies,
non-tariff restrictions, and upgraded protection for US and intellectual
property innovation. It was the opinion in US to keep position against most
favoured nation status for China and trade war against China was supported.
By early July 2018, there
were negative and positive results already showing up in the economy as a
result of the tariffs, with a number of industries showing employment growth
while others were planning on layoffs. In anticipation of tariffs going into
effect, stock prices in the US and China sustained significant losses for four
to six weeks prior. Trade war fears had led to a bear market in China where by
late June the total value of the country’s stock markets was 20% lower than it
had been at the beginning of 2018 when it
reached record levels.
The Japanese Nikkei also suffered a “three-week pullback”. On July 6,
2018 when the tariffs went into effect, markets rebounded and rallied due to
positive jobs report in the US–Asian markets similarly rebounded, ending the
day in a high note. According to the Associated Press, the positive reaction to
the tariffs in the US and Asian markets was because of an end to uncertainty
and, according to Investor's Business Daily, because “markets had largely
priced in the impact”. Announcements of escalation of tariffs by the US and
China, representatives of several major US industries expressed their fears of
the effects on their businesses. Organizations critical of the intensifying
trade war included National Pork Producers Council, American Soybean Association,
and Retail Industry Leaders Association. Several mayors representing towns with
a heavy reliance on the manufacturing sector also expressed their concerns. In
September, a business coalition announced a lobbying campaign called
"Tariffs Hurt the Heartland" to protest the proposed tariffs.
Proponents of the increased the US tariffs included Scott Paul, president of
the Alliance for American Manufacturing.
To stay afloat on both global and national markets, corporations will look for ways to protect their margins by avoiding paying hefty tariff bills. The costly price of building manufacturing infrastructure in the US means corporations will now turn their eyes toward other countries hungry to entice US manufacturing and jobs to their country. Many companies are already beginning to look to relocate manufacturing to China’s close neighbour, Vietnam. The global news magazine, Foreign Policy, reports that Goertek, a Chinese company known for supplying Apple Air Pods have already begun relocating their machines to Vietnam. Goertek looks to escape the tariffs by manufacturing in Vietnam instead, as talks between the US President Trump and Chinese President Xi Jinping continued on November 1st, 2018. This is a decision that many companies will be forced to make. Coi Rubber’s President, David Chao, has said that he too had already been considering offshoring manufacturing to other countries near China prior to the trade war talks. The passage of recent tariff laws only solidified Mr. Chao’s decision to relocate their China based factory to other competitive countries to escape unreasonable tariff costs and maintain the company’s global expansion trajectory. Coi Rubber will continue to operate their three factories in China but will make Vietnam their primary factory. Although the tariffs may impact many manufacturers initially, Mr. Chao sees this as an opportunity to invest in Coi Rubber’s future by building their 4th factory in Vietnam, thereby allowing them to save costs in not only tariffs but in labor costs as well. The decision of the US administration to impose a new round of tariff increases on imports from China has taken the US-China trade dispute to a new level. The new list is subject to a 10 percentage point increase in import tariffs, which would be eventually raised to 25 percentage points at the end of the year 2018. It represents a large expansion in the range of Chinese products included in the first two tranches of US import tariff hikes implemented on 6 July and 23 August 2018. The policy has triggered retaliation. China raised tariffs by 25 percentage points on similar amounts of imports from the US on the same dates that the US tariffs came into force. This protectionist tit-for-tat can have consequences for the economies of the warring parties, as the experience of the Great Depression illustrates [43]. At the same time, it can also affect third countries, especially those more economically linked to the US and China. In this column, we provide novel partial equilibrium estimates of the potential trade and investment impacts of the US-China trade dispute, focusing on East Asia. Countries in this region are the most exposed to the dispute given their integration with Chinese-led supply chains and the similarity of their export baskets with China. We focus on the impact on these countries of US tariff hikes on Chinese production. We estimate the expected import response to the tariff increase. To do so we combine HS-8 digit US import data for 2017 from the US Census Bureau of Statistics, HS-6 digit product-level price elasticity of US imports and the published lists of Chinese products subject to the three tranches of US tariffs. We assume the price of import to increase proportionately with the tariff, which is then multiplied by the relevant elasticity and the import value to obtain the expected reduction in US import from China. Our calculations suggest that the total US imports from China in the affected products amounted to $234.8 billion in 2017, of which $188.9 billion have been targeted in the last tranche of tariffs (Table 1).
Table 1: Value of US imports from China targeted by the tariff measures.
Value of targets imports in first announcement (in $ bn) |
Value of targets imports at effective dates (in $ bn) |
|
1st Tranche |
32.3(April 3rd) |
32.3(July 6th) |
2nd Tranche |
13.8 (April 3rd) |
13.7 (August 23rd) |
3rd Tranche |
197.2 (July 10th) |
188.9 (Sep. 24th) |
Total |
234.8 |
Based on the data we use,
the tariffs would reduce US imports from Table 1 Value of US imports from China
targeted by the tariff measures China by $68.6 billion, equivalent to 13.6% of
total US imports from China and 3% of global Chinese merchandise exports. This
expected drop in Chinese exports would translate into a reduction in domestic
value added by $41.4 billion, a relatively modest 0.3% of Chinese GDP. This is
an upper bound of the direct impact on Chinese exports, as it does not consider
the possible re-direction of these exports towards third markets. The bulk of
the affected imports is concentrated in electronic equipment and machinery and
their components. Electronic and optical equipment (including TV and sound)
(Figure 3).
Figure 3: Expected drop in US imports from China due to US tariffs hike, by HS-2 digit sector ($ million).
o get a sense of these potential export opportunities, we identify the Chinese products (at the HS-8 digit level) that are subject to higher tariffs in the US market and which happen to be also exported to the US by other East Asian countries for a value of at least $10 million in 2017. The intuition is that a country which is already exporting a non-negligible amount of the same product to the same market would be more likely to replace an existing exporter in that product-market pair. According to this metric, the replacement potential of Chinese exports in the US by East Asian countries – especially emerging economies – is quite significant. Vietnam, the Philippines, and Cambodia are the East Asian countries with the largest replacement potential relative to the size of their economy. The estimated drop in Chinese exports to the US (Figure 4).
Figure 4: Potential replacement of Chinese exports to the US, by countries (% of GDP).
Potential replacement of Chinese exports to the US, by countries (% of GDP) in products which Vietnam already supplies to the US for at least $10 million is worth 10.9% of Vietnam’s GDP, or 4.4% of GDP when considering the associated domestic value added of these exports. The largest opportunities lie in those products where both the expected Chinese export drop and the existing Vietnamese exports to the US are large, such as chairs, insulated ignition, shrimp and prawns, travel bags, parts of seats, television cameras, wooden furniture and handbags (Figure 5).
Figure 5: Main potential products where Vietnam could replace Chinese exports in the US.
A much smaller set of products fulfils these characteristics for Main potential products where Vietnam could replace Chinese exports in the US Cambodia, including plywood sheets, handbags, travel and sports bags, lighting sets for Christmas trees, dog or cat food, parts of seats and bicycles, reflecting the high concentration of its export basket. Taiwan, Singapore, Malaysia, and Thailand also have non-negligible exports replacement potential. The potential replacement is more limited for Indonesia. The drop of Chinese gross exports in products also exported by Indonesia to the US is worth 1.3% of GDP, with an associated domestic value added of 1.0% of GDP. By raising the cost of serving the US market from China, the trade war could also lead to diversion of investments towards third countries. This diversion would likely concern mainly Chinese investments seeking to by-pass US import tariff hikes. The extent to which investments may relocate towards other countries to serve the US market would partly depend on each country’s ability of producing the same set of affected products for the relevant market and perceptions about the duration of the trade war. We measure this ability through the correlation index between the expected drop in US imports from China and the US imports from each East Asian country in the HS 8-digit products subject to the tariffs. The value of the index is highest for Taiwan, followed by Thailand, Malaysia, Vietnam, and the Philippines (Figure 6).
Degree of similarities of export baskets to the US with China for affected products (index of correlation at HS-8 digit) and Myanmar have the lowest value of the index. While this ranking tries to capture only one of the several criteria used for investments choices, it is suggestive of the variation in the relative attractiveness across potential destinations for investments based on existing similar export basket as China. While China has progressively absorbed large chunks of the value chain in various sectors it still relies on imports of foreign intermediates and final inputs for some of its production. East Asian countries are key suppliers of such intermediates and inputs to China. Hence, the expected drop in Chinese exports to the US may have knock-on effects on these countries via backward linkages.
Figure 6: Degree of similarities of export baskets to the US with China for affected products (index of correlation at HS-8 digit).
The extent of this impact would depend on what parts of the value chain each country contributes to. This in turn determines what intermediates and raw materials countries provide to China in the production of the products affected by the tariff hike. In order to gauge the importance of this channel, we match our estimated drop in Chinese exports at the HS-8 digit level with the country-specific shares of domestic value added in Chinese gross exports to the US in those products (available from OECD TiVA data). Taiwan and Malaysia are the East Asian countries that appear most vulnerable to the drop in Chinese exports via the supply chain with an estimated GDP loss of 0.24% and 0.20% respectively (Figure 7).
Figure 7: Estimated effects of US-China trade war on GDP via supply linkages.
Estimated effects of
US-China trade war on GDP via supply linkages. That is mainly due to the
countries’ provision of inputs for Chinese exports to the US in electronic and
optical equipment as well as electrical machinery, which account for two third
of this loss. Singapore and South Korea, and Thailand are all expected to lose
more than 0.1% of their GDP via this channel, while the effect for Cambodia,
Indonesia and Vietnam are relatively muted given the low participation in Chinese-led
global value chains. While these negative effects are smaller than the
estimated (positive) export replacement potential, the two figures are not
necessarily comparable. The latter are upper bound estimates of the potential
for replacement. In fact, the true dimension of the replacement effect is
likely to be considerably smaller than what is reported in figure 4 for two
reasons: first, each country would compete for the same potential market;
second, any such replacement would hinge on the supply response in each
country-product pairs, which could be relatively small (and even zero) in many
cases. On the other hand, the effects via the supply chain are likely to
provide a more precise order of magnitude of the actual losses. This type of
analysis could help policymakers in East Asia (and beyond) identify the
potential winners and losers among domestic producers from the US- China trade
war. Governments could help the former replace Chinese exports in the US
markets through measures such as facilitating access to imported inputs, which
are heavily used by East Asian exporters, and ensuring the availability of
finance, including trade finance, required for the additional production and
exports. At the same time, assistance to potential losers to reallocate their
production and/or their labor could help minimize the domestic costs of the
trade war [44].
After almost a year of
going it alone, President Trump finds himself with a surprising weapon in his
trade confrontation with China: allies. Pressure from Europe and Japan is
amplifying the president’s vocal complaints about Chinese trade practices that he
says discriminate against foreign companies and threaten the US economic growth
— as fresh economic data in the end of 2018 year in Beijing showed the economy
slowing more than expected. To eliminate one major irritant, Chinese leaders
already have begun scaling back an industrial
policy aimed at
dominating 10 technology industries, after concluding
the president’s objections were widely
shared and could not be resolved merely by waiting out the mercurial US
leader. “One thing the Chinese have had to acknowledge is that it wasn’t a
Trump issue; it was a world issue”, said Jorge Guajardo, senior director at
McLarty Associates and a former Mexican ambassador to China. “Everybody’s tired
of the way China games the trading system and makes promises that never amount
to anything”. Administration officials deserves credit for driving a harder
line towards Beijing both domestically and foreign. Attacking Chinese
protectionism now has bipartisan support in Washington, Germany, and the United
Kingdom joined the United States in 2018 year in tightening limits on Chinese
investment. But critics say the President has not done enough to capitalize on
those shared grievances, instead alienating European and Japanese officials in
2018 year by imposing tariffs on their shipments to the United States of steel
and aluminium. Trump’s resolve to pursue his confrontation with China is
doubted amid administration infighting and suggestions that the United
States might settle for increased Chinese purchases of American products rather
than demand wholesale changes to China’s economic system in ongoing trade
talks. “It makes sense to get the other countries more involved. But they don’t
know how serious Trump is on the systemic reform bits”, said Chad Bown, a
senior fellow at the Peterson Institute for International Economics. China has
tried to defuse the global irritation over its mercantilist stance by
signalling a willingness to revise a program of state subsidies and market
share targets called “Made in China 2025”. The new flexibility comes as Chinese
industrial production figures in the end 2018 year fell short of economists’
expectations and retail sales grew at their slowest rate in 15 years. Analysts
in China and the United States say China is modifying the Made in China program
because of pressure from all its major trading partners. In September 2018
year, trade ministers from the United States, European Union and Japan issued a
joint statement that blasted the use of subsidies in turning “state owned
enterprises into national champions and setting them loose in global markets”.
The statement, which did not name any country, also rejected forced technology
transfer and cyberattacks — underscoring key elements of the president’s
attacks on Beijing. The US Trade Representative Robert E. Lighthizer has
described the subsidy program, which sets market share goals for Chinese
industry, as imperilling US technology leadership. China wants its
semiconductor manufacturers to provide 70 percent of domestic needs, up from
less than 20 percent today, threatening the $6 billion in annual US exports.
But roughly a dozen other countries are even more dependent on high-tech
manufacturing and exports of advanced factory gear, and are more exposed to
China’s desire to replace purchases of foreign products with domestic
alternatives, according to the Mercator Institute for China Studies in Berlin.
The pushback from other trading partners is a really important piece of the
dynamic development of China. That’s because the Made in China 2025 program is
more of a threat to Germany, South Korea and Japan than it is to the United
States. External pressure drove China in 2018 year to open markets for
financial services and automobiles, according to economist Andrew Polk, a partner
in Trivium China, a Beijing-based consultancy. In the end of 2018 year, the
Chinese government also temporarily rolled back a tariff increase on the US
autos, implementing part of a trade-war truce Chinese President Xi Jinping and
Trump agreed to during their meeting in Buenos Aires. Chinese authorities have
eliminated the foreign ownership cap for life insurers, approved foreign
financial institutions underwriting domestic bond offerings and agreed to lift
limits on foreign stakes in automotive joint ventures by 2022. It’s the only
bipartisan issue in Washington. It’s a concern for Brussels and Canberra and
that recognition is what has helped drive accelerated market openings. From the
outset, the President has pursued his plans for an “America First” remake of
the US trade policy with little regard for sentiment abroad. He withdrew the
United States from the 12-nation Trans-Pacific Partnership as one of his first
official acts, and he has imposed unilateral tariffs to a degree unseen since
the 1930s. His attacks on the World Trade Organization also undermined any
chance that China’s trading partners would unite in a comprehensive complaint
in Geneva. The United States did win the EU and Japanese support for a
complaint to the WTO alleging China has violated the US intellectual property
rights. But rather than use the global trade body for a broader attack on
China, the administration has demanded changes in the way the organization
operates. To critics, the administration missed an opportunity to marshal
China’s trading partners behind an across-the-board indictment of its state-led
economy. The EU agreed in the end 2018 year to establish a new screening
mechanism for foreign investments, motivated largely by a sharp increase in
Chinese activity on the continent. Yet the EU measure leaves final decisions to
national governments and falls short of the Committee on Foreign Investment in
the United States. The German government in July 2018 blocked two potential
acquisitions by Chinese investors, following similar action by Canada two
months earlier, and lowered to 15 percent from 25 percent the foreign ownership
stakes that require review. British Prime Minister Theresa May’s government
also announced plans for closer scrutiny of investments by foreign entities.
Despite his reputation as a global loner, Trump’s views on China are becoming
the conventional wisdom. The rest of the world knows that China has been
violating common trade practices, WTO trading practices and laws. The rest of
the world knows full well about the issues of IP theft and forced transfers of
technology. They know that and they’ve said so. This idea that other countries
are not with us — it’s just not true”, said National Economic Council Director
Larry Kudlow. “The rest of the world knows this, and China knows the rest of
the world knows this”. The US and Chinese officials are racing toward a
self-imposed March 1, 2019 deadline to negotiate a trade deal that would
involve changes to China’s state-directed economy. Many Trump allies are sceptical
China will agree to turn away from its state-directed system and embrace
additional market changes. With the United States and China locked in a
geopolitical competition. It is easier for revision-minded officials to
advocate changes in programs like Made in China 2025 by citing shared concerns
among all the country’s major trading partners. Chinese authorities have
changed course under pressure before. In 2015, regulators scrapped plans to
require foreign financial institutions to install Chinese software amid
complaints from the US, European and Japanese diplomats and business groups.
Some administration officials scoff at the proposed changes as cosmetic and
designed to sap the US negotiating willpower. Plans to allow foreign companies
a greater role in the Chinese technology program “an influence operation at its
best. Chinese laws would mean much so long as the courts remained under the
control of the Communist Party. What the Chinese are talking about are really
just baby steps [45]. On June 1, 2018, after similar action
by the US,
the European Union launched WTO legal complaints against China's alleged
forced ownership- granting and usage of technology that is claimed to
discriminate foreign firms and undermine the intellectual property rights of
the EU companies. They are allegedly forced to establish joint ventures in
order to gain access to the Chinese market. The European Commissioner for Trade
Cecilia Malmström said “We cannot let any country force our companies to
surrender this hard-earned knowledge at its border. This is against
international rules that we have all agreed upon in the WTO [46-50]. American,
European and Japanese officials have discussed joint strategy and taken actions
against unfair competition by China. The 2018 G20 summit in Buenos Aires
concluded the multilateral trading system “is currently falling short of its
objectives, necessary reform of the WTO to improve its functioning” [51-78].
The foreign trade policy
plays a key role in the maintenance of both economic and political
liberalisation. The prominence of rent seeking in a country can have far-
reaching implication for its economic development. Especially in underdeveloped
or transitional countries, rent seeking takes scarce resource out of productive
areas in the economy, using them to promote and/or perpetuate further rents.
Structural and micro-political economy analyses of foreign trade policy in the
context of the sustainable development have missed the impact of changing ideas
about protectionism and relatively unchanging institutions designed to handle
domestic producer complaints. The political consensus on the supply of foreign
trade policy and protectionism has changed over time. In the economic
depression tariffs revenues and protectionism played important roles in the
politics of political parties. At the same time in the market economy even
during the economic depression one can observe a little support for liberal
foreign trade policy. It is necessary to emphasize that in the foreign trade
policy there are not pure liberalism and pure protectionism. In the high
economic growth there are tendencies to liberalism in foreign trade policy and
in the economic crisis there are tendencies to protectionism. China will be
significantly hurt by tariff trade war in all indicators, including welfare,
gross domestic product (GDP), manufacturing employment and trade. However, it
is pointed out that although there will be definite impacts on China, the costs
should be maintainable and will not severely damage the Chinese economy. In
regard to the United States, the simulation produced results that described,
the US will gain on welfare, GDP and non-manufacturing production, but hurt
employment and trade (both export and import). Since each nation maintains a
large economy, their actions affect not only each other but also the entire
world. As a result of the trade war, the simulation predicts that the rest of
the world will also see impacts within their economies. For most large and
developed nations, they will see positive benefits from a US-China trade war.
As trade decreases between the United States and China, the trade will
presumably increase between other nations as a result. For example, within the
rubber industry, both Chinese and international companies are readying the
restructure of their supply chains by shifting the manufacturing of rubber
products from China to neighbouring Asian countries, Vietnam and Malaysia.
However, smaller nations will see significant negative impacts. For example, World
total welfare, GDP, manufacturing production and employment, export, import,
and total trade are expected to decrease since many of these nations are highly
trade dependent. The 21st-century initiative is not merely for China to
romanticize its historical legacies: it carries major strategic economic and
geopolitical calculations. Realistic point is important trends in the trade
regime. The commercial relations are too important to become hostage to
political grandstanding or airy rhetoric by politicians performing for domestic
galleries. Disturbing this relationship would have ramifications for sales,
growth, and employment especially in the time of COVID-19. Commercial interests
in autocratic regimes like China cause political dilemmas especially in the
time of COVID -19. The Global Crisis was a total shock to the comparison in
cost savings. Global supply chains became more costly when the risk of a
non-delivery of an input good increased substantially after the Global Crisis.
Firms may have also expected higher tariff rates after the Global Crisis, which
shrinks advantage of GVCs as input goods pass the border several times. At the
same time, the Global Crisis made robot adoption less costly, with the sharp
decline in interest rates relative to wages when central banks started to fight
the adverse effect of the crisis. As a result, many firms in rich countries
like USA started to re-shore production back to their home country and invested
in robots instead. In the wake of the Global Crisis, uncertainty in the world
economy led many firms to reassess their business models. Rather than relying
on global supply chains, an increasing number of firms invested in robots,
which prompted a renaissance of manufacturing in industrialized countries like
USA. Changes in the world economy due to COVID-19 make a V-shaped recovery from
the coming recession unlikely, more likely is U and in services L. Instead,
COVID-19 will accelerate the process begun after the Global Crisis by
encouraging firms to re-shore activity back to rich countries like USA.