Trade War Cannot Reduce US Trade Deficit but Helps China Grow StrongerPosted: August 28, 2019
An article on The Hill yesterday titled “Trump already has won the trade war with China” says Trump has already been able to get 90% of what he wants in his trade war with China. However, he would not stop and keeps on tariff rises to hurt US and world economy.
The article lists what trump has or would have got from China if he simply accepted Chinese commitments in the trade negotiations, such as reduction of US trade deficit by Chinese purchase of lots of US energy and agricultural products, protection of intellectual property, prevention of forced transfer of technology, end of government subsidies to industries, ensure of fair treatment for US entities, etc.
What is Trump’s strategic goal?
The article says, “In the U.S., President Trump appears to be holding out for a starkly decisive outcome — equivalent to China’s unconditional surrender — to maximize his political standing for winning re-election in 2020.”
Trump’s problem is his failure to see China’s strategic goal. China would not surrender as it wants Trump to keep on US pressure to facilitate China’s further reform and opening up for transformation from export- and investment-geared growth to innovation-, creation- and consumption-led growth.
Such transformation certainly will slow down China’s economy. US trade war only quickens the transformation while worsen the slowdown. However, such slowdown is but short-term. In the long run the transformation will enable China to achieve better growth later.
To keep exports to the US, China has to move its labor intensive export-oriented enterprises to its neighbors where labor costs are lower.
China has been helping Sri Lanka train workers for employment in Sri Lanka’s vast special economic zone near Hambantota to enable China to move such enterprises to the zone. The port China is building there will facilitate the exports.
Similar zones are being established in Bangladesh and Myanmar since China signed memorandums of understanding with them on the establishment of China-Bangladesh Economic Corridor and China-Myanmar Economic Corridor last year.
China-Pakistan Economic Corridor is being built and there are also such zones for China to move such enterprises there.
The construction of infrastructures of power stations, roads, railways and ports in those countries under China’s Belt and Road initiative will facilitate such movements.
US tariff hikes will only quicken such movements to avoid the hikes. China will only have the problem of substantial unemployment due to the movements, but the unemployed will blame US tariff hikes instead Xi Jinping’s economic transformation.
On the other hand, Chinese enterprises in those countries will make greater profits due to reduction of labor costs and have greater competitive edge in US market in exporting their products to the United States. As US enterprises cannot compete with them due to much higher labor costs, the US has to keep on importing the products. Its trade deficit will increase instead of decrease. However, China is not to blame as the deficit of trade with China has been switched to that of trade with China’s neighbors.
Comment by Chan Kai Yee on The Hill’s article, full text of which can be viewed at https://thehill.com/opinion/finance/458846-trump-already-has-won-the-trade-war-with-china