Trade War Cannot Reduce US Trade Deficit but Helps China Grow Stronger

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

Will US Regret in Helping China’s Further Rise with Trade War?

There is the Chinese saying: “It is going to rain; Mother is going to remarry; there is nothing one can do to stop that.”

To entertain my readers, I would rather rephrase the saying as follows: “It is going to rain; China is going to rise; there is nothing the US can do to stop that.”

It is a sad world full of undesirable events, even wars to kill people. Even if the US had not launched its prolonged wars in Iraq and Afghanistan leading to the death of hundreds of thousands people there, there would still have been terrorist attacks and even accidents causing death and injuries.

We need some fun in our life. As what the US has been doing to stop China’s rise is ridiculous, I want to make fun of that in order to entertain my readers.

I said yesterday in my post “US Regrets Helping China’s Rise by Getting It into WTO” that the US believed Gordon Chang’ prediction of China’s collapse when China had jointed WTO so that the US got China into WTO. However, it now regrets that because China’s accession to WTO, on the contrary, has helped China’s rise.

As I said in the beginning, the US cannot stop China’s rise. That is because China relies on itself instead of the US to rise. In fact, what the US and other Western countries have done has only helped instead of enabled China’s rise. Without such help, China would still have risen but only a little slower.

Now, what the West, especially the US, is doing facilitates China’s rise again.

Western Pressures Facilitates Removal of Opposition to Further Opening-up
US current administration must be cleverer: It is conducting a trade war to force China to make concessions of opening its market wider, reducing US trade deficit with China, stopping “forced transfer” of technology, protecting intellectual property and preventing devaluation of Chinese currency.

China no longer needs the protective measures it has kept since it began to open up as Chinese enterprises have grown strong enough. In fact, such measures protect local industries from competition with outsiders. They reduce instead enhance Chinese enterprises’ incentive to improve themselves in order to win competition.

Protectionism only protects backward enterprises.

China’s labor costs have risen to the level that it is no longer able to maintain its labor-intensive products competitive on world market. There are two measures to resolve that problem:

1. Improve technology to reduce number of workers employed in production in order to reduce labor costs. That will cause enterprises to lay off some workers; and

2. Move labor-intensive industries to countries with lower labor costs. It will also result in unemployment of some workers.

Local governments certainly oppose such measures as both may give rise to the problem of unemployment.

Moreover, as moving factories abroad incurs some costs in moving equipment and training local workers, enterprises affected also oppose that.

Therefore vest interests in enterprises and local governments affected strongly oppose further opining up. However, US tariff hikes force them to adopt the above-mentioned measures. Removal of their opposition also facilitates China’s investment abroad, especially investment in and even takeover of foreign high-tech enterprises. Trump’s trade war and EU’s demand for further opening-up helps China overcome the opposition.

West Restriction to China’s acquisition of Foreign High Technology
The US has already imposed some strict restriction to Chinese investment and other Western countries have also been planning to do so. China has to further open up so as to enjoy other countries’ opening up to its investment there. US and Western pressure helps Chinese leaders overcome the opposition to further opening up.

In the past, China obtained lots of quite advanced technology through transfer of technology to its joint ventures with foreigners, but none of the technology is the best in the world as foreign companies are not willing to transfer their best technology for fear of losing their competitive edge. China has grown rich and is able to pay for the best technology or takeover of foreign companies that own the best technology. It also has surplus capital to invest in other countries.

The US strictly restricts China’s takeover and investment in high technology for fear that China’s further rise may make China a rival world hegemon or even surpass the US as the only hegemon in the world. Other developed countries that have some of the most advanced technology also fear China’s rise as they do not know what China will do when it becomes another hegemon.

Trade War Helps China Obtain High Technology
As mentioned above, China is no longer able to obtain the best technology through joint ventures. It has to buy technology from or take over foreign enterprises of high technology.

US trade officials want China to allow foreign enterprises set up enterprises or joint ventures without the requirement for technological transfer.

That is really stupid. A wholly owned foreign enterprise in China has to employ Chinese staff and workers as foreign ones are too expensive to employ in China. Chinese employees there will soon learn the technology of the foreign enterprise.

That is why international lawyers help foreign parties get Chinese joint venture partners and their employees to sign non-disclosure agreements to keep the technology they leant confidential. For joint ventures the agreements aim at preventing competitors not the joint venture partners from learning the secret as the technology has already been transferred or licensed to the Chinese partners.

A wholly foreign owned enterprise, however, can only sign non-disclosure contracts with its technical personnel, but a real expert may get employed in the enterprise as a common worker and learn the technology when he has only seen it with his professional eyes.

China can selectively provide preferential treatment for foreign enterprises to attract them to set up wholly owned high-tech enterprises in China. That will enable China to learn their high technology.

The US Helps China Protect Its Intellectual Property
China is now able to develop lots of its own intellectual property so that it has great need for protection of intellectual property. How can it expect other countries’ protection of its intellectual property if it cannot protect others’; therefore, US trade war demand for protection of intellectual property provides China precisely what China wants for reciprocal protection.

The US Helps China Reduce Financial Dominance of US Dollar
In the past, China might have the desire to reduce the exchange rate of its currency in order to stipulate its exports to earn foreign exchange it needs for import of foreign advanced technology, but there are no such needs now. China has already been able to earn trade surplus and accumulated world largest foreign exchange reserve. However, due to the financial dominance of US dollar, most of China’s foreign reserve has to be kept in US dollar. It is unable to get enough return as the US keeps interest rate very low to support its economy. There is also the risk of devaluation of US dollar due to the decline of US economy and US excessive issue of money for its excessive spending.

China needs to maintain the exchange rate of its currency stable and even make it rise a little to facilitate turning its currency into an international currency in order to reduce US financial monopoly. US President Trump’s trade war demand for China not to reduce the exchange rate of its currency is precisely what China wants.

From the above, we see what the West, especially the US, is pressurizing China to do will benefit China. Will the US regret what it is doing now later?

We know the US will be benefited by what it may get from China in forcing China to conduct further reform and opening-up, but China will also be benefited. If what the US wants is to stop China’s rise, it will regret even though it has been benefited. However, such regret is stupid, just as it was stupid to regret having China join WTO. China’s rise has enabled China to provide lots of cheap goods for US consumers. That has enabled them to make ends meet in spite of the hardship they encounter due to America’s declining economy.

Article by Chan Kai Yee

China posts first monthly trade deficit in three years as imports soar

By Sue-Lin Wong | BEIJING Wed Mar 8, 2017 | 9:48am EST

China unexpectedly posted its first trade gap in three years in February as a construction boom pushed imports much higher than expected and as increasing U.S. protectionist rhetoric casts a spotlight on the export giant’s trade position.

The upbeat import reading reinforced the growing view that economic activity in China picked up in the first two months of the year, adding to a global manufacturing revival.

That could give China’s policymakers more confidence to press ahead this year with oft-delayed and painful structural reforms such as tackling a rapid build-up in debt.

“We suspect that this largely reflects the boost to import values from the recent jump in commodity price inflation, but it also suggests that domestic demand remains resilient,” Julian Evans-Pritchard at Capital Economics said in a note.

The surprise monthly deficit also comes as U.S. President Donald Trump focuses increased attention on China’s large and persistent run on trade surpluses with the U.S. and as global efforts to ward off trade protectionism face growing difficulties.

China’s imports surged 38.1 percent from a year earlier, the biggest increase since February 2012, official data showed on Wednesday, while exports unexpectedly fell 1.3 percent.

That left the country with a trade deficit of $9.15 billion for the month, the General Administration of Customs said.

Most analysts, however, attributed the rare trade gap to distortions caused by the long Lunar New Year celebrations, which began in late January this year but fell in February in 2016. Many businesses shut for a week or more and factory production and port operations can be significantly affected.

“All deficits since 2005 have been in either the Lunar New Year month or in one of the months around the Lunar New Year month,” ING’s Chief Asia Economist Tim Condon wrote in a note.

“Like those earlier ones, we expect February’s to be a one-off and the full-year trade surplus will be close to 2016’s 3.4 trillion yuan.”

Still, combined January and February data showed China’s trade rose 13.3 percent from the same period a year earlier, suggesting real improvement in underlying demand at home and abroad.

That also jives with strong China factory activity surveys which showed growth in both output and orders is accelerating.

“Looking ahead, we expect external demand to remain fairly strong during the coming quarters which should continue to support exports,” Evans-Pritchard said.

But he added that it was unlikely the current pace of import growth can be sustained as the impact of higher commodity prices will start to drop out of the calculations in coming months.

Analysts polled by Reuters had expected February shipments from the world’s largest exporter to have risen 12.3 percent in dollar-terms, an improvement from a 7.9 percent rise in January.

Imports had been expected to rise 20 percent, after rising 16.7 percent in January.

That would have produced a trade surplus of $25.75 billion in February, roughly half that recorded in January.

China’s February trade surplus with the United States fell to $10.42 billion, the smallest since February 2014. China exports to the U.S. fell 4.2 percent, while its imports from the U.S. rose 38 percent.


China’s first-quarter economic growth could accelerate to 7 percent year-on-year, from 6.8 percent in the last quarter, economists at OCBC wrote in a note on Monday, while adding that the pace may start softening in spring.

As the government ramps up infrastructure spending and developers rush to complete new housing projects, steel mills are consuming more iron ore and coking coal to meet demand.

With the economy on much steadier footing than a year ago, the government has trimmed its economic growth target to around 6.5 percent this year, Premier Li Keqiang said in his work report at the opening of parliament on Sunday. The economy grew 6.7 percent last year, the slowest pace in 26 years.

As with last year, China has not set a target for exports in 2017, underlining the uncertain global outlook and fears of rising U.S. trade protectionism, but Li said China will take steps to steady exports this year.

Trump hasn’t made good yet on his campaign pledges of greater protectionist measures in the early days of his presidency, but analysts say the specter of deteriorating U.S.-China trade and political ties is likely to weigh on confidence of exporters and investors worldwide.

The U.S. trade deficit jumped to a near five-year high in January, pointing to slower economic growth and posing a challenge for the Trump administration.

The U.S. reported its trade gap with China rose 12.8 percent to $31.3 billion in January, with China-bound exports dropping 13.4 percent.

Elsewhere, Trump administration trade adviser Peter Navarro said on Monday that the $65 billion U.S. trade deficit with Germany was “one of the most difficult” trade issues.

Meanwhile, the world’s financial leaders are preparing to meet next week for the G20 finance ministers in Germany, the first gathering attended by representatives of the Trump administration.

A draft communique showed finance ministers and central bank heads from G20 countries may no longer explicitly reject protectionism or competitive currency devaluations, promising only to keep an “open and fair international trading system”.

(Reporting by Sue-Lin Wong, Cheng Fang and Elias Glenn; Editing by Kim Coghill)

Source: Reuters “China posts first monthly trade deficit in three years as imports soar”

Note: This is Reuters report I post here for readers’ information. It does not mean that I agree or disagree with the report’ views.