Home > Uncategorized > Why the US would not win the Trade war with China.

Why the US would not win the Trade war with China.

The US has threatened China with Section 301 of the US Trade Act of 1974 against China since early this year but China has retaliated back against the US. The only time when this section 301 was applied successfully was with Japan in the 1980’s but it would not be the same with China today. I would like to point out this good article from Wall Street Journal.

https://www.wsj.com/articles/in-trade-fight-china-today-differs-from-1980s-japan-1523202722

WASHINGTON—The White House is looking at the U.S. trade fight against Japan in the 1980s and 1990s for lessons in its trade battle against China. But the two eras are as striking for their differences as they are for their similarities.

U.S. trade officials admire Ronald Reagan’s use of tariffs to get Japan to open its semiconductor market and limit steel and other exports to the U.S. Current Trade Representative Robert Lighthizer, then a midlevel U.S. official, helped carry out that strategy.

Japan back then, like China today, ran a large trade surplus with the U.S. Japan, like China, used industrial policy to turn favored companies into global powers and like China was looking to get U.S. technology any way it could.

The main tool the U.S. used to get Japan to change course, section 301 of the U.S. Trade Act of 1974, is the one the Trump administration is using to confront China. It gives the president broad powers to retaliate through tariffs and other means in trade disputes. “The last time it was used [with Japan], it worked,” says Clyde Prestowitz, a prominent Republican trade warrior from that era.

But even Mr. Prestowitz doubts such tactics will work again.

“China is a different animal,” he says.

Along with targeting Japan, the U.S. used section 301 to pressure India. Washington threatened tariffs unless Delhi liberalized its protected insurance market. India was so incensed, it refused to negotiate. “It is not for [the U.S.] to decide the Indian policy matters,” said India’s finance minister at the time. The U.S. backed off.

China today is more like India of that era than Japan. Like India, China is a huge, nationalist country. Its leaders believe they are destined to reclaim China’s place as a world leader and are building a world-class military in the process. Japan was a relatively small nation, whose global aspirations were snuffed out during World War II. It depended on Washington for its security.

While Tokyo frustrated the U.S. through delay, it ultimately had to accommodate Washington’s demands. Among other things, says Mr. Prestowitz, “Japan needed us to protect them from China.”

In practice, that meant Japan never retaliated against U.S. trade actions by putting tariffs on U.S. goods—indeed, it never even threatened to retaliate.

Contrast that with China today. Less than 24 hours after the Trump administration threatened tariffs on $50 billion of Chinese imports to the U.S., China published its own $50 billion hit list of U.S. goods. When President Trump added another $100 billion of Chinese goods subject to levies, a spokesman for Beijing’s Commerce Ministry pledged, “China is fully prepared to hit back forcefully.”

Japan de-escalated the trade battles by allowing some of its most successful auto and electronics companies to build factories in the U.S. Japanese companies continue to invest in U.S. plants, and today directly employ hundreds of thousands of U.S. workers, and through that investment have cultivated useful political allies, particularly among Republicans.

That avenue isn’t as open to Beijing. Chinese investment in the U.S. was $29 billion in 2017, estimates the Rhodium Group a market-research firm. That was down by about one-third from a year earlier. The U.S. is increasingly blocking Chinese purchases of semiconductor and other technology firms because of concerns about national security.

China is fighting back by targeting politically sensitive goods for sanctions, especially U.S. agriculture and aircraft. The idea is to make a trade war so costly, that the U.S. will back off, even if the fight harms China’s economy.

When it comes to imposing tariffs, there is another lesson from the Japan fights: Domestic opposition blunts White House plans. In 1995, the Clinton administration was set to put 100% tariffs on imported Japanese luxury cars to pressure Japan to buy more U.S. auto parts. Few U.S. consumers would be affected and, some Clintonites assumed, they were mainly Republicans anyway.

But the uproar from U.S. auto dealers put pressure on the White House to cut a deal that mainly required Japan to expand production in the U.S., which it was planning to do anyway.

In the current fight with China, U.S. lobbyists are focusing on the potential harm to farmers—a politically sympathetic and powerful group that is an important part of Mr. Trump’s political base. The president last week said the administration would come up with a plan “to protect our farmers,” but provided no details.

U.S. presidents have long overestimated their advantages in trade fights. In the early 1800s, President Thomas Jefferson embargoed British exports to get Britain to stop harassing U.S. ships, figuring the move would damage the British economy. The plan backfired. When trade collapsed, the U.S. was the loser. “Jefferson was delusional,” says Dartmouth trade historian Douglas Irwin.

Former U.S. Trade Representative Mickey Kantor, who helped negotiate U.S. deals with Japan in the 1990s for the Clinton administration, says his biggest takeaway from those days is the need to be steadfast in deciding goals and strategy.

President Donald Trump has threatened massive retaliation against China but his aides then tried to calm markets by claiming there is no trade war. “The uncertainty undermines your credibility domestically and with the Chinese,” Mr. Kantor said.

Japan in the 1980’s has many established brands in the US like Sony, Panasonic, Toyota, Nissan, Honda that produced many value added goods in the US and most of the market of these Japanese companies are to the US. Therefore, many of the profits from the value added Japanese branded goods are going back to Japan and the US was able to use that as leverage against Japan during the negotiations.

China on the other hand has few established brands in the US today. In fact the US government has taken steps to stifle them from succeeding in the US, think Huawei and ZTE. So the profits from value added Chinese branded goods are low. In fact, many of the profits of the value added goods go back to the US companies, think iphone, HP, Dell, Appliance makers and etc… The very same reason why the US deficit with China is so skewed. China companies has reduced its reliance in developing markets in the US, but focusing its market in Europe, Sooutheast Asia, Africa and Latin America.

As the result of US stifling China from big name companies succeeding in the US, most of the companies who are doing business in China are mostly low cost, low profit margin goods, like cheap stuff you get from walmart and your typical dollar store. A tariff will hit the poor the hardest. Even if the US hits a tariff on them, you won’t see many countries to replace China to produce those goods. In fact, many Chinese companies being established overseas will build factories there in order to circumvent the tariff. IE, as the result of good relations between China and Mexico, many Chinese companies will establish their presence there and circumvent trade with the US because of NAFTA.

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  1. November 30th, -0001 at 00:00 | #1

    The trade deficit is due to three major causes:
    1. US companies importing their merchandise for sale to US consumers. Companies like Apple, Dell, HP, Google , Fitbit, Garmin etc imported huge amount yearly. US, Japanese, Korean and other MNC contributed the lion share of the added value to these products. Chinese companies and labor contribution is around 5% of total value.

    2. US refusal to sell so-called high tech products that other MNC would sell and China mostly can produced domestically.

    3. US consumers spending more than Chinese consumers.

  2. pug_ster
    November 30th, -0001 at 00:00 | #2

    @KRam

    I don’t know how I “proved your point” about foreign tech companies in China. You seem to be making incoherent straw man’s arguments. Companies doing business or having their presence in China have to follow Chinese laws. Apple has presence in China because they did just that whereas Facebook and Google does not. There are many articles about this same issue, and a simple google will point this out.

    https://www.nytimes.com/2017/07/12/business/apple-china-data-center-cybersecurity.html

    About One Belt one Road, China is probably not making any money on the projects directly funded by OBOR, rather Chinese companies can better trade with other countries as the result of OBOR.

  3. pug_ster
    April 13th, 2018 at 07:59 | #3

    @Ray

    I pretty much agree and the US don’t know much about it. But it has been mentioned in this article of my case of why US won’t win the trade war.

    http://foreignpolicy.com/2018/04/13/why-china-will-win-the-trade-war/

  4. pug_ster
    April 16th, 2018 at 12:52 | #4

    https://www.cnet.com/news/us-bans-american-exports-to-chinese-phone-company-zte/

    Looks like ZTE won’t be sold in the US anymore. Sad, ZTE paid 1.19 billion for selling Iran and North Korea Telecommunications equipment. They paid the fine, fired 4 executives, but didn’t ‘discipline’ 35 employees triggered this stupid 7 year ban. That means that they can’t buy or use American products, like Optics providers, Qualcomm chips for phones and not certified for Google android OS. It is sad, they are making decent phones in the US and despite what the Media said about them and Huawei of spying, there were no proof.

    https://www.zdnet.com/article/us-intelligence-chiefs-advise-americans-to-avoid-using-huawei-and-zte-phones/

  5. alanking
    April 16th, 2018 at 22:32 | #5

    To me this is a clear signal that the US will start doing to china what it has been doing to Russia – the beginning of sanctions galore. I hate those cctv talk shows where they keep asking questions like will US do this or that, instead of the tough questions like “yes, so what you going to do about it?” I hope they will be able to fight back on sanctions much belter than the russians. I wish Xi best of luck.

  6. N.M.Cheung
    April 19th, 2018 at 21:20 | #6

    @alanking
    The sanctions are obvious excuses aim directly at “China 2025”. China will invest heavily to be independent of future bottlenecks imposed by U.S., but it will take time, and some like ZTE will suffer. I expect there will be backlashes from Chinese consumers, maybe like boycott Apple I phones and purchase ZTE phones instead.

  7. pug_ster
    April 20th, 2018 at 08:59 | #7

    Chinese semiconductor companies’ are already going up. Qualcomm is a good company because it produces good soc’s at affordable prices. Chinese phone manufacturers will look at Samsung, Mediatek and Spreadtrum for phone soc’s. For some reason Huawei don’t sell their SOC’s to 3rd party companies. I would imagine other parts of the phone Chinese companies will be pushed to develop their own.

    ZTE also relies on American Optics for their telecom equipment, the Chinese don’t have one which is good yet but it will probably be as good as the Americans in a few years.

    The only thing that ZTE can’t crack is the app store. Unlike China, Google still maintains a monopoly on the app store in the US. Not sure what Tencent would do in order to push their presence in the next few years but I would not be surprised if they would face resistance if they come to the US.

  8. July 1st, 2018 at 09:32 | #8

    Both countries would suffer from the trade war, and possible Western Europe even more than both of them. The outcome will remain difficult to predict. It must be remembered that China has also started on an overambitious OBOR programme, which requires huge amount of capital invested in economically dud countries. If China can keep that programme on pause or even backtrack from it, yet manage to not lose influence in those regions, and at the same time advance its technology prowess (I am not talking of mere semiconductors, but also advanced defence and attack capabilities such as hypersonics, and space technology), then in the long run, China will be stronger. However, that’s a big if, but a possible if at the same time. Probable though? Can’t say. On the other hand, Trump also wants the space tech. to be the sixth column of U.S. defence forces now, so race is very much on (a race in which the U.S. leads comfortably at the moment). As for the nitty-gritties of the trade war itself, I foresee China getting more harmed than U.S. – the reason is simple, that China depends heavily on exports and has to feed a large working population. Less of exports means factories shutting down, discontent spreading, a threat to China’s dictatorship system itself. Something like what is happening in Iran currently. When one wants to run a dictatorship, one has to keep the people nicely opiated, or else it’s trouble time. A big factor that can enable for the U.S. to eventually win the trade war is the censorship policy of U.S. So apart from a few like Apple, most tech companies of the U.S. are not even present in China – and hence they anyway don’t have skin in the game. Tech is the main strength for the U.S. – as long as it does not suffer too much, U.S. can’t be defeated in any trade war.

  9. July 1st, 2018 at 09:36 | #9

    ^ I meant the “censorship policy of China” (e.g., tech giants Google and FB not allowed to operate there).

  10. pug_ster
    July 1st, 2018 at 19:15 | #10

    @KRam

    Read what I wrote about the value added goods. Most of the value added exports from China are American branded goods. Most of the Chinese branded goods are mostly low end, so adding tariffs so it will hurt the poor anyways.

    FYI, companies like facebook and Google are banned in China because they won’t allow their data to be stored in China. And no this is not unusual, as many countries require their user data to store in their own countries.

  11. July 3rd, 2018 at 09:05 | #11

    @pug_ster, I know that a lot of component production or so-called value addition happens in China. Of course, as I said, the U.S. will suffer heavily, and especially the U.S. customers: everything becomes very expensive for them, the country’s purchasing power would go down. However, China’s economy, to my eyes, is a bit too much imbalanced in favour of exports of goods: in addition, China is still an emerging country, still not a developed country. A large population, many of whom are still poor, a services sector that is not well developed, and over-reliance on exports: I don’t see how China will not fare worse in a trade war, at least in the short and medium term.

    And as for tech companies, I don’t see from where you got that reason. Facebook and Google work in Europe, they store data on European servers. Can you specify a link where Facebook and Google executives, for example, have said that this is the reason they are unable to operate in China?

  12. pug_ster
    July 3rd, 2018 at 13:58 | #12

    @KRam

    The problem with Trump is that he is starting trade wars not just with China but with Allies like Mexico, Canada and the EU. China is already taking advantage of this by promoting trade with those very countries that the US is having trade wars with. Not just that, the One belt one road policy is promoting trade with those countries. Also made in 2025 policy will reduce on reliance on exporting cheap goods, which is what China is doing.

    As for facebook data stored in China, here’s an article. Facebook doesn’t want to play China’s rules, so they are out.

    https://qz.com/644588/the-only-way-facebook-enters-china-is-as-a-tool-of-the-government/

  13. July 4th, 2018 at 10:09 | #13

    @pug_ster : Haven’t you proved my point regarding tech companies? The article that you quote itself points out local data storage as only one of the conditions, and not the only condition. On top of that, that article is merely someone’s hypothesis. Do you have anywhere from any Google or Facebook executive that absence of local data storage is the only reason why Facebook and Google are not present in China? I don’t think you will find that anywhere, for that’s not the case, but I will be happy to be proved wrong. China today lacks leverage over U.S. tech, precisely because of censorship policies. U.S., on the other hand, does have quite a lot of leverage over China, as proved by the recent ZTE humiliation, as well as data theft cases such as that of Sinovel vs. AMSC.

    As for what you call the “problem with Trump”, yes, trade wars are mushrooming, and the U.S. is going to get hurt, and so will many other countries. EU-China trade could prosper to some extent, but never to a large extent: already, because of the secret stakeholding of Geely owner in Daimler, Germany is on tenterhooks with respect to China. Europe is caught in a hard place right now, and most probably some implosion is waiting to happen there. A weak Europe means some opportunity for China, yes, but also quite a big loss of business for China. As for OBOR, well, it’s become a kind of hazy term these days: originally, it reached only till Eurasia, not Europe. And the future of OBOR as an economic force is quite in doldrums: how can one get any money back from investments made in such duds as Pakistan or Kazakhstan, or even a much-better Czech Republic, if you want to include Europe? The utility of OBOR is twofold: (1) geopolitical, and (2) domestic audience (giving a message out to domestic population that China is now a world power, not just the “Middle Kingdom”). If you are so convinced of it, I guess reason no. 2 is already succeeding. OBOR’s economic end is simply bad investment, huge debt.

  14. August 17th, 2018 at 01:13 | #14

    A very interesting article on CPEC, part of OBOR, can be read here: https://geopoliticalfutures.com/one-belt-many-headaches/

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