Scaling the Great Wall that Separates the U.S. and China

Highlights

  • The Chinese-American Trade War is a biproduct of China’s rise as an economic world power.
  • Neither side is likely to win a trade war.
  • Chinese and American negotiators should set their sights on a bilateral, enforceable, rules-based trade pact that targets free and open trade and protects technological innovations and trade secrets.

Historically, Chinese-American trade relations reflected the fact that China was a poor nation with an undeveloped economy, while the U.S. has historically been a rich nation with a developed economy.  As a result, America was willing to cut China some slack in trade deals, at least in part on humanitarian grounds. 

The current trade war reflects China’s reluctance to give up the advantages it has enjoyed in the past.  The Trump administration’s position is that China no longer needs a handicap to compete with the U.S., and points to the U.S.-China trade deficit, which reached $419.2 billion in 2018, to support their position. 

It is hard to deny that China’s economy is no longer undeveloped.  To the contrary, China now has the second-largest economy in the world.  A comparison of the U.S. and Chinese economies can be found in the following illustration.

Moreover, China’s economy has been growing much faster than America’s for several years, although the gap has narrowed by just a bit. 

China has also made dramatic progress in reducing poverty over the past three decades.  Data from the World Bank indicates that China’s poverty rate fell from 88 percent in 1981 to 0.7 percent in 2011.[1]  Undoubtedly much of this progress is attributable to China’s success in international trade.

Notwithstanding the foregoing, China still has a very large number of poor citizens.  If you believe the Chinese government, 30.46 million of its citizens live in what it defines as poverty.  However, given the source, that estimate is probably much lower than the actual number of poor Chinese.  The New York Times reported in 2018 that around 500 million people, or 40 percent of the Chinese population, survive on $5.50 per day or less.

It’s also important not to overlook the fact that China’s economic growth has benefited the U.S. as well.  For example, according to the U.S Treasury Department, China has invested $1.2 trillion in U.S. Treasury bonds.  In addition, China has invested over $180 billion from January 2005 through June 2019 in U.S. business, according to the American Enterprise Institute.

Another bone of contention in the trade war relates to China’s alleged theft of American technology and trade secrets.  According to the office of the United States Trade Representative (USTR), China has a long-standing policy of using foreign ownership restrictions and its administrative review and licensing processes to coerce U.S. companies to share their trade secrets with their Chinese counter-parts.  Not surprisingly, the Chinese government has rejected all such accusations, and points to recent legislation that claims to safeguard the technology of foreign companies doing business in China.

It seems clear, then, that both sides have sound arguments to support their respective positions.  At this point it has also become clear that both sides have much to lose if a truce in the ongoing trade war is not reached.

So, what can be done to bring this mutually destructive trade war to an end?  Here are my thoughts.

  • Both sides have to give up on the idea that the trade war can be won.
  • The U.S. must publicly acknowledge the fact that China is an economic super-power. This will be a political win for Chinese President Xi Jinping, and an ego boost for Chinese citizens.  Insults, such as the recent claim by Trump’s economic advisor Larry Kudlow, that “the Chinese economy is crumbling.  It’s just not the powerhouse it was 20 years ago”, aren’t helpful.
  • For its part, China needs to acknowledge that it is no longer an undeveloped country that is deserving of generous trade concessions from the U.S. It also needs to respect the property rights of its trading partners.
  • Both sides need to come to the bargaining table as acknowledged equals, with equality in trade relations as the goal. More specifically, the objective should be a bilateral, enforceable, rules-based trade pact that creates the foundation for open and fair trade.
  • The U.S. should seek assurances that the laws that China already has on the books to protect foreign companies’ technology and trade secrets will be vigorously enforced, and backed up by the ability to recover losses if they aren’t in an international forum, such as the World Court.

Would you advocate a different approach?  If so, let me know in the comment section below.  I’d enjoy hearing from you.

Thank you for reading,

Mr. Market Commentator

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[1] As measured by the percentage of people living on the equivalent of the U.S. $1.90 or less per day in 2011 purchasing price parity terms.

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