Why America’s Economic War on China Is Failing
President Donald Trump, supported by most of the US establishment, deepened the government’s assault on the Chinese economy. The “trade war” seemed to play well with Trump’s political base, who somehow hoped that an economic attack on China would miraculously create economic prosperity for them.
In 2018, Trump slapped tariffs on more than US$200 billion worth of various Chinese goods. Then, Trump’s administration went after Chinese high-tech firms such as Huawei, ZTE, ByteDance (the owner of TikTok), and WeChat.
None of this has worked very well. Trump faces negative legal judgments about his “trade war,” and the US economy is slipping into negative territory. But it is not just Trump. Both the Republican Party and the Democratic Party are committed to a policy that will not cause China to surrender to US ambitions.
Whether or not the US can backtrack from this policy orientation and begin a dialogue with China remains to be seen; doing so would be, of course, desirable.
Legal challenges in the World Trade Organization (WTO) and in the US District Court for the Northern District of California went against the Trump administration. This is a setback for the policy orientation of the US government.
After Trump announced the tariffs against a wide range of Chinese imports, the Chinese government formally took up the matter through the WTO’s dispute mechanism. After considerable study, the WTO came back with a verdict.
On September 15, 2020, a three-person WTO panel found that the US had violated the provisions of the 1994 General Agreement on Tariffs and Trade (GATT), the treaty that established the WTO. This was a serious defeat for the United States; the Trump administration was given 60 days to file an appeal.
The US government does not like to lose. US Trade Representative Robert Lighthizer released a statement condemning the ruling.
“This panel report,” Lighthizer said, “confirms what the Trump administration has been saying for four years: The WTO is completely inadequate to stop China’s harmful technology practices.”
The US has paralyzed the WTO’s ability to hand down a final binding verdict, as the WTO’s appeals court is currently no longer functioning because of Washington’s refusal to accept new members for it.
In 1994, the US pushed for the creation of the WTO, wrote many of its rules, and brought China into the organization in 2001. Because the US felt in command of the world, the WTO worked to advance its interests; now that China’s economy has grown in strength, the US finds the rules of the WTO to be burdensome.
Free trade is only useful to governments like America’s when it is beneficial to their companies; the principle of free trade is otherwise easily rejected.
Even within the US, there is doubt about Trump’s policies. A judge signed an injunction to halt Trump’s attempt to prevent US residents from using WeChat as a means to communicate with people in China. Pressure on TikTok may also dissipate after the US elections next month.
A senior analyst at the Federal Reserve Bank of St Louis says the economic impact of the “chaotic” lockdown in the US will create major disruptions for at least a generation. It is unlikely, he says, that the US will be able to “recover easily.” When asked about China’s recovery, he said that so far things look much better. But any persistent reliance of China upon the US market will have a negative impact on China’s growth.
China has in essence broken the chain of Covid-19 infections, although the authorities remain vigilant for new outbreaks; in the US, it is hard to talk about a second wave, since the first wave has not yet crested.
What this has meant is that as early as the second quarter of 2020, China’s gross domestic product rose to 3.2% above the level a year previously; meanwhile, the GDP of the US fell by 9% below last year’s level. China is already on the way to recovery, while the US does not even know if the infection has peaked or not.
The US and China publish somewhat different measures of industrial output, but the contrast is so striking that it leaves no doubt as to the relative trends.
China publishes data for total value added by industrial enterprises, which in August 2020 was 5.6% higher than a year previously, whereas in contrast the US industrial output for August 2020 was 7.7% lower than a year earlier. China’s level of industrial production was higher than a year previously, whereas the United States’ was far below it.
As a result of China’s much more dynamic economic recovery, its trade is recovering much more rapidly than that of the United States. This is clear for imports, which for other countries are their exports.
In July, the last month for which there are data for both the US and China, China’s imports had almost regained pre-pandemic levels, being only about 1% lower than a year previously. In contrast, US imports were still about 11% below a year previously.
The result of these trends is that China will be the center of world economic recovery from the Covid-19 recession, while the US will contribute almost nothing to it.
The latest global projections of the International Monetary Fund indicate that in 2020-2021, China will account for the absolute majority, 51%, of world growth, and the US for only 3% – and the latest IMF predictions for the US indicate that this may be an exaggeration of its growth.
Most of the other contributors to world growth according to the IMF analysis will be Asian economies that have strong trading relations with China: South Korea, Indonesia, the Philippines, Vietnam and Malaysia.
To analyze the global situation, the impact of the Covid-19 crisis has a very dramatic impact on the pattern of development of the world economy as divided between developing and advanced economies.
The data in the IMF’s projections show that by 2021 GDP in the advanced economies will still be 3.6% below its level in 2019 while in the developing economies it will be 2.7% above 2019. This is a major distribution of world economic growth in favor of developing economies and against advanced ones.
The April IMF estimates indicate that in 2020-2021 more than 95% of world economic growth will take place in developing economies. The data in the April IMF World Economic Outlook database means it projects that 51% of world growth will take place in China and 44% in other developing economies. Less than 5% of world economic growth will take place in advanced economies.
By attempting to reorient world trade away from China and to the United States, the US is therefore attempting to lock other countries into subordination to its own very low growth instead of the much more rapidly growing economy of China. This will be strongly damaging for other countries’ economies.