Trade War Between China and US History Analysis Essay Example

The trade relationship between the USA and China are going through a difficult period. Over the last decades, the United States was a trade leader in the world market. Despite this, China is steadily gaining momentum and in just a few decades has become one of the major trade rivals of the United States of America. In the conditions of the globalization, US-Sino trade operations have reached the huge turnovers, and their commercial ties expanded significantly.

What’s at stake in US-China trade war

The trading volumes between 1979 and 2010 have increased from $2 billion to $457 billion. China is the third largest market for exports and the largest importer to the United States. Since the growth rate of Chinese imports in the US was much higher than the growth of US exports to China, the US trade deficit with China rose from $10 billion in 1990 to $273 billion in 2010 (Morrison, 2011).

There are numerous issues concerning the US-Sino trade relations that disturb many politicians and American citizens. However, Chinese citizens and politicians are also wary of the US actions. Nevertheless, the US-China trade relations are officially recognized as a mutually beneficial partnership. In fact, the trade cooperation flows smoothly into a trade war, which is conducted under the elegant cover of tolerance, cooperation, and community.

Therefore, this paper attempts:

  • to address the causes of a trade war between the US and China;
  • to analyze the main points of conflict between the studied countries;
  • to assess the one who acts dishonestly and whose actions are forced.

A methodology of the analysis and synthesis will be applied for given research. The paper will disclose a theme of the trade war between China and the USA in the context of several issues, find the reasons and the consequences of the actions on each issue and sum up the results of the analysis into the conclusion. The sources with the variety of points of view will be used in the study, and the analysis of some of them will be conducted. On the basis of the analyzed sources, a unanimous opinion on the US-China trade relations will be formulated and comments given on this issue.

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The Reasons and Premises of Occurrence of the Conflict

There has always been, is and will be the winners and the losers, the leaders and the outsiders in the politico-economic game. As in any other game, leaders will always try to maintain their position, and their nearest rivals to oust the favorites to add the championship. Today, the economic situation in the world is that the United States is a leader, and China is a rapidly developing rival, who is rapidly approaching the leader and causes many inconveniences.

The peculiarity of the Chinese economy is that it remains at the stage of the rapid growth. Based on the enormous resources that China has, this growth has reached the global proportions. The nature of the development process is that it is practically impossible to maintain the status quo for a long time. A subject develops or is degraded. There is no third. Therefore, China has to expand its activities not to have their development reversed. It is a natural process, and it should be understood. In turn, the United States is at the stage of the maturity. It means that the development is slowed down, and the task of the US is to hold the accumulated power. These two states can be compared to the tiger and the elephant. China looks like a tiger – fast, strong and agile. The US reminds an elephant – large, powerful, and dangerous, but hulking. Under these conditions, the conflict between the US and China is inevitable. For China, the United States is a hindrance to development. For the US, China is a dangerous competitor, threatening the present state of affairs.

Sensing a potential threat, the United States began to act in the post-war period. Until 1972, the US was trying to contain and isolate China.

It made the following steps to reach the goal:

  • the United States established a trade embargo against mainland China;
  • the United States supported the development of the Japanese army (a strategic adversary of China);
  • the USA intervened in the Korean War;
  • the USA supported the regime of Chiang Kai-shek in Taiwan;
  • American government supported Tibetan guerrillas, who tried to get out of the Chinese control (Nathan & Scobell, 2012).

In general, a conflict arose due to the objective reasons, and the ways out of this situation depend only on the decisions of the leaderships of both countries.

Bilateral economic relations have always been a source of beneficial collaboration for both sides, but with time, the relationship between China and the United States are becoming increasingly lopsided. China uses its advantages and monetary policies to increase exports. It opens access to its domestic market in exchange for the foreign technology. In addition, Chinese companies are participating in the mass theft of the intellectual property (Friedberg, 2012). Economic relations between Washington and Beijing are quite complex. Fast-growing Chinese population and a rapidly growing economy have made China a great market for the US exports. In the recent years, China has been the fastest-growing export market for the United States. In turn, the US imports cheap Chinese goods that bring benefits to end consumers by increasing their purchasing power. Both US import and export are growing, but the US trade deficit with China is increasing rapidly.

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American firms also use the Chinese market for the manufacture and final assembly of its products. It helps to reduce costs and offer competitive prices in the world market. At the same time, many American manufacturers complain of “unfair” competition on the part of Beijing, which is the understatement of the price of Chinese products. They argue that China contributes to the displacement of production capacity of American companies in Asia. As a result, thousands of Americans are losing their jobs (Morrison, 2011). Many politicians also express their fears that China buying the US securities for nearly one trillion dollars can serve an instrument for affecting the United States by Beijing. In the process of economic and political development in China, the country has not fully switched to a free market economy. Too many sectors of the economy in China are still controlled and regulated by the government. It causes the negative comments of many politicians and economists, as well as the supporters of a free-market economy. In addition, this fact more and more increases the friction between Beijing and Washington on many issues (Morrison, 2011).

Among them are the following:

  • the issue of fixing and understating of the Chinese currency, the requirements allow the Yuan to rise to the real market level;
  • the issue of partial compliance with Beijing’s WTO obligations;
  • the issue of piracy is rampant in China as well as the lack of security of intellectual property;
  • the issue of China’s industrial policy and policy of public procurement, in which the Chinese government protects

Chinese firms by the discrimination of foreign companies

Perhaps one of the most vulnerable areas of the US economy to the impact of the Chinese offensive is the labor market. Ordinary Americans primarily benefit from cheap Chinese imports, but at the same time, they are the first to suffer from it indirectly. The relocation of the US companies on the Chinese market, on the one hand, allows reducing the price of products that Americans are more advantageous to buy, but, on the other hand, Americans are losing their jobs. Local American labor markets are forced to confront the Chinese imports. The most sensitive areas of industry to the impact of cheap Chinese products are manufacturing of footwear, textiles and furniture (David, Dorn, & Hanson, 2013).

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Allegations of unfair Chinese trade deal with many important sectors of American industry, including high-tech and eco-technologies. In 2011, the Solar World and six other US manufacturers of solar batteries and modules sued Chinese companies producing similar equipment. The plaintiff argued that the defendant had received unfair subsidies from the Chinese government, which allowed them to understate the price for the products of the transformation of solar energy greatly and sell it to the American market at the “unfair” value. The plaintiff argued that it could seriously harm the American solar manufacturing industry, which is already going through hard times. As a result, the US Commerce Department and International Trade Committees approved the import duties on Chinese solar processing production from 31% to 250%. This trial has brought discord into the US solar manufacturing industry. Hardware manufacturers consider duties necessary to protect American industry. However, installers disagree with it. They argue that such measures would hinder the installation sector. Others do not believe that the measures taken will effect on the Chinese producers since they still have options for delivery of their products, using a loophole in the law. They could collect the modules from foreign units of solar cells and deliver them to the United States duty-free (Darby, 2014).

Today, China produces about forty percent of furniture sold in the United States. In addition, certain types of metal are sold by China at low prices. It made the United States establish anti-dumping duties with the aim to protect domestic producers. Speaking of the textile industry, there are about 30 thousand exporters of textile products in China. The textile industry was the first in China where the Internet was used for sale transactions. After the US producers complained that Chinese products are destroying the American market, the US Department of Commerce has established “safe” limits on imports of Chinese textile products. At the same time, there is also an issue of extensive piracy of intellectual property in China. This problem entails the loss by American companies from 2.5 to 4 billion dollars annually. Although the law on the protection of intellectual property exists in China, its implementation is not properly controlled. As a result, Chinese companies massively use trademarks, patents, copyrights and technology, the rights to which they did not purchase. In China, the penalty for such crimes is too soft to be effective (Hughes, 2005).

One of the examples of China’s global trade policy is the purchase of IBM by the biggest Chinese computer maker Lenovo Group. This trading operation had a great psychological effect on Americans, as IBM has been the icon of the American business for a half a century. Although, Lenovo Group with the purchase of IBM has not acquired significant new technologies, this operation has caused a suspicion in the American politicians. They concern that China is trying to gain control of the key assets and technologies and that the 1.76 billion IBM-Lenovo deal is one of the many Chinese acquisitions committed to obtaining this control (Hughes, 2005).

While China attacks, the US has to take the defensive measures

Among other complaints, the United States filed a lawsuit at the WTO on the following issues:

  • subsidizing of Chinese companies involved in wind energy;
  • the introduction of the laws by Beijing that protect domestic manufacturers;
  • imposing the restrictions on the electronic payment services.

Some US politicians argue that, given the high unemployment and low pace of development of the US economy, China’s economic policy should not be left without countermeasures. Strict measures are needed to force China to moderate its pace and abandon policies that harm the US economy. If China continues its policy of a rapid increase in exports, it can cause more tension in the US-Chinese conflict and lead to harmful consequences for both sides (Morrison, 2011).

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Henry Kissinger (2012) argues that the struggle between the US and China for domination is inevitable, if not already started. At the same time, the US-China cooperation appears outdated and even naive. Even though the results of the negotiations of the Doha Round of the WTO admit that the relations between Washington and Beijing continue to deteriorate. The number of complaints from both sides increases rapidly. Trying to protect their domestic producers, the US introduces measures of protectionism. Namely, in 2009, China filed a complaint with the WTO in response to the US plans to impose duties on imports of Chinese tires in America (Loridas, 2011). The US invited China to join the Trans-Pacific Partnership but under the conditions of change of the internal structure of the Chinese economy. Probably, the United States is trying if not to isolate but at least contain the rapid growth of the rival. Under the conditions of joining the Trans-Pacific Partnership, the US requires to make China’s economy not export-oriented but focused on consumption (Kissinger, 2012).

Analyzing the above-mentioned sources, their basic idea can be summarized in the following statement. China is a country with a booming economy, which is actively expanding its business scope, conquering the world markets and often using dishonest methods to attain its goal. The USA is a leader in the world trade and, at the same time, it positions itself the world’s police officer who tries to tame China and force it to play by the rules. The strength of these sources is a clear description of the aggressive actions of Beijing, as well as the countermeasures of the USA. A weakness is a superficial, factual analysis of the US-China relations. These sources did not sufficiently deeply penetrate into the reasons of origin and development of the conflict. In addition, there is a certain degree of bias in these sources as China seems to be the culprit and the United States are presented as a victim.

Analysis of the Issue

The Americans believe that China is stealing their jobs, understating the Yuan and selling their products at unfairly low prices. These aspects certainly have a negative impact on the employment of Americans, but misunderstandings on both sides cause a trade war between China and the United States. However, China is not stealing American jobs. Foreign companies, most of which are American, produce almost 60% of China’s exports to the United States. These companies have relocated their production capacity in response to the competitive pressure to reduce the production costs and, thereby, to offer the best price on the market and higher dividends to its shareholders. Thus, it becomes obvious of who is accusing China of unfair competition, increase exports, and reduced prices. They are the US importers, American consumers who buy Chinese products at low prices, and shareholders of the US companies stationed in China who get their share of the import operations. A long trade war between the US and China will significantly harm all of these categories of the population (Hughes, 2005).

Some critics of China’s trade policies argue that China has huge foreign reserves as a result of direct investment and trade surplus. They believe it is a proof that China understates the Yuan. Therefore, foreign companies that invest in China’s economy make it solely because of cheap labor and cheap currency. Moreover, when binding Yuan to the dollar, the Chinese currency undervaluation provides an unfair export advantage. This unfair advantage, according to critics, is the main cause of the US trade deficit with China. However, foreign business is in China for a very long time. This country has the world’s largest national market and allows the development of any multinational companies (Hughes, 2005).

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The reason for such a situation in China is not so much in the manipulating the exchange rate, as in the tight control of the prices and capital. With a free economy, exchange rate pegs to the dollar, and substantial accumulation of foreign currency would lead to a sharp increase in the money supply and inflation. Because the Chinese government regulates the prices of key industries in China, it does not happen. The increase in foreign investment and money supply stimulates the growth of production more and more, leading to overheating of the economy. However, thanks to the control, this process does not trigger inflation. Maintaining a stable Yuan exchange rate is an important task for China’s economy. Therefore, China’s currency does not increase as expected, not because of the artificially low rate by the Chinese government but thanks to the strict control of prices and capital in the key sectors of the economy (Hughes 2005).

Many blame China in the US trade deficit, arguing that the Asian dragon lowers its currency, as well as product prices, causing an excessive demand for Chinese goods in the United States. However, Leightner J.E. (2010) believes that the United States is also guilty (if not more guilty than China) in this. He believes that the problem of the US trade deficit is excessive consumption of Americans. In contrast, one can observe the excessive savings in Chinese. In this case, one satisfies another.

Speaking about the ways of the conflict Cai, Yan, Lian, & Xin, (2013) consider that the protectionism of the US should be canceled. The authors state that the US and China should increase the trade cooperation. In that case, the cost of the conflict would be too high. However, this opinion seems to be biased and naive. After all, the current conditions of the US-China trade relations are the cause of the conflict. There are several ways to overcome the US-China conflict. Some support the policy of interaction, cooperation, and dialogue. Others prefer mixed methods, namely the use of dialogue when it can be effective in combination with invasive procedures of the WTO. There are also supporters of punitive measures against China as the only effective method to force China to play by the rules (Morrison, 2011)

The United States and China are big world players competing for leadership. The motives of both countries will inevitably lead to a conflict. The USA is still the leader and has a great impact on the world market including China. However, China also has the leverage over the US. Countries that finance the US trade deficit take the US currency and hold it. Thus, the size of the Chinese foreign exchange reserves of $1 trillion corresponds to Chinese goods and services of one trillion dollars in the US market. These $1 trillion dollars is a potential lever of the influence of China on the US economy. If China suddenly decides to sell all of its foreign assets, it will cause a depreciation of the dollar by 44 percent in Asia and Europe. In addition, China may harm the United States in another way. It can cause significant inflation in some sectors of the US economy by using its dollar reserves to buy US goods and services. This advantage of China is due to the fact of the excessive consumption of Americans. Enjoying consumption today, American citizens risk the well-being of future generations who may have to pay for the excessive consumption of its predecessors (Leightner, 2010). To avoid disastrous consequences of the US-China trade war, it is necessary that at least one player would step back if the reaching of the compromise would be failed.