In the summer of 2019, President Trump declared on twitter: “We don’t need China and, frankly, would be far better-off without them. Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies home and making your products in the USA”.
This neatly sums up President Trump’s attitude and economic policy toward the Chinese; and it has culminated in the biggest trade-war the world has ever seen.
The economic relations between the world’s two largest economies can hardly be described as cozy. The Cold War between the United States of America and Soviet Union ended about thirty years ago; but a new war has taken its place. A subtle but more devastating war, this war has seen each of the economic behemoths – China and the United States of America – impose sweeping tariffs on selected goods emanating from each other’s country.
Is this hostility justifiable? Do the Chinese have an unfair advantage over the United States of America in their trade practices? Are the Chinese pirating American goods such as computer software en mass? Are the Chinese leveraging a relatively weak currency to make their exports more affordable to Americans and the rest of the world?
In order to satisfactorily answer these questions, a cursory look the history of trade between these two economies is necessary.
Until quite recently, America was not doing much business with China. That is, China was exporting far more goods to America than Americans were importing from China. By 1984, China was only America’s fourteenth-biggest trade partner. In contrast, America was China’s third-biggest trade partner. So, the trade deficit has always existed – and it was bound to present a problem for America in the future if it accelerated imports from China.
And accelerate they did. With increasing affluence, America slowly began developing a voracious appetite for Chinese goods.
In 1991, China only accounted for 1 percent of total US manufacturing spending. But between 1996 and 2001 (the year China became a member of the World Trade Organisation) however, U.S. imports from China almost doubled from US$51.5billion (US$84.2billion in 2019 dollars) in 1996 to US$102billion (US$148billion in 2019 dollars).
But there was no corresponding increase in Chinese demand for American goods to cancel out the trade deficit. Indeed, the Chinese – being experts at mass-production, were making huge profits out of American goods by pirating American products such as computer software and music and video compact disks, and selling them within China and in other countries.
The piracy and theft of American-produced music, videos and software was costing American companies US$1billion a year by 1994 (US$1.73billion in 2019 dollars). By 2019 the estimated costs to the U.S. economy from Chinese Intellectual Property theft was between US$225billion and US$600billion annually. Computer software as well as music and video compact disks are among America’s most popular exports.
The Chinese economy is an export-based economy. Indeed, it is the world’s biggest exporter. In contrast America, with its unmatched affluence, is the world’s biggest importer. With these two countries occupying opposite ends of the export-import spectrum, a trade-war seemed inevitable. In 2005, for example, Chinese exports to the U.S. increased 31 percent, but Chinese imports from the U.S. rose only 16 percent. And while the U.S. trade deficit with China was US$90.2billion in 2001 (US$130billion in 2019 dollars), it nearly doubled by 2005. In 2017, the U.S. had a US$336billion trade deficit with China and a US$566billion trade deficit overall.
A major complaint Americans have about the Chinese is that they have intentionally refused to open up their markets to foreign goods. This is somewhat true. In 2008, for example, the World Trade Organisation issued a formal ruling against China for requiring foreign automakers operating there to buy most components from local suppliers or face higher tariffs, 25 percent, instead of the normal 10 percent. China is also known for using a combination of subsidies, tax incentives and an undervalued currency to gain an unfair advantage over foreign companies operating in China.
The trade war between the US and China does not show any sign of ending soon. But with dialogue, a truce can be reached.