Right Problem, Wrong Solution

6 August 2019

 

Cogito Ergo Non Serviam

US-China Trade, Currency War Escalates

 

The US and China have escalated their trade and currency war. Mr. Trump announced last week that the US would slap tariffs on the $300 billion in imports from China that are not currently under a tariff. Yesterday, the Chinese responded by letting the yuan fall in value; it now takes more than 7 yuan to buy a dollar. As a result, the US Treasury decided to declare China a currency manipulator. The global financial markets responded with a massive sell-off. This is idiotic, and both sides are going to suffer needlessly.

There is no doubt that the Chinese have not played fair over the years. They have stolen intellectual property right, left and center. They have forced technology transfers as a condition of operating in China. They have insisted on holding a majority of the equity in all joint ventures. On the latter two points, short-term thinking and Western greed accepted those terms when, in retrospect, they should not have.

That said, tariffs are exactly the wrong kind of response. First of all, they are not paid by the Chinese but rather by the Americans who purchase the goods China exports. So, they work as a tax on one's own countrymen. China can, and has, responded by lowering the value of the yuan to protect marketshare. While China will suffer if these tariffs persist, for the immediate future, the US bears the burden.

The labeling of the Chinese as currency manipulators is an empty move. The 1998 Act that the administration is using would allow the US to ban the Overseas Private Investment Corporation (a US government entity that invests in developing countries) from investing in China. Further, the Chinese would be excluded from US government procurement contracts. China does not currently receive OPIC investment nor does it supply the US government with anything. Yet, a symbolic act like this in the public eye makes fixing the problems that much harder.

The South China Morning Post's Tom Holland stated back in April 2018, "The US objective is not to win trade concessions but to force a change in China's whole economic and industrial policy approach." Even if that isn't the objective, it should be.

China is rapidly becoming a developed economy, and many of the things a developing economy does cannot persist as it switches to developed status (infant industry tariffs for instance). It is in China's long-term interest to become a more market-oriented economy.

That runs up against the long-term interest of the Chinese Communist Party, which wants nothing to do with the liberalization of politics that tends to follow economic liberalization. Thus far, the ChiComs have succeeded in walking that fine line, but if they must change their economic and industrial policies, they must navigate a difficult political sea.

Doing all of this in public, in the press, is guaranteed to fail. The Chinese cannot be seen giving into the American pressure. America cannot be seen to let the Chinese to continue to get away with their current policies. What would work is quiet diplomacy to arrange for a trade agreement between the two biggest economies in the world. That will take time, and it will take discipline that neither seems to possess at the moment.

Instead, the Chinese will wait Mr. Trump out. He is out of office in 2021 if the US economy goes into recession next year. They can afford to stall that long. If he is re-elected, they may soften their stance. Of course, they could always intervene in the election to counteract what Russia is doing.


© Copyright 2019 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.


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