The US’ Trade War Fallacy: Washington Must Now Live With New Reality – Analysis


The current trade war between the US and China is a fallacy. There is no trade war going on here. A real trade war exists when a country tries to protect its industries by placing tariff barriers on the import of cheaper goods from foreign countries, or provides subsidies to local manufacturers to artificially lower production costs in order to compete with imported products. Trade wars are about protectionism. These rounds of tariffs on goods from China are not protecting any US industries.

In the current case many of the goods imported into the US are made by US corporations in China. Of the US$539 billion exports from China to the United States, a substantial portion is from US companies shipping inputs for assembly in China. Another 20 percent are OEM products produced for US corporations. The tariffs are not paid by China. They are either absorbed by US corporations, which reduces profits, or passed onto consumers who pay higher prices for goods, which adds to inflation.

According to estimates made by JP Morgan Chase, the tariffs will cost the average American family around US$1,000 per year. This is expected to deeply dampen Christmas spending. The major US retailer Macy’s share value dropped by 13 percent late last week. Share prices of other US retailers also fell.

The only thing that will hurt China is a reduction in demand for goods bound to the US, thus reducing some employment. However, China is reducing the value of its currency, the yuan, to compensate for the new tariffs.

Trump’s tariffs may put pressure on companies exporting to the US from China to relocate to third countries. This is something that has been already happening due to rising Chinese labor rates. This could be seen as Trump’s “scorched Earth” move. If the US can’t produce the goods destined to the United States, China shouldn’t produce those goods. The motives of Trump’s advisers should be questioned on this.

The consequence of continuing this action is more retaliation from China, a drop in worldwide aggregate demand and a recession which will hurt the United States, corporations and everyone else. Some already see the signs of the US slipping into recession with bond markets giving warnings.

It was the US Corporations that moved to China

Between 1990 and 2017 US corporations invested more than US$250 billion into China. Initial investments didn’t go that smoothly. Chinese authorities later eased the processes required for foreign investors, opened special economic zones and partly opened the domestic market, bringing US corporations in droves. US corporations moved to China for lower labor and operational costs and manufacture under less stringent regulatory regimes, increasing corporate profits immensely.

There was also the expectation that US companies would be able to enter the quickly-growing Chinese domestic market, as demand in the US has already matured.

As a result, manufacturing jobs dried up in the US. The promise of better jobs didn’t materialize. Only low-paid menial service, warehouse and retail jobs became available, which had absolutely no career paths. Those jobs were for the lucky ones, as many became unemployed. The middle class began to shrink, as did purchasing power and the tax base. Eventually a trade imbalance between China and the US occurred, partly brought about by US products, which now became imports.

Corporations made higher profits for their shareholders at the cost of a loyal workforce that became redundant. A generation of manufacturing skills was just discarded, along with cities and towns that once housed the manufacturing facilities of these corporations. Many of these factories became warehouses and condominiums, ironically bought up by Chinese, which inflated the housing market.

After more than 30 years of capital and production capacity flight, China is now a manufacturing economy and the US is not. US manufacturing has declined to around 11.5 percent of GDP against  40 percent post WWII.

A general economic lull in the United States existed before the last election, which helped give Trump the support base he needed to win the presidency. However, the tariffs may affect parts of this support base as the extra costs to consumers are felt.

China owes its faster-than-expected rise as an industrial power to the transfer of jobs, capital, technology, and business know-how from the United States.

The brands grab

Like Japan and Germany after WWII, China learned how to develop its economy through gathering technology and buying up well known established companies and brands around the world including Iconic brands like General Electric (appliances), Hoover, Motorola, MG, Pirelli, Sunseeker, Rotary, Superdrug, Ingram Micro, Wiko, Dirt Devil, Miss Sixty, Sandro, Tommee Tippee and Vax. China then went on to create its own companies, technologies and brands including Huawei, Oppo, Alibaba, Haier, Xiaomi, Geely, and Chery. The number of Chinese companies today on the 2019 Fortune Global 500 list equals those in the US. Chinese companies now have their own global brands which are challenging traditional company and brand leaders.

Branding is not just restricted to corporations. China launched the Asian Infrastructure Investment Bank (AIIB), that operates within the same domain of the World Bank and Asian Development Bank. More than 100 countries have applied for membership in AIIB, although boycotted by the United States.

Perhaps China’s most ambitious brand encapsulating what General Secretary Xi Jinping calls the Chinese dream to recreate the ancient Silk Road trade routes into a logistical trade and supply chain is the Belt and Road Initiative. The prime intent behind the project is to create a global trade and supply network that will enhance relationships with other countries and regions. Theoretically this would reduce the dominance of the United States in trade relationships, tipping influence more towards China.

After Obama’s Asian Pivot, Trump’s meandering Asian foreign policy is a bonus for China, especially with Trump early in his Presidency abandoning the Trans-Pacific Partnership. However, China has faced setbacks with logistical problems in rolling out the BRI over so many countries at once. Many media outlets have put out disinformation and highlighted Chinese mishaps in BRI development and rollouts.

The real problem

The problem isn’t China. Trump didn’t cause it either. He inherited the problem from successive presidential administrations. The problem was caused by the corporations which abandoned US production, and workers who were also their customers, lured by the promise of lower costs, higher profits and entry into the Chinese market.

Trump was elected to save and create jobs. To his constituency, ‘make America great again’ is about reacquiring traditional manufacturing jobs. However, corporations are blocked from returning from manufacturing offshore because of the high profits they are making and higher production costs they would incur if the company returned to US production. The levels of profits the corporations now enjoy can’t be made manufacturing in the United States.

Bringing back the corporations

Trump recently called on US corporations to leave China. He does have executive powers to force them, but this would be politically untenable. Working through a multi-layered constitutional democracy such as the United States would almost be impossible to garner strong and committed bi-partisan support to bring the corporations back.

Even if US corporations returned, the financial costs would be high. Companies would have to rebuild manufacturing facilities, recreate supply networks where local suppliers may no longer exist, and regenerate the community environments to house their workforce.

This would be one of the most ambitious projects the United States has engaged in, something along the mammoth scale of China’s Belt and Road Initiative. Extensive city re-planning would be necessary. Infrastructure built. Communities re-nurtured. The US Government would most certainly have to adopt a regime of incentives something akin to what South East Asian Governments are giving investors, something unprecedented in the US. This would most likely need to be accompanied with a tax scheme where companies manufacturing in the US would pay a lower tax than companies importing their products to factor in differential labor costs.

Has the horse already bolted?

This is the reality the United States must now live with. Now the US must learn how to accommodate China diplomatically and economically, completely outside the military paradigm. Unlike the Cold War, which was about military supremacy, this one is about trade. Although there are some real issues like IP that need to be sorted out between China and the US, economic relations with China must be based on the reality of mutual co-existence and avenues of cooperation. This would be a complete reversal in US policy thinking.

However, despite all the US rhetoric, American corporations are still investing in China. In fact, US corporations have gone far beyond just setting up factories to export back to the United States. They are heavily involved in distributing products within China’s domestic market, and investing in other sectors like fast food, leisure, and equities. A so-called trade war with a nation that the US have heavy investments in is nonsensical. There is the potential that US firms could be hurt in China. The interdependency between the Chinese and US economies needs to be recognized and reflected in policy.

Originally published in the Asia Sentinel

Murray Hunter

Murray Hunter has been involved in Asia-Pacific business for the last 30 years as an entrepreneur, consultant, academic, and researcher. As an entrepreneur he was involved in numerous start-ups, developing a lot of patented technology, where one of his enterprises was listed in 1992 as the 5th fastest going company on the BRW/Price Waterhouse Fast100 list in Australia. Murray is now an associate professor at the University Malaysia Perlis, spending a lot of time consulting to Asian governments on community development and village biotechnology, both at the strategic level and “on the ground”. He is also a visiting professor at a number of universities and regular speaker at conferences and workshops in the region. Murray is the author of a number of books, numerous research and conceptual papers in referred journals, and commentator on the issues of entrepreneurship, development, and politics in a number of magazines and online news sites around the world. Murray takes a trans-disciplinary view of issues and events, trying to relate this to the enrichment and empowerment of people in the region.

2 thoughts on “The US’ Trade War Fallacy: Washington Must Now Live With New Reality – Analysis

  • September 3, 2019 at 5:21 am

    Good article.

    The US opened China up to sell them US brand goods but now that Trump is publicly slapping China’s president around and calling China the enemy I cannot see many Chinese people wanting to walk around with US brand goods.

    The damage done to US brands in China by Trump is massive.

    The damage done to America’s international reputation by Trump will not be able to be undone for decades.

  • September 4, 2019 at 10:51 am

    Trump’s trade war is using exports and imports as pretext for imperialist objectives. Trump came to power without being elected by the American people. If the public votes were taken into consideration Trump would not make in US politics. At any rate he is the president.
    Trump was talking about tariffs as weapon to submit China. Trump aims at weakening China techonologically and economically. He would like to see China as a second-hand country to the USA. He thinks America is exceptional with the full rights to dictate and manage all countries in the world. Trump thought that China would surrender and sign its submission because otherwise China would lose money. Trump thinks of money as the only dynamic force in the world affairs. Trump does not take into consideration history, people, culture, dignity, goals and dreams of nations, and all other variables.
    Trump’s weak voews of the world and of China has created problems for him and for the American economy and for the world economy. His trade war is going no where and he will lose it. This will destroy millions of US jobs domestically and damage significantly the rate of profits of all US corporations. These corporations as whole linked directly and indirectly to each other and damage to one companie will be affecting others. His trade war will hurt American farmers, workers, and capitalists. Trump has no funds left for bail-out. Trump is just like a fighter who expects to win in the first round and when the game goes on to many round the fighter will be defeated. Trump cannot go longer and the pressure continues.
    Trump’s trade war will affect all economies in the world because these economies are linked. All these linkage with their magnaified effects were studies by Ibn Khaldun, Quesnay, Cantillon, and became very sophisticated by Leontief and other economics under the topic of Input-output analysis. Trade war is no easy and usually followed by currency and military wars. The world economy is slowing in growth rate and this slowdown will push debt to rise. When the economy sinks in a recession this debt bubble will burist and destroy all economies, particularly the US economy which carries more than 60 trillions of which 21 trillion in public debt. If this crisis occurs the dollar as reserve currency will die out and the military power of the USA cannot protect the dollar.
    Finally, Trump has a very narrow-mind and does not take all macroeconomic variables into consideration. His economic advisor has no degree in economics and the rest of his helpers do not provide him with what is needed. Trump again does not follow even what capitalism is preaching him because he does not believe in competition and the American economy should compete in innovation and profit rates, among others, in order to be dominant, Cutting taxes on the wealthy and deregulation and massive military spending do not improve US global competitive position.


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