Trade And Currency Wars Between US And China: Geo-Economic Gaffe? – OpEd


Currently, trade and currency wars have become the buzz-word in the changing geo-economic world order, where both the US and China have been locking their horns, apart from the strategic and security competitions. The major rationale for the current war is the major trade deficit is being experienced by the US. The incumbent Trump regime has been failed to check the trade deficit with China, making the economy vibrant, providing the employment, and bring the troops deployed in foreign countries like Iraq and Afghanistan etc. Along with these problems, another challenge on part of China i.e., currency devaluation has become another concern for the US economy. Against this backdrop of trade deficit and currency devaluation, the US and China have been at loggerheads. What is the geo-economic meaning of the ongoing trade and currency wars between the US and China? 

The economic policies of President Donald Trump have been outlined and formulated during his presidential campaigning. Among his pledges, the most important to worth mention here is making the US economy vibrant by checking the trade deficit, regulating the immigration and introduction of the tax reforms in terms of individuals and corporates. In this line, the trade protectionism has been figured prominently, giving form to the trade policy by withdrawing from some trade partnerships and imposition of tariffs on several countries those are harming the US economic interests. Upon taking over the office, President Trump had discontinued the negotiations on the Transatlantic Trade and Investment Partnership (TTIP), which has been going on since 2013, initiated by the Obama administration. Rather, the trade war was started with China and the EU. 

In the context of the US and China, what is a trade war and how it is being shaped, it is to be examined here? There are many disagreements, differences, distrusts and mistrusts held responsible for the ongoing trade war between the US and China. Economics Professor Lawrence J. Lau (2019) has observed that the major cause for growing trade war between the US and China given the aspiration of global economic and technological dominance throughout the geo-economic world. He argued that “It is also a reflection of the rise of populism, isolationism, nationalism and protectionism almost everywhere in the world, including in the US.” 

As per one article (23 April 2019) published in Wilson Centre has argued that China was targeted severely. Chinese economic and trade policies and practices have been criticized as unfair on issues like market accesses, import duties, coerced intellectual property transfers, currency manipulation etc. Foreign direct investment is another area of conflict and concern between China and the US. Since Deng Xiaoping regime (1978 -1992), foreign companies have been restricted from entering business sectors particularly in the automotive industry, until the same committed to establishing a joint venture having the majority share of the Chinese domestic partners. The joint ventures conditioned by the rights to use intellectual property by the Chinese companies. In one survey (2018), the members of the American Chamber of Commerce located in China had opined that the “leakage of intellectual property” is one of the major concerns for doing business with the latter. In the environment loaded with distrusts, mistrusts and differences exacerbated by the moves and countermoves of rounds of tariffs on part of both sides had turned the trade war into full-blown. On the other hand, the espionage on part of China has further exacerbated the trade war between both the countries. Keith B. Alexander (Former Director of the National Security Agency) has called the Chinese industrial espionage as “the greatest transfer of wealth in history.”

The US and China Trade and Currency Wars

China has remained one of the topmost trading partners of the US. China has been enjoying an extremely large and bilateral trade surplus with the United States. As per the Treasury Report 2019, about US$ 419 billion trade surplus is being enjoyed by China vis-à-vis the US. The outsized magnitude of the bilateral deficit of the US is due to China’s widespread use of non-tariff barriers, state subsidies, nonmarket mechanisms, and some other discriminatory measures related to trading and investment relationships.

To bride up the trade deficit, the trade war has been started since 22 March 2018, when the Trump regime had asked the United States Trade Representative (USTR) to investigate applying the tariffs on the Chinese goods worth of the quantum of US$50–60 bn. The move was justified by the regime using the Section 301 of the Trade Act (1974) giving the rationale of the proposed tariffs over the long list of Chinese 1300 imports, a response to the “unfair trade practices of China over the years as well as the theft of US intellectual property.” On the other hand, China had responded by imposing tariffs on 128 products being imported from the US on 2 April 2018.

Notwithstanding the moves and counter moves, Trump had denied the existence of any trade war between both the countries. He countered the existing perception of the trade war by saying, “that war was lost many years ago by the foolish, or incompetent, people who represented the U.S.” However, seeing the expanding trade deficit, Trump had expressed his anguish as, “Now we have a trade deficit of $500 billion a year, with intellectual property (IP) theft of another $300 billion. We cannot let this continue.” 

Trump signed an executive order (13873) on 15 May 2019, under which the restrictions were sought for the export of information and communications technology to “foreign adversaries” in general and China in particular given the national security concerns. During the G-20 Osaka Summit, an extensive offside talk was held between Trump and Xi Jinping agreed to a trade war truce. However, the same has not been fructified, rather resulted in more critical trade war. Trump regime had raised from the previous 10% tariffs to 25% over the worth of $200 billion Chinese goods on 10 May 2019 justifying the same that China had not complied to the already agreed-upon deal. Trump declared additional 10% tariffs over the $300 billion on Chinese goods. Treating the Trump regime in tit for tat mode, the Chinese government had asked its state-owned enterprises not to buy any US agricultural products amounting to $20 billion per year before the trade war and $20 billion per year as of July 2019.

China – A Currency Manipulator

Currency devaluation on part of China has emerged as another area of the trade war with the US. But the question is, why is Chinese depreciation becoming a challenge for the US? Historically, given its adverse and critical consequences and impacts, devaluation has rarely remained a preferred strategy for the good health of the economy. Renowned economist, Cooper (1971), has argued a considerable devaluation would be one of the most “traumatic” policies adopted by any government/country. It is always resulted in exasperation at the public/private level and even could lead to the replacement of the government. Also, the same could be responsible for the lowering citizens’ standard of living, purchasing power, escalation of inflationary pressure, making interest payments on international debt more expensive etc. Moreover, a strong currency used to be taken as the symbol of prestige, whereas on the other hand, devaluation is a symbol of weak economy or government. If it is so, then why Chinese devaluation has become so controversial for the US to call the former as a currency manipulator?

There is a paradox in the geo-economic world. The economic global institutions, from where the developing countries used to take loans are being asked to devalue their currencies, for example recently when Pakistan asked for a loan and it was made conditional –the devaluation of the currency. Now, China did the devaluation of currency-yuan. On 5 August 2019, China depreciated its currency -yuan to its lowest value i.e., 7 yuan to the dollar since 2008. Emily Feng (11 August 2019) has argued in her opinion that China has given in to the monetary pressure out of escalated tariffs by the US. A depreciated currency would be advantageous for China making its goods cheaper for American consumers. It would offset the damages given the imposition of higher tariffs by the US. 

Why China has been called as a currency manipulator? As per the Trade Enforcement Act (2015), there are certain criteria identified to constitutes the manipulation of the currency. It includes the determinants like an annual $20 billion bilateral trade surplus; current account surplus (above 3% of the country’s annual GDP); and “persistent one-sided intervention” in the foreign exchange market to depreciate its currency. Here, it is crystal clear and pointed out by the latest report (May 2019) of the US Department of Treasury that China only falls in the purview of the first of those three criterias. Moreover, Pan Gongsheng (Vice-Governor with the People’s Bank of China and the Head of China’s State Administration of Foreign Exchange) assured the US regarding the devaluation after designating China a currency manipulator that, “We will not engage in a competitive devaluation and won’t use the exchange rate as a tool to handle international trade disputes.” Would this assurance can be taken as a truce for the currency war between both the countries? 

WTO Trading Principles and Trade War

The WTO has laid down some principles for free, fair and just practices of trade among the member countries. The first principle is non-discrimination, having two major components- the most favoured nation (MFN) rule, and the national treatment policy, for the trade of goods, services, and intellectual property. As per the MFN rule, the WTO member required to apply the same conditions on all trade with other WTO members. National treatment stipulates that the imported goods should be given equal treatment as the domestically produced goods. This principle is followed by the reciprocity means better access to the foreign markets and reciprocal concessions. The third principle is binding and enforceable commitments. Once the tariff commitments made by WTO members are binding and in case if it is to be changed, it is only after negotiating with the trading partners. The fourth principle is transparency, which means member countries are required to maintain transparency by publishing their trade regulations. And then lastly, the fifth principle safety values, wherein in certain circumstances (public health, animal health and plant health), member countries can restrict trade.

It is crystal clear that the trade and currency wars have been going on between the US and China. To counter each other, the game of rounds of tariffs are being played. If this trade war is seen through the WTO trade principles. The trade war is against the first principle – non-discrimination. The trade war is entirely discriminatory by escalating the tariffs against each other. MFN component of the non-discriminatory principle is being violated. Tariffs commitments are violated in the trade war. Although, it has been said that it is not something like trade war but that is not coinciding with the ground realities. Currency devaluation on part of China and designation of currency manipulator by the US, further put both the countries on loggerheads. 

Thus, trade and currency wars have highlighted many geo-economic paradoxes. Somewhere currency depreciation is a compulsion and, where it is intentional, the same is facing the conflicts and concerns. One point is very clear from this trade war is, the countries either developed and developing have not been able to digest the outcomes of the open market economy. From this trade war, many countries are likely to take a leaf out of this trade war and initiate restrictive trade policies leading to the strengthening of the protectionism and de-globalization. Although, considerable development has taken place throughout the world given the open market economy, but it is with the wide inequalities, making it meaningless for the wider sections of the societies. On the one hand, efforts are being made for open market economy and whereas on the other hand, the major economies of the world are feeling uncompetitive and restricting the trade policies. Is it geo-economic paradox or geo-economic gaffe?  

*Bawa Singh, Ph.D.
Assistant Professor
Centre for South and Central Asian Studies
School of Global Relations
Central University of Punjab
Bathinda (Pb.)-INDIA

Dr. Bawa Singh

Dr. Bawa Singh is an Associate Professor, Department of South and Central Asian Studies, School of International Studies, Central University of Punjab, Bathinda, India

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