The U.S.-China Trade War

With recent innovation, the world has become more interconnected than ever. This globalization results in more vulnerability and reliance between countries. Different ways of life and perspectives have caused a shift in balance, particularly for the world economies. America consists of large multinational corporations looking to gain profit and citizens looking to spend money. China is largely farm and low-wage workers who save money and look to sell. The United States is now undergoing large unemployment and a growing deficit. Some U.S. Officials blame these problems on China, claiming Chinese officials for manipulating Chinese currency and threatening a trade-war. Considering how Chinese currency affects the United States, China, and the global economy, government leaders from both countries are trying to fix the imbalance.

HISTORICAL CONTEXT

China has not always been a strong economic force. Its strength has only occurred in the past few decades. During the Cold War, U.S. officials thought trading with other countries would help keep the peace. President Dwight Eisenhower argued that measures "which tend to drive away an ally as dependable as Great Britain … do much more harm in the long run to our security than would be done by permitting a U.S. industry to suffer from British competition” (Lind). After the Cold War, differing presidents continued to negotiate international trade with American markets in order to gain support for military efforts and diplomacy. Besides, at that point in time, America was very prosperous and did not feel a need to fear competition. President Harry Truman wrote: "American labor can now produce so much more than low-priced foreign labor in a given day's work that our workingmen need no longer fear, as they were justified in fearing in the past, the competition of foreign workers" (Lind).

In the 1980s, economists “pushed for a large Yen appreciation” (Woo 68). U.S. Government officials began fearing unemployment, so they pressured France, Japan, the United Kingdom, and West Germany, also known as the G-5, to appreciate their currency in order to reduce the U.S. deficit. In 1985, the countries signed the Plaza Accord and the Yen appreciated dramatically (Woo 68). The dollar dropped so quickly, the G-5 and Canada signed the Louvre Accord in 1987 in an effort to balance things out. But, for another year, the Yen kept appreciating. Finally, in 1985, the Yen started to depreciate. The years that followed showed China gaining steam once again in the economic sector. Japan lost its foothold as China took its place as the second largest economic force in the world.

In January 2000, President Bill Clinton said:

We want a prosperous China open to American exports; whose people have access to ideas and information; and that upholds the rule of law at home and plays by global rules of the road on everything from nuclear nonproliferation to human rights to trade. … It will open a growing market to American workers, farmers, and businesses. And more than any other step we can take right now, it will encourage China to choose reform, openness, and integration with the world (Lind).

Unfortunately, President Clinton’s hopes never panned out.

When China finally held a larger role in world economic affairs, they were officially recognized as a part of the World Trade Organization, or WTO, in November 2001. The United States hoped such a move would boost the US economy. Yet, the opposite held true and even furthered China’s international economic strength (Gong 63). At the same time, the average American lifestyle reduced Americans’ savings and increased their consumption to a level beyond their sustainable income (Moosa 90). Many, including the AFL-CIO, viewed President Clinton's renewal of MFN status critically, stating, "Profits, not people, matter most.” (Schield 421). Almost overnight, China’s exports rose exponentially. “Between 1998 and 2008, the U.S. merchandise trade deficit with China alone rose 470 percent” (Lind). Joining the WTO also opened up the possibility for multinational companies instead of “domestic workers and firms” (Scott). These high gains lead to major claims by U.S. officials.

ECONOMIC CLAIMS AND GUESSES

Many U.S. politicians pushed for strict tariffs on Chinese products and even claimed the Chinese government purposely held down the value of the yen in order to continue economic growth. Some economists believe such manipulation in order to “dominate the world economy” is immoral and illegal (Mossa 87). Fareed Zakaria says there is “no doubt” the Chinese currency is manipulated (52). Robert Scott of the Economic Policy Institute states: “best estimates are that the rate of this effective subsidy is roughly 40 percent” (Scott). However, the word ‘estimate’ is very important here for there is no way to accurately gauge, or even estimate, the value of China’s currency. A country’s exchange rate “would always be “undervalued” in relation to the Purchasing Power Parity (PPP) exchange rate” and the country would be “unsustainable””(Woo 71). The best anyone can do is guess. In fact, Woo calls Scott’s estimation flat out wrong, stating Scott did not mention the unemployment rates leading up to the years used in his estimation (1998-2006) were actually lower by almost 3 percent, showing the U.S. economy as “a highly successful job-creating machine” (75). This is just one example of how “evidence on the misalignment of the yuan/dollar exchange rate is a mixed bag and highly unreliable” (Moosa 87). Because of China’s high exports, many guess the depreciation to be about 40 percent, yet some estimates actually show an over-appreciation. The International Money Fund has even suggested the U.S. has overvalued its currency (Schield 447). Woo believes “many analysts have drawn the wrong conclusions on China’s exchange rate policy and on economic globalization” because the real cause of the imbalance is not Chinese currency manipulation but “technological innovation, to include machines that now do the jobs people once used to, resulting in unemployment” (65, 78). Even still, many blame U.S. unemployment on Chinese currency.

THE EFFECT ON THE UNITED STATES

Congress enacted “Buy American” rules in the 2009 stimulus bill in order to decrease Chinese exports (Lind). That same year, The Obama administration voted to save General Motors and Chrysler from bankruptcy, hoping to increase employment and prevent furthering the recession. President Obama also “imposed temporary tariffs on Chinese steel pipes and tires” (Lind). U.S. Officials hoped that by cutting off exports, China would be forced to appreciate their currency. The Chinese publication Chinascope publicized: Washington is also trying to persuade Vietnam and other Southeast Asian countries to join its anti-China alliance…Because the U.S. wants to see the depreciation of the U.S. dollar, it is printing more and more dollars so that other countries become stakeholders and all get involved in the currency war (“How China Deals”).

Printing more money would depreciate the dollar and help balance the deficit. But, printing too much money would also cause hyperinflation (Schield 447). The possibility of tariffs placed on Chinese goods unless the Yuan appreciates has greatly increased (Lind). These two superpowers are getting closer and closer to a trade war that will not only affect both parties, but the global economy as well.

The United States has suffered from a recession for many years while China seems to continue growing. After China entered the WTO, the U.S. deficit increased $30 billion dollars per year between 2001 and 2006 (Scott). “In August 2011 alone, the U.S. imported $37 billion in goods from China, while only exporting $8 billion” (Schield 416). Even though the U.S. deficit is increasing, many U.S. firms have benefited from China’s growth with a profit of more than $4 billion in 2012 - 50 percent more than in 2007 (Hale, Hale 60). Many large-name manufacturers, such as Apple, take advantage of China’s low wages and state subsidies by offering the Chinese people millions of jobs that otherwise could have been given to Americans (Lind). The growing trade deficit has increased right along with unemployment, despite low-interest rates (Scott). Americans lose jobs and spend less, only worsening the American economy. Woo says the large unemployment blame on China is “greatly exaggerated” and that frequent job turnovers from a rise in “labor income” and “greater competition” is the source of current unemployment (62). Many U.S. politicians point the finger at China for causing U.S. unemployment and, ultimately, the recession. Yet, “27 percent of China's exports are actually generated by U.S.-owned corporations, which pass on their savings to consumers back home” (Hale, Hale 59). Min Gong from Global Studies Journal says: If U.S. imports from China decrease because of RMB [renminbi] appreciation, Americans will buy more from India, Vietnam, Mexico, Indonesia, Bangladesh, and other low labor-cost economies instead. Thus, the U.S. trade deficit is not likely to decrease (71).

Chinese currency appreciation “would only reconfigure the geographical distribution of the global imbalances and not eliminate them” (Woo 67). Also, many other Asian countries purposely depreciate their currencies, making such a transition indifferent (Zakaria 52). Economists David Hale and lyric Hale agree saying tariffs on Chinese goods “could result in fewer exports, lost jobs, and capital flight to other demerging markets with cheaper labor costs” ultimately costing the U.S. “hundreds of billions of dollars… now held by the Chinese government” (62). Wing Thye Woo uses the drop of the U.S. exchange rate by more than 100 points between 1985 and 1988 and its virtual indifference to the U.S. economy as a historical example of why a RMB appreciation would not significantly affect the U.S. economy (61). In contrast, China’s economic surplus has benefited the global economy, to include the U.S. In fact, The People’s Bank of China buys U.S. debt, which is more than any other country and greatly benefits the U.S. economy (Hale, Hale 59). Furthermore, the U.S. dollar is the world’s reserve currency, staking claim as a “financial superpower,” despite China’s improving economic successes (“How China Deals” 32). Economist Imad Moosa says “revaluation of the yuan may be harmful for the United States, reducing living standards without correcting the trade imbalance” (91). Even still, the possibility of tariffs is high and tensions are rising. Iranian journalist Rana Foroohar recommends acknowledgement of Eastern perspectives and wrote “If you really want the Chinese to do something, never pressure them about it in public” (Foroohar). On the same token, Chinascope’s response to such tariffs was: “Throughout the history of the new China (since 1949), peace in China has never been gained by giving in, only through war” (“How China Deals” 33).

THE EFFECT ON CHINA

Chinascope reminds its readers that China’s “economic power, especially…the foreign exchange reserves,” is their country’s most powerful weapon (“How China Deals” 31). After surpassing Japan as the world’s second-largest economy, projections predict China will surpass the U.S. by 2030 (Schield 442). Despite their high standing, Chinese government officials are still trying to balance international trade, for the global economy’s sake and their own, yet they have been doing so on their own terms in fear of an economic collapse. If the Chinese government appreciates the Yuan too fast, it “could result in mass unemployment and… social instability” (Foroohar). Most of the country’s money goes to preparing roads, ports, and airports for better and more efficient exporting instead of to the country’s citizens (Zakaria 53). Yet China’s government has continued increasing minimum wage and “re-introduced more flexibility in the exchange rate regime” (Gong, 74). From 1998 to 2008, the Chinese government doubled its universities and quintupled its student enrollment. Many economists fear more productivity will increase along with the education, even furthering the gap between China and the U.S. (Zakaria 54). Even still, the Chinese government continues to appreciate the Yuan in accordance with global concern. Just since 2005, Chinese officials appreciated the Yuan by 30 percent (Foroohar). Chinese inflation is now the highest it has been in the past 11 years, yet the Chinese surplus continues to grow (Hale, Hale 59, Woo 82).

China fears a rapid increase currency appreciation because they rely heavily on exports. The Chinese people are known for saving their money and spending little, resulting in small domestic profits. There is no social security, health care, education or retirement for Chinese citizens offered by their government so they rely on their own support (Schield 426). These precautionary savings result from “underdeveloped financial markets”, no safety net, and an “income disparity between the urban area and rural area” (Gong 74). Secretary Clinton said: “It would not be in China's interest if we were unable to get our economy moving again. So, by continuing to support the American Treasury instruments, the Chinese are recognizing our interconnection”: an interconnection with the U.S. and the world (Schield 423).

THE GLOBAL EFFECT

After the U.S. senate approved the tariff on Chinese products, the International Monetary Fund (IMF) and the European Union (EU) demanded “China change its policy regime on external economic engagement” (Woo 64). Then the U.S. promoted Americans to only buy American made products and placed tariffs on Chinese goods. Chinese foreign ministry spokeswoman Jiang Yu warned: “Promoting protectionism against China on the basis of the exchange rate will severely damage

China-U.S. trade and economic ties and will have a negative impact on the two economies and the world economy” (“Implications…”). The measures taken by the U.S. are solely on estimations of the possibility of manipulated currency. “According to World Economic Outlook by IMF, April, 2010, there is no absolutely positive relation between adjustments of exchange rate and current account improvement” (Gong 73). If the U.S. inhibited China to an extent of social and economic collapse, the entire global economy would decline. Few products are made completely in China. D. Hale and L. Hale write “production has become so globally integrated today that very few manufactured goods are actually made in a single country from start to finish (62). They also state the trade imbalance between the U.S. and China is a “multilateral issue that will affect almost every nation on earth” (53). China is completely aware of its reliance on exports to other countries and its vulnerability “to adverse shocks from the rest of the world” (Gong 66-67). It is in China’s best interest to keep an economic balance; therefore, it would be suicide to depreciate the Yuan for an extended period of time. Even considering China’s vulnerability, the world economies still rely heavily on the “stable growth” of China (Gong 72).

EFFORTS MADE TO FIX THE IMBALANCE

Every country only wants the best for their country. The brink of the trade war teetering on possibility is based on fear. The U.S. wants more jobs for its citizens and China wants a safe future for theirs. Many scholars have many opinions about what should be done to fix this problem.

U.S. EFFORTS. U.S. Officials have already started “Make it in America,” a program that promotes investments in domestic products (Lind). David Hale and Lyric Hale say the U.S. “should reform the traditional G-8 summits to include China as its ninth member” (64). Bradley Schield believes the only options are export subsidies and temporary tariffs (431). Chinascope tells its readers in regards to the tariffs, “China must stand up to the U.S, since a global consensus is unlikely, in order to stop this planned global depreciation (“How China Deals” 32). Some economists are pushing for a new Plaza Accord, but Woo says it will probably not reduce the U.S. trade account deficit since it did not work in the 1980s. The new deal would have to include all the countries of the world, which is just “not realistic” (69).

MULTILATERAL CHANGE

Moosa says the real problem is not the exchange rate but the trade balance and notes that if the “appreciation of the Yuan since July 2005” has not worked, why would more appreciation? (85, 93). Economist Min Gong believes China’s production and trade will only change once China’s comparative advantage has changed (73). By this, she means the Chinese people need to buy more products and the gap between the rural and urban wages should be decreased. D. Hale and L. Hale also think China policymakers will better the imbalance by “reforming tax laws, increasing consumer spending, encouraging capital outflows, and changing the regulations governing Chinese corporations” (64). Moosa, too, thinks the exchange rate is not a legitimate issue and believes placing tariffs on Chinese goods classifies as protectionism (94). Scott disagrees: “addressing the exchange rate policies and labor standards issues in the Chinese economy are important first steps” (Scott). Woo believes unemployment is not an issue in the U.S. but, rather, the high turnover and the fear it costs because of insufficient safety nets (78). He believes U.S. officials should provide more for U.S. citizens, decreasing fear and finger pointing.

CONCLUSION

The issue between China and the U.S. is simple economics. If you produce more, you sell more and earn more. If you produce less and buy more, you lose more. U.S. Officials have been working with China for decades, slowing building up to the issue of the modern trade-war. Chinese leaders have enacted on U.S. requests, perhaps realizing its effect nationally and internationally. Many economists are pushing for multilateral change, yet some people still believe China is solely to blame. These issues are based on fear of losing power for either country. However, the more both countries work together and with the world, the more likely such economic issues will dissolve.

Works Cited

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Zakaria, Fareed. "The New Challenge From China." Time 176.16 (2010): 52-54. Academic Search Complete. Web. 20 Nov. 2012.