August, 2017

Would the US win a trade war with China?

Original article: Time

Now that US President Donald Trump has ordered an investigation into China's alleged theft of American intellectual property, some analysts fear a trade war may be imminent. The consensus thus far is that China has more to lose than the U.S. 

Don't U.S. corporations have considerable China exposure? Yes, some of the heavyweights like Apple, Boeing, General Electric and Microsoft do, and a trade war would hurt their business in China. 

What's more important is the trade deficit the U.S. has with China. According to the U.S. Census Bureau, last year U.S. exports to China totaled $115.6 billion. Meanwhile, China exported $462.6 billion worth of goods to the U.S. Trade comprises 40% of China's GDP compared to less than 30% of the U.S.'s. Trade with the U.S. supports a lot of jobs in China - more than it does in America. 

At the same time, China's allure as a low-cost manufacturing destination has faded. Research firm Oxford Economics notes that China's unit labor costs are just 4% less than the U.S.'s. U.S. firms can manufacture in Southeast Asia for much cheaper than China - if low labor costs are a paramount concern. Or they can even "reshore" in some cases, when it makes sense from the standpoint of both the supply chain and customers. 


A U.S.-China trade war is not imminent. The Trump administration has merely opened an investigation into China's purported theft of U.S. intellectual property. The investigation could take up to a year, and its conclusions are not predetermined. China's behavior between now and the end of the probe will influence the outcome of the probe. 

Additionally, Trump and Chinese President Xi Jinping have established a good rapport - better than that of Xi and Trump's predecessor Barack Obama. That may help forestall an escalation.

Since the launch of his presidential campaign in June 2015, Trump has signaled he intends to hold China accountable for unfair trade practices. If he does nothing substantive, Beijing will conclude that he's a "paper tiger" - all bark and no bite. 

That's a poor strategy for dealing with China and its zero-sum approach to geopolitics. President Obama eschewed confrontation with China - and Beijing seized the moment to vastly expand its footprint in the South China Sea, accelerate theft of U.S. intellectual property and squeeze American companies operating in its territory. 

Among U.S. China watchers, there has long been a contingency that believes not taking a hard line with the Middle Kingdom is the best way to keep bilateral ties on an even keel - that the relationship is too important to risk destabilizing. Foremost among these thinkers is former Secretary of State and National Security Advisor Henry Kissinger, who remains an influential voice in U.S.-China relations even now at the age of 94.   

Some of these China watchers have commercial interests in the PRC that could be disrupted in the event of a deterioration in Sino-U.S. relations. Kissinger himself is the head of a consultancy, Kissinger & Associates, that has handled big-ticket projects for U.S. firms in China. Kissinger also has served as an advisor for a major corporate lobbyist group seeking better U.S.-China relations. 

America's overall commercial interests, as well as the intangible value of U.S. intellectual property should be given priority over the narrow interests of those who are focused on extracting short-term profits from their engagement with China. A recent op-ed in The New York Times penned by two former senior U.S. intelligence officials rightly points out that for many years, U.S. administrations accepted that "some level of exposure to China’s depredations against our intellectual property is simply the cost of doing business with the world’s now second-largest economy. This is not acceptable."