US-China trade war at point of no return: Washington’s demands go beyond tariffs

This is when and how the trade war begun. On Tuesday January 23, 2018 in the Oval Office of the White House, in Washington D.C., US President Donald Trump signed Section 201 Action to provide relief to US manufacturers, by imposing extra tariffs on imported washing machines and solar cells and modules. Official White House photo, by Shealah Craighead.

It seems the US-China trade conflict, if not full scale trade war, is entering the phase of no return. Nothing will be as before in the economic and otherwise relations between the two largest economies of the world. Washington appears ready to push its cause to the end, while Beijing still pretends not to understand it. The Americans insist on their demands, which reach far beyond tariffs touching some structural pillars of the Chinese economy. The White House says it’s about misappropriation of U.S. intellectual property and the industrial subsidies Beijing allegedly freely employs.

But China has become what she is today by absorbing western technology and running a centrally planned economy, having made subsidies its very structural base. During the last years though, things have evolved in China and the functioning principles of the Chinese economy have dramatically changed. Beijing now promotes the idea of China being a market economy. This allegation can be adequately defended. The country has two giant capital markets, the Shanghai Stock Exchange and the Shenzhen Stock Exchange, which by and large have substituted the role of central planning in regulating the use of the factors of production; capital, labor and nature.

Markets in place of central planning

This observation aspires to take care of the key issue of how production of goods and services is organized and functions in the vast country. There are much stronger arguments though to defend the market economy status, in the distribution system of goods and services. Within China prices of goods and distribution channels are set and organized more or less in the same way as in the ‘western capitalist world’, by demand and offer, expressed by billions of decisions taken by producers and consumers.

Now if the White House wants to denounce the truly strong Beijing government interference in the structuring and functioning of the Chinese financial system, it has better look elsewhere for arguments. The latest meltdown of the western financial system in the crisis years of 2008-2010 was just stopped from destroying the real economy of major westerns countries by the use of some trillions of government dollars, euros and pound sterlings. Still today the western financial system doesn’t fall apart because everybody knows that the government will intervene and save the bankrupt banks. If this is not government interference words have lost their meaning.

Who is more market oriented?

In reality the administration of practically all the major ‘capitalist’ western countries acts as the lender of last resort and the ultimate insurer of each entire financial system. In comparison, the Chinese system is actually more people friendly and democratic than the western arrangement which favors the banks and the bankers instead of producers. In contrast, the Chinese deal uses the banks as instruments to favor production and employment for the masses, not the bankers. Those simple arguments leave Trump’s ‘America Fist’ strategy, as a naked and unprovoked declaration of war against China.

Back to the latest developments, last week’s the US-China trade talks ended without issuing a joint statement. The two days deliberations in Washington, involving mid level officials from the two sides, produced no results at all. It’s even more discouraging that no new meeting was set. This leaves the trade confrontation to what the White House plans for the next two months. Up to now the two sides have implemented tariffs on goods worth $50 billion for the other’s exports.

Threatening all trade

The US administration though under the orders of the President, is preparing a new mammoth package of tariffs on imported Chinese goods worth $200bn. In total the Chinese exports to the US amount to $500bn, leaving a surplus for Beijing of not less than $355bn. Last June the U.S. Commerce Secretary Wilbur Ross, on official visit to Beijing, failed to convince the Chinese to increase their imports of American soybeans and liquefied natural gas (LNG). Washington’s rhetoric goes as far as threatening all the $500bn of Chinese exports to the US.

Under these conditions, reliable commentators estimate that the Chino-American trade war is to escalate. The same sources observe though, that the two sides are careful not to let their trade differences spill over to other, more dangerous areas. Still the trade war has already touched the real economy, with China paying the larger cost. So far the impact is estimated at 0.3% – 0.5% of the country’s GDP.

America prospers

On the American side though the New York Stock Exchange breaks its capitalization records one after the other, in what is the longest Bull period for stock prices in history. For more than nine years now NYSE is jumping from one summit to another. Growth is also robust in the real US economy. Obviously then the Trump administration emboldened by the robust performance of the American economy is not going to ease up the pressure on China, at least not before the mid-term elections in the Congress this November. The Republican electoral base is thrilled with Trump’s tough stance towards China.

Nevertheless, this may be the good outlook. The precarious prospect may be that the Trump administration will continue embarrassing the global trade relations and order throughout their four years term. In any case even if Trump is not to seek reelection in 2020, the ‘America first’ narrative is there to stay. China and Germany are to feel the heat.

 

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