China.com: On July 6, the United States began to impose a 25% tariff on the first batch of 818 categories of Chinese goods worth $34 billion. As a counterattack, China also imposed a 25% tariff on imported American products of the same scale on the same day, leading to an escalation of the trade war between the two countries. In order to better understand the cause and effect of the US-China trade frictions, the “China Interview” program invited Ms. Chen Wenling, Chief Economist of the China Center for International Economic Exchanges to give us a comprehensive analysis.
China.com: The trade frictions between the two sides have been escalating since the US threatened to impose tariffs on China, what do you think of these trade frictions?
Chen Wenling: Obviously, we have seen an escalation of the trade conflicts. Previously, I thought that the two countries could return to trade negotiations and work together to achieve a win-win outcome. Unfortunately, the United States is going along the wrong path.
Earlier, China took the initiative to develop the “100-day plan” with the aim of importing more aircraft, beef, and energy from the United States, and it has achieved significant results in 2017. China’s imports of aircraft and energy from the United States such as shale gas, oil and natural gas increased eight times compared with the same period of the previous year. Furthermore, China is planning to replace the “100-day plan” with a “one-year plan” so that it could have positive interactions with the US. On the contrary, the US introduced tariffs on steel and aluminum last March, followed by the special 301 report, announcing a 25% tax on $50 billion China’s commodities which cover 1,333 categories.
I was visiting different research institutions in the United States when this special 301 report was released. The English version of the report has 185 pages, more than 1,000 footnotes and five appendixes.
According to US experts, the suggestion made by experts at the beginning was $30 billion of Chinese goods, but President Trump doubled it to 60 billion. In the end, they decided to impose a 25% tariff on $50 billion of China goods. After the special 301 report was released, China made it clear that it will not be intimidated by the report, it will not hide but to fight back. In order to avoid any further escalation, the US government sent a 7-person delegation to China for negotiations, and invited China’s Vice-Premier Liu He to the US for trade negotiations. The two sides even issued a joint statement in the US, saying that China and the United States will not fight trade wars or impose tariffs on each other, which made everyone believe that a trade war will not break out and the escalation of trade frictions can be avoided. Surprisingly, the US government did not keep its promise and turned the trade frictions into a trade war.
On July 6, the US introduced a 25% tariff on the 818 categories of Chinese goods with the worth of $34 billion. In response, China fought back by imposing the same tariffs on the same amount of US goods, came into effect at 12:01 on July 6.
I think that China’s counter-measures are totally reasonable. China has always advocated economic globalization, global trade and the connection of global supply chains, industrial chains, and value chains. China has always taken the initiative to communicate with the United States, promote bilateral negotiations and resolve problems under the WTO rules. Undoubtedly, China has demonstrated great tolerance and patience a responsible country should have. On the contrary, the United States has become more irrational and escalated the trade frictions.
Whether it is a trade conflict or an escalation of trade friction, the purpose of these frictions is to impose unjustified barbaric sanctions on a country that has made significant contributions to the international orders, rules and markets, even the US market. A country like that should be well respected. This kind of irrational sanctions should be condemned and opposed. If the United States continues to behave this way, it will bring significant losses to China and the United States and damage the China-US relations and the world as a whole in the following five aspects.
First of all, the trade war will undermine international trade rules, trade order, and ultimately disrupt the international trading system. The United States has always said that the WTO does not treat the United States fairly and the United States wants fair trade. The US ambassador in the WTO also insists that all those rules that are unfavorable to the United States are unfair and therefore, the US has to promote “America first” in trade.
Trade can be defined as different parties trade and exchange goods under equal rules. It is a market behavior and a voluntary act of different parties. Trade, especially cross-border trade, is to supply goods needed by another country. For example, the domestic demand in the United States has led to American companies to buy Chinese products, which is a transnational market behavior. There is no such a thing as who is the first or second. The US government should impose sanctions against the US companies because they are the one who has created the trade deficit by importing a large amount of Chinese goods. China should not be the scapegoat. Furthermore, the goods exported from China include the trade volume generated by American companies’ Chinese investment, or the investment made by European and Japanese companies. Taking the Apple mobile phone as an example, it is produced in Zhengzhou, China but most of the phones are sold back to the United States.
There is a demand for Chinese goods, which is why the US companies come to China buying Chinese products. This is a choice made by the US companies entirely on their own. Nonetheless, the US government uses its unilateral rules and laws to sanction Chinese goods which are imported to satisfy America’s domestic demand. The US feels great about the sanctions it imposed on China but actually, it has damaged the international trading systems and rules.
All the countries choose to resolve trade disputes under the framework of the WTO after joining the organization. It is rather rare for a country to sanction other countries by using its domestic laws and regulations. Before the establishment of the WTO in 1995, the United States also used the 301 clauses to sanction other countries for many times. However, this kind of unfair practices has been terminated since the WTO was established.
The United States once again waved the stick of the 301 clause and used the US trade act of 1974 as a basis for trade sanctions against China. What the US did has damaged the systems and rules of international trade. More than 30 countries will be under the US sanctions, including China, Japan, South Korea, the European Union and even some of its allies. These countries have to apply for exemptions from the US, instead of consulting with international organizations such as the WTO in accordance with international rules and trade rules. For example, eight countries are exempted from the US metal tariffs. Apparently, the EU might get an exemption from planned US auto tariffs.
The process of applying for exemption made the US feels great! It completely ignored the WTO rules and even threatened to withdraw from the WTO if necessary. The international rules have become invalid for the US. How should we deal with Trump? This is a very important question as it will have a great impact on international trade.
The trade frictions between China and the United States will have a certain impact on both Chinese and American exports. Some economists suggested that the trade war will also adversely affect China’s GDP by 0.1% or 0.2%. The important thing is that the market expectation has deteriorated, which made it very hard for us to trade with each other. The trade war launched by Trump has damaged the rules of fair trade, which is a very destructive consequence.
The second major damage of the trade war is that it has destroyed the global industrial layout and the connection among the global industrial chain, supply chain, service chain and value chain. The trade sanctions have imposed tariffs on many commodities, including the imports to the United States, making the entire supply chain a mess. The high tariffs on some high-tech products will make it difficult for China to import certain core components from the US.
For example, the US sanctions on ZTE will affect China’s entire industrial chain as ZTE has more than one thousand large suppliers. Furthermore, the US has also imposed sanctions on the participants of the trade, such as the Mexican workers in the United States, even the Chinese students who are studying in the United States, all these will have a great impact on the industry chain. Another consequence of the restrictions is that we will have to restructure certain core components, positions, and services and the resulting costs are very high.
The supply chain will be completely ruined after the trade order is being disrupted, the trade of two thirds of the global intermediate goods will be in a mess. Many companies will have to re-adjust the process in the industrial chain, including the upstream and downstream relationships, which is a very painful process and will have a dramatic impact on the world’s manufacturing industry.
Thirdly, the trade war will be destructive to the global economic recovery. According to the IMF’s forecast, 75% of all the economies have started to recover in 2018 after ten years of painful adjustment. China has made a great contribution to the world’s economic recovery. For example, China’s investment and trade have driven world economic growth and its manufacturing accounts for 25.5% of the global manufacturing sector.
The escalation of the US trade friction and other irrational measures it takes will destroy the future of the world economic recovery and hit the global market. The stock markets of various countries have already experienced significant turmoil whenever the US government takes an action. The irrational trade sanctions of the United States and its US dollar policy will hit the world economy hard.
Fourthly, I think it will cause great damage to the global governance system and the ways countries deal with each other. The United States says that China is a revisionist country, but in fact the United States is now revising the international order and rules. After the Second World War, the international order and rules, including the three major international institutions, were established under the leadership of the United States. The same is true for the WTO. At the beginning, the US advocated economic globalization, trade facilitation, and liberalization but now I feel that the US government has given up all of these.
The hegemony of the US has damaged the global order, rules, and the basic principles followed by different countries when dealing each other, such as mutual respect, peace negotiations, bilateral negotiations and the global framework. Based on its hegemonic position in the US dollar, military and economic power, it magnifies all conflicts and attacks others, which is absolutely unreasonable.
China has always adopted a positive approach to strive for better cooperation between the two countries. Trump took away $250 billion deals after visiting China and the relationship between the two countries should become better and move towards a win-win cooperation, rather than escalating the trade friction. The escalation of the trade frictions is exactly contrary to our expectations. Therefore, I think that the trade war is also destructive to the international order, the relationship between different states, especially the big powers.
Lastly, it will also damage the US-China relations if the US continues its practices. We want to build a new type of relationship between China and the US based on mutual respect, mutual benefit and win-win outcome.
The US-China relations have actually been moving in the right direction since they established the diplomatic ties 40 years ago. Despite the frequent twists and turns, the US-China will gradually go back to normal. However, this time is different. At the beginning, there was a good interaction between China and the US and most of us expect that the bilateral relationship will become better. On the contrary, Trump has shocked the world and caused great damage to the China-US relations.
Personally, I think that there are some other reasons behind the trade frictions. Anyway, the trade war launched by Trump has already undermined the relationship between China and the United States and hurt Chinas and the Chinese people.
When a country fails to keep its promise, it will hurt the people seriously. Looking back at the history of China, we have always believed that the leader of a country should always keep his words. Obviously, some countries failed to do so and there will be a severe consequence. Apart from the disappointment, Chinese people are full of anger and they will do whatever they can to defend their county. The Chinese government will also have to take appropriate countermeasures because it has to be responsible for its own people. In the face of a bully, China will not back up. Now, we hope that all countries can follow the principle of building a common community with a shared future when dealing with each other. I think that China has done a very good job in this regard.