The trade war between the United States and China has turned into a cold war

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What started as a trade war against China’s unjust economic policies has now turned into a so-called cold war propelled by different ideologies. Bilateral US-China relations plunged in 2018 when US President Donald Trump’s obsession with trade deficits led him to impose punitive tariffs on China. The tariffs have been followed by restrictions on both China’s access to US high-tech products and foreign investment involving security concerns and by allegations of unfair Chinese trade practices.

Despite calls from the American business community to ease tensions, US President Joe Biden has so far amplified his predecessor’s policies by strengthening anti-China alliances and implementing additional sanctions. Biden now characterizes the US-China conflict as “a battle between the usefulness of 21st century democracies and autocracies.”

But the logic behind the US trade war was flawed, and the most recent politically motivated restrictions are counterproductive given the damaging long-term economic consequences for both sides. Nonetheless, there have been few signs so far that Biden is likely to change course. In the meantime, the Europeans may be in a better position for productive give-and-take talks with China on economic policy making.

Wrong US trade policy

The Trump administration’s initial mistake in launching a trade war was to assume that US trade deficits, which occur when a country imports more than it exports, were inherently bad and that China was to blame.

Yukon Huang

Huang is a senior researcher in the Carnegie Asia program, where his research focuses on the Chinese economy and its regional and global impact.

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However, trade deficits are not a good indicator of the state of the economy, and US trade balances are largely influenced by soaring US federal budget deficits, which have little to do with China. . The irony is that three years after the launch of Trump’s tariffs to correct the US trade deficit, bilateral trade between the US and China has now rebounded to record levels, China’s trade surplus has grown. and the US deficit has worsened.

Trump also echoed popular but mistaken sentiments that U.S. companies have overinvested in China, resulting in loss of competitiveness. But over the past two decades, only 1 to 2 percent of the United States’ annual foreign investment has gone to China. In contrast, the EU, which is comparable to the US in economic size, has invested around twice as much as the US per year. The concern should be why the United States is investing so little in China rather than so much.

China’s Intellectual Property Safeguards

China’s alleged failure to protect intellectual property rights is also distorted. In the extreme, China is accused of stealing foreign intellectual property, especially technology. But after taking into account the size of foreign transactions and China’s research activity, such events may not occur abnormally often or may be exaggerated.

In addition, Chinese patent courts have matured in dealing with this problem: foreign plaintiffs are now more likely to succeed than domestic companies. In addition, theft is less of a concern as royalty and license payments by Chinese companies, according to a think tank researcher, have almost quadrupled in the past decade, causing the China is the world’s second-largest payer of such royalties.

The reality is that it takes generations to develop a strong regime for intellectual property rights, as it did for the United States. The foundations of the Chinese system were laid only two decades ago with the reforms that accompanied China’s 2001 accession to the World Trade Organization. Progress has been notable in recent years, as evidenced by the findings of the US Chamber of Commerce’s “Business Climate Survey 2020” in China; the survey found that nearly 70% of U.S. companies surveyed in China believed that China’s enforcement of intellectual property rights had improved, up from just 47% in 2015.

China’s protectionist policies

But there are also credible concerns that China’s investment policies are treating foreign companies unfairly. One complaint is the use of subsidies by China. All countries provide subsidies to domestic businesses and households, such as the U.S. support for farmers, household tax deductions to encourage clean energy use, and incentives for companies like Amazon to relocate. But in China, grants tend to be more focused on using the country’s banks and stock markets to support high-tech companies and strategic industries.

The US government might choose to pressure China to better align its subsidy policies with Western standards, but instead, the Biden administration is copying China’s handbook by offering its own subsidies to promote strategic industries.

China’s protectionist tendencies are also evident in the requirement that foreign companies form joint ventures with domestic Chinese companies as a condition of market entry in certain economic sectors. This provision has been widely cited as a way to promote so-called forced technology transfer, where foreign companies pass on new technologies to their Chinese partners as a condition for being able to invest and produce in China.

But those Chinese requirements also appear to be getting less stringent in recent years, as evidenced by major foreign investment in chemicals manufacturing (BASF), auto manufacturing (Tesla) and finance (BlackRock). These foreign companies were allowed for the first time to enter key sectors without a Chinese partner.

China’s willingness to drop the joint venture requirement featured prominently in the EU-China Comprehensive Investment Agreement negotiated in December 2020 (which has yet to be ratified). This experience suggests that political differences can be addressed through consultations if both sides are willing to compromise.

Building better bilateral relations

The key to more harmonious economic relations is to recognize that a more developed China must not threaten the well-being of the West. The United States, Europe and China have different comparative advantages, which are reflected in the composition of their exports. Europe specializes in consumer goods and high-end machinery; the United States in agricultural products, high-tech components and services; and China in basic manufactured consumer goods and inputs. All parties can continue to prosper by operating within a rules-based international trading system.

However, tensions between the United States and China are now driven less by economic realities than by great power rivalry and nationalism, factors exacerbated by mutual mistrust of each other’s strategic intentions. In describing the United States’ multifaceted relationship with China, the Biden administration emphasized the need to “compete, confront and cooperate” at the same time. But as Chinese President Xi Jinping pointed out at the 2021 World Economic Forum, “competition is about striving for excellence, not killing a rival.”

Punitive trade measures have had little effect in changing economic outcomes, and experiences from countries around the world show that sanctions generally do little to get governments to change their core beliefs. Instead, there is more to be gained from leveraging China’s dependence on a rules-based international trading system as the country seeks to become a more prosperous and modern nation.

Practical steps forward

The challenge now is to emerge from a self-defeating cold war by working within the international economic system to mediate and moderate tensions. The initiative for such a venture may have to come from Europe, given that Republicans and Democrats in the United States are united in their hard-line approach to China.

Europe and the United States may have similar goals in their relationship with China, but Europe is more economically integrated with China in terms of investment and trade flows. For this reason, the competitive aspect of their relationship offers more potential for mutual benefit. Moreover, Europe is neither as preoccupied with the politics of the great powers nor as dependent on technological advantages as the United States, which makes the bloc more open to compromise.

If the United States is to maintain its technological and moral authority, it must first address the economic and political weaknesses of its country. Lamenting China’s unfair policies and authoritarian rule will not solve this problem. Instead, the United States should focus on strengthening its own economic competitiveness, forging internal political cohesion, and working with European and Asian partners to build sustainable international institutions.


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