US-China Ties

Spearhead Analysis – 29.12.2016

By Hira A. Shafi
Research Analyst, Spearhead Research

The president elect appears to be facing criticism over postulating ‘inadequately informed’ statements. One, much debated has been: pointing fingers at China for several of America’s economic grievances.

His recent moves regarding Taiwan and the creation of the National Trade Council which will be managed by –as Trump promised ‘a tough negotiator’; Peter Navarro; a stern China critic, seems to have antagonized and even cautioned the Chinese leadership of a tumultuous future. Yet, official Chinese stances indicate that they are giving Trump the benefit of doubt over inexperience in foreign policy. But eventually, expect him to understand that the China-US relation is mutually beneficial on several grounds and is ‘too big to fail’.

The Concerns:

In Trumps view: China’s currency manipulation, inability to fully liberalize their economy and ‘theft’ of US intellectual property dents the American Economy. While, Navarro paints a more gruesome picture of China’s impacts on the US; he believes China has flooded the markets with illegally subsidized products, their crony capitalism has put 50,000 US factories out of business and 25 million Americans out of jobs. But, worst of all; China has put the US in a debt of 3 trillion USD! Cumulatively, they both seem agree that China is a monster that needs to be contained.

Misdirected anger?

Presently, US exports to China amount to 116.2 billion USD, while the imports are at 481.9billion USD. This concerns the US. The exports to China include raw materials; to be used by their food or industrial sector. The US also exports its services in areas of technology transfer, logistics and even banking.

Whereas, China mainly exports electronics, furniture, toys, apparel, food items and machinery to the US, and its services are primarily in research and development. The Chinese exports do not seem to hinder interests of core US industries which include aerospace, refined petroleum products, machinery, pharmaceuticals and automobile.

However, the demand for the types of Chinese goods and services in US markets seems to have emerged from ‘personal’ choices and indicates a classic case of ‘good times producing careless men’ . Threats of imposing high tariffs would most likely not resolve this issue. But, a focus on boosting these industries by better allocation of resources may help US businesses and reduce the deficits. The Central commercial banks lending rate in US appears to be much lower than China’s, which indicates that spending culture in the US is more common.

Further, the US engagements in global conflicts may have also directed focus on industries which cater to the ‘war oriented’ demands. And money spent on these escapades also tightens space for varied investments and developments.

Contrary to the popular ‘evil China’ notion, it seems that China has just wisely allocated its own capital. Since the 1979 ‘open door policy’ reforms they started off by enhancing their agricultural exports and the revenues earned from those exports were used to develop infrastructure, help support local businesses and purchase foreign technology.

However, during the 80’s when Chinese markets began flooding with foreign consumer goods, policies were devised to discourage the practice. Maybe they just did not want to create ‘careless’ men right from the inception of the development process. India too, has implemented such policies.

It has been noted that China, over the years has taken several steps towards liberalization of their economy; President Xi Jinping has shown willingness towards further steps ,including less control on allocation of resources. China, currently appears to be retaining control of their two crucial forms of capital, i.e.: land and labor; careful utilization of these two, has allowed China to turn itself into a ‘global factory’.

Their lax labor and environmental laws have enabled several MNCs including big US companies such as : Apple, Nike, Coach and several others to amass huge profits. This also benefits the US economy.

One could then complain about their ‘exploitative’ environmental and human activities. But, Navarro’s self contradicting conclusion seems to best justify several of China’s actions. Quote” China is undergoing an industrial revolution in the information age’. The US too, carries a dark history of human right abuses during its industrial revolution and people still haven’t forgotten England’s tales of environmental horrors during their industrial revolution.

China’s process of economic liberalization is relatively recent. Yet, they appear to be adapting well with ways of ‘the civilized world’ and the remainder of the so-called flaws can be worked via constructive dialogue because the time needed for transition needs to be taken into account. In fact, their policies on restricted and recommended areas of foreign investment suggest that despite, currently serving as a manufacturing hub; they are taking measures against uncontrolled exploitation of labor and land. Based on details issued by the Chinese government; projects based on exploring and exploitation of resources are restricted; especially in the energy, mining, communication and agricultural sector. But, research and development projects even in these core areas are encouraged. So, perhaps , the concern over technology transfer is not so threatening after all…

The belief is that Chinese requirements on technology transfer (for which China pays heavy royalties) from foreign businesses; gives them an unfair advantage in the long run, as these intellectual properties are then used to flood markets with cheaper imitated goods. This could instead be viewed as their long term plan to improve social and economic conditions of their people.

Japan- which has probably once upon a time posed a bigger threat to the world; used a similar strategy of imitation and improvement, post war years. But constructive integration rather than isolation helped in subduing threats from them and has enabled them to technologically advance the entire world. And after 65 years, a Japanese prime minister is paying a visit to Pearl Harbor to commemorate the victims. So trust and space changes a lot.

Another set of concern includes: currency manipulation, holdings of US debt and large accumulations of reserve currency in USD; this again stems from differences in priorities or ‘’visions’’; China’s ‘opening’ with the world was based on export driven visions, a major driving factor behind this was a growing ,and somewhat ‘out of work ’ population. But, since they are trying to expand their production base; perhaps the stern control over currency would automatically relax.

But, expecting them to give up controls on currency, (which could directly impact the wellbeing of the Chinese population who rely on the exports) is unrealistic. And at the same time, expecting them to stop asking for technology transfer (which could prevent them from diversifying and opening up further in the future)…almost translates to expecting them to stop defending their national interests.

Buying of US debt too; emerges from extravagant spending of the US government; of which only a certain amount is spent on ‘Chinese goods while enabling the US to carry on with their spending spree. Making it somewhat of a mutually beneficial situation. And one of the main reasons, China holds large amounts of USD as reserves is due to their energy and other commodity requirements, which are usually traded in USD. This allows them hold a currency needed for certain trades and at the same time this also prevents adverse inflationary effects on the US economy– which again appears to be somewhat mutually beneficial.

History contains a plethora of incidents when miscommunication led to war or near-war situations. But, the nature of warfare post WWII appears to have changed, the advancement in military technologies, has replaced direct confrontations with proxy conflicts. And though, the age of technology carries a promise of improved communication; but alongside a rise in disinformation & misinformation, as tools for manipulation have also emerged. People are drowning in a sea of information, yet struggling to understand objective truths.

It is believed that big wars have gone out of vogue; but the fact that nations are trying to design infinite countering strategies in a finite space, with assistance of proxy conflicts and mis/dis-information, creates a new form of miscommunication, of which the consequences are yet to be fully experienced.But, so far, it seems to have expanded and diversified war agendas; and the final burst of this bubble maybe more detrimental than big wars of the past.

A rollback is required; which could be initiated by powerful global leaders. And in the case of China and US, adherence to Obama’s statement “When the United States and China are able to work together effectively, the whole world benefits,” would certainly be a better option.