In an interconnected world with faster, more efficient trade flows and supply chains, the perception is often that the protectionist countries stand alone, erecting economic barriers that isolate them from the global community. Global trade is a sign of prosperity and benefits to consumers who gain access to a diverse array of goods and services, often striking a more favorable balance between price and quality. Those who question such prosperity often garner admonishment from heads of government, economists, or the media, among others.
However, globalism, or any particular system for that matter, is imperfect. Some countries or individuals benefit at the expense of others, breaking rules or violating trade agreements as they gather wealth and influence. As imbalances persist, it becomes far more difficult for individual leaders to appease the foreign masses if the domestic masses start to convey their own struggles.
For years, the United States and China have shared a cohesive economic relationship, fostering global economic prosperity in the process. After opening its emerging economy to the world, China offered a value proposition of cheaper resources and labor, and many aspects of global production moved there in response; there were buyers for China’s cheaper exports and companies for its’ cheaper labor.
Over time, that relationship gradually became less cohesive. Perhaps the U.S. overextended its economic clout, trading away certain levels of American jobs, such as in manufacturing from the Rust Belt, in exchange for cheaper goods and a trading partner with a far cheaper currency. China, meanwhile, has been continually criticized by the global community for deploying an array of unfair and broadly protectionist practices, including: intellectual property theft or forced technology transfer, in which companies must provide strategic knowledge to Chinese entities in order to enter the Chinese market; government subsidies for state-owned firms and industries; and manipulation of the value of its own currency. Nonetheless, China has emerged as the second-largest economy in the world (behind the U.S.), but still self-reports itself as a “developing” nation in order to receive trade benefits governed by the World Trade Organization. Note that China also maintains relations with the adversarial regimes of North Korea and Venezuela.
Displaced American workers (i.e. in manufacturing), not all of whom can simply “get an education and learn coding and computer skills” to solve their employment woes, were one of the driving forces of the election of President Trump, whose policy agenda included addressing U.S.-China relations and the ballooning $375 billion trade deficit between the two. While a protectionist policy at its core, Trump’s “America First” stance has been spurred by the increasingly critical need to remediate these issues.
As a result, we now find ourselves at a significant moment in world history as the two largest economies by gross domestic product (GDP) have been embroiled in a trade dispute for a year. The Trump Administration has taken action to address its grievances, implementing tariffs on $250 billion worth of imported goods from China, while China has retaliated with duties of its own on $110 billion worth of imports from the U.S.
Subsequent negotiations, spearheaded by key U.S. officials like U.S. Trade Representative Robert Lighthizer, Treasury Secretary Steven Mnuchin, Commerce Secretary Wilbur Ross, and National Economic Council Director Larry Kudlow, have focused on issues like intellectual property protection and forced technology transfers. This is a worthy point of discussion considering that counterfeit goods, pirated software, and the theft of trade secrets, all of which China is heavily involved in, costs the U.S. up to $600 billion each year, according to the Commission on the Theft of American Intellectual Property.
As the two economies undoubtedly rely heavily on each other, the trade war has posed risks to both countries; China is the third-largest market for U.S. exports and trade while U.S. investment with China supports about 2.6 million American jobs. Moreover, the impacts of the trade war has resonated globally. As tensions escalated amid the potential threat of new tariffs, financial markets stalled in the latter half of 2018 as manufacturing and supply chains were disrupted and investors awaited the outcome of the ongoing negotiations.
Global sentiments and financial markets have rebounded in recent weeks given growing optimism that the two countries may strike a deal. China is hoping to revive its profitable relationship with the U.S., especially considering that the 6.6 percent of GDP growth it reported in 2018 was slowest reported since 1990. The 6-6.5 percent expected in 2019 is even slower. To put into context, the U.S. has not grown at more than 3 percent, a key economic threshold, since 2005. From the U.S. perspective, while Trump has expressed his willingness to walk away from a “bad deal,” the likelihood of an agreement has increased as he targets a key economic win prior to the upcoming 2020 Election campaigns. A deal with China would likely provide a boost to the stock market and alleviate some of the tariff-related burdens that have already impacted American workers and consumers.
Progress always requires patience, and as the world awaits the results of these constructive negotiations, we should remain optimistic that the outcome will be fair and mutually beneficial for all involved.
Photo credit: The White House, Flickr
United States Trade Representative Ambassador Robert Lighthizer, senior staff and cabinet members meet with Chinese Vice Premier Liu He and members of his delegation for the U.S. – China trade talks Wednesday, Jan. 30, 2019, in the Diplomatic Reception Room in the Eisenhower Executive Office Building at the White House. (Official White House Photo by Andrea Hanks)