By Meghaa Gangahar
The two biggest economies of the world – US and China, are slowly inching closer to a trade war. Though the world’s largest exporter is the second-largest trading partner for the United States, the tilt of the trade deficit has always been in favor of China.
Impact on the US economy
Trading with China over the past decade has led to a loss of American manufacturing jobs. There has been a reduction of real wages for semi-skilled workers, while communities depending on low-end manufacturing have been hit hard.
As a consequence, there has been a rise in protectionist sentiments among the US citizens, reflecting in the political and diplomatic intent of their government. The Trump administration has threatened China with the imposition of high tax barriers on trade. This move can be traced from their frustration stemming from China’s currency manipulation to keep exports cheap, supplemented by grievances regarding other unfair trade practices.
China is believed to strategically steal business secrets and intellectual property to manufacture cheaper versions of goods to be exported.
The Commission on the Theft of American Intellectual Property concluded that if this were to be prevented, over 2 million jobs would return to Americans.
China and WTO
In December China completed 15 years as a member of the WTO. It was expected that China’s status as a non-market economy will be shifted to that of a market economy on this occasion, though the US and the European Union opposed this move.
The qualm that the WTO members have with China is regarding the subsidized credit, energy and raw materials that it enjoys along with the heavy intervention of the Chinese government in industries. Up till now, the members could protect their industries from cheap Chinese imports by ignoring domestic Chinese prices.
America’s changing foreign policy
The recent actions of the new US president, have further strained US- China relations. These actions include deviating from a decades-long American diplomatic policy of supporting the ‘One-China Policy’, and threatening China’s control over territories in the South China Sea.
On the other hand, the ties with Taiwan – which pumped in $1 billion and 12,000 jobs in the USA – seem to be growing stronger. The protectionist tax barriers that the US plans to impose against China, starting with heavily subsidized steel and aluminium, may trigger a tit-for-tat response from China. As China happens to be a crucial exporting ground for US agricultural products (yearly export of over $20 billion) and aircrafts, it can heavily crackdown on the US by substituting these imports.
Even though the US-China trade led to a loss of manufacturing jobs, the trade relation supports about 2.6 million jobs across industries in the US, included those created by Chinese companies. There is also a lucrative and growing customer-base for US products in middle-class China, which has potential to be tapped into if relations are strong.
Though a trade war seems to be looming, China favors avoiding it as Mr Xi Jinping affirmed in his WEF speech at Davos that “No one will emerge as a winner in a trade war”.