China-United States Trade War
Historically, the United States has been involved in several trade wars with several nations, such as Japan and even the European Union. The United States also has a long history of trade wars with China dating back to the 1990s. Through the use of Section 301 of the United States Trade Act of 1974, various presidents of the U.S. have instigated investigations into Chinese trade practices. This paper provides a brief overview of the history of China-US trade wars, the current trade war, and its impacts and challenges. Besides, various solutions to the problems are presented. The ongoing China-U.S. trade war has created a loss-loss situation for the countries involved and, to an extent, negatively impacted the world’s economy.
Brief History
China and the U.S. first engaged in a trade war in the year 1989, and the trade war was instigated by the administration of President George H.W. Bush. The trade dispute was a reaction to the 1989 Tiananmen Square Protests in China, which was brutally suppressed by the Chinese Law Enforcement (Abor91). The trade war saw the American Congress and Bush’s Administration impose stringent legal and administrative measures on investments, exports, and numerous other trade relations with China (Abor92). Besides, China was stripped of its most favored nation (MFN) status by the United States. In 199, the new U.S. President Bill Clinton undertook to end the American trade war with China and restored China’s MFN status (Abor95). Besides, he marshaled congress to approve the U.S. – China trade concession and China’s accession to the World Trade Organization (WTO). The U.S. – China trade agreement was underpinned by China’s admission to resolve several trade differences between the two nations, such as protection of copyrights and patents and reduction of Chinese import tariffs. Even though China undertook massive reforms aimed at reducing the importation tariffs, the U.S. still blamed it for numerous violations and theft of American intellectual property (Zeng165). This move sparked off another trade war which was amicably settled by the WTO.
in 2010, President Barrack Obama’s administration opened a Section 301 investigation on China’s policies on subsidies concerning green energy technology companies. The U.S. decided that China’s subsidy policies and investment in green energy technologies violated the WTO regulations to which China was a party (Sachs145). Section 301’s investigation on the issue revealed massive infringements on American patents and intellectual property by the Chinese government, which had enacted and implemented several policies that forced American companies that wished to establish joint ventures with like-minded Chinese companies to surrender their technologies and plans to the Chinese government. The American government held that this was a breach of WTO regulations aimed at stealing their techniques from their Chinese trade counterparts (Sachs149). Consequently, the Obama administration imposed numerous tariffs and regulations on trade relations with China to find remedies to the situation. The imposition of tariffs and sanctions prompted the Chinese government to revise its subsidy policies that were related to green energy technology companies.
The incumbent United States President, Donald Trump, and his administration have taken a tough stance on trade policies, more so on China. In June 2017, on the grounds of national security, President Donald Trump instigated a Section 232 investigation on China’s trade policies and activities. Section 232 investigation is usually used to establish the effect of American imports on its national security (Linet al. 219). The researchers concluded that the Chinese government maintains a policy of forced technology transfer, which, coupled with state capitalism prevalent in China, poses a significant threat not only to America’s cybersecurity but also national security (Lin et al. 225). This finding laid the foundation for the current China – U.S. trade wars. The war was further escalated in intensity when the Trump administration launched a Section 301 investigation on China’s policies on intellectual property and imposed tariffs on many Chinese trade activities.
Achievements, Challenges, and Solutions to the China-US trade war
Achievements
The trade war between China and the United States has had several successes. However, the accomplishments have been drowned by the calls for an end to the trade war. The trade war brought an urgent need for honest and in-depth trade negotiations between the two countries (Zhang 57). The talks saw the United States secure many vital Chinese commitments, which can be deemed as achievements for the United States.
One of the achievements is the reduction of the U.S. trade deficit. The high U.S. trade deficit with China was one of the reasons that instigated the trade war in the first place. President Donald Trump, when announcing his administration’s imposition of tariffs and sanctions on Chinese trading activities, held that the move was a solution aimed at addressing the Sino-America trade deficit, which was spiraling out of control (Knowledgeatwharton). The trade negotiations between China and America have resulted in a deal to cut the ever-growing U.S. trade deficit through the purchase of large amounts of American energy and agricultural products.
Another achievement of the trade war is intellectual property rights protection. The U.S. negotiators have managed to draw concessions from their Chinese counterparts on the need to strengthen the intellectual property rights of both nations. Intellectual property rights protection is to be achieved through the abolishment of China’s policy of forced transfer of American technologies and designs for American firms venturing into business in China.
There has been non-discriminatory market access. The U.S. government has received concessions from the Chinese government aimed at ensuring the fair and equal treatment of American investors and entrepreneurs, together with their respective companies in the Chinese market.
The trade war has also led to the establishment of an enforcement mechanism. The American government reached an agreement with the Chinese government to come up with a practical and structured enforcement mechanism to facilitate the compliance of trade agreements to prevent future trade disputes from escalating into trade wars,.
Challenges
The Sino-American trade war has not only posed economic and political obstacles to the two nations involved in the trade war but has also negatively affected the world economy. The war has brought several challenges, more so to the U.S. One of the problems is the increase in U.S. debt levels. The massive trade between America and China has always generated finances used in servicing American loans and debts. The present trade war has resulted in a significant reduction in the number of trade relations between America and China. The decrease in trade has directly led to the decline in America’s financial inflow, which has instigated an increase in the debt levels of the United States. When a trade channel, the American-China trade channel in this case, worth billions of dollars is shut down, a nation has to find another avenue to bring in the much-needed finances. Indeed, the United States households have been forced to buy into the debt (Knowledgeatwharton). The reduction in a country’s financial flow of income increases it debt level in the short term but in the long-term it drives down its economy.
The second challenge is the increase in consumer prices. The increase in tariffs by both the Chinese and American governments on trade activities has distributed the existent global supply chains. The increase in tariffs has augmented production costs, which has forced both China and the United States to source for other countries for cheaper imports. The United Nations Conference on Trade and Development (UNCTAD) has reported massive economic gains in countries neighboring America and China as the trade war between the two countries has made imports quite expensive. According to UNCTAD, Mexico has increased its exports to the U.S. by $3.5 billion and Vietnam’s exports to the U.S. also grew by $ 2.6 billion (UNCTAD). Besides, massive trade diversion benefits to European countries such as Canada and Asian countries, such as Korea and India, were noted. The disruption of regular global supply routes has pushed up prices of household goods. The trade war has resulted in the increase in tariffs that has triggered the continual rise in the prices of consumer products, with the most affected being electric appliances and gadgets due to the structure of China-America trade (Zhang62). Moreover, the readjustment in global supply chains is highly likely to push American importers into stockpiling as they prepare for an economic downturn.
Reduction in foreign investment flows has also been witnessed. The trade war between America and China has reduced the quantity of U.S. imports. A reduction in the number of imports in the country will reduce inflows of foreign investment. Economist Berkovich argues that an increase in tariff rates results in a reduction in imports, which reduces the inflow of capital and therefore reduces the purchase of American debt by foreign investors (Knowledgeatwharton). In line with the principle of home bias, an increase in tariffs make investors highly inclined to invest in their countries of origin even at the risk of foregoing higher returns in foreign markets (Zhang 65). Besides, a reduction in the inflow of foreign capital and investments will directly impact the labor market of the United States negatively as it would decrease wages. Reduced wages will reduce the purchasing power of the average American household, which would be disastrous for the U.S. economy.
The unsteady stock market is another challenge of the trade war. The phenomenon has rattled investors therefore making the stock market to be highly unsteady. According to the Wall Street Journal, the Dow Jones and the S&P indices fell by three percent, weakening the stock markets and currencies in emerging markets (Taplin). Besides, treasury yields inverted to its most general level since 2007, therefore strongly indicating signs of recessions and a high possibility of economic decline.
Solutions
One of the answers to the trade war is bilateral negotiations. The imposition of tariffs and the China-America trade war is mostly a result of a political process. Therefore, the two nations should have consultative and open bilateral negotiations aimed at coming up with a lasting solution to the trade war. In essence, the China-U.S. bilateral talks need to come up with tangible, verifiable, and enforceable solutions that are market-based (Meltzer and Shenai 7). The two parties should improve on their current approach, which is based on seeking concessions and commitments from the respective states. Besides, the talks should be done with the support of the World Trade Organization (WTO) since the two nations are members of the entity (Knowledge at wharton). Both China and the U.S. should commit to enforcing and complying with all the WTO regulations more so on intellectual property and patent rights.
The two countries should negotiate a bilateral investment treaty (BIT), which is an internationally recognized legal instrument signed between two countries to enhance the smooth flow of cross-border foreign direct investments (Chilton 373). A well-structured BIT would create structures and mechanisms in place to ensure the accountability of each nation to the agreed-upon trade agreement. Moreover, the BIT could create a dispute settlement mechanism to deal with any trade disputes between America and China.
Co-operation with allies should also be increased. America should focus on finding like-minded commercial partners to mitigate the possible negative economic consequences of the U.S. trade war with China. The U.S. should focus on developing a progressive trade policy to conclude free trade agreements (FTAs) with allies that raise standards for trade (Meltzer and Shenai 8). Such a move will be fundamental in creating economic benefits to the U.S. and her allies while creating financial costs to China, which may, in the long run, encourage China to make reforms to its trade practices.
There ought to be astute domestic actions to tame China’s technology transfer requirements. The outcome of the Sino-America trade war largely depends on the local activities and policies undertaken by the American government to safeguard American technology, intellectual property, and patent rights. The American government should come up with pertinent legislation and policies to control access to U.S. technologies by its trade counterparts, which can be achieved through the regulation of foreign investments and export controls. Lastly, according to Meltzer and Shenai, America should implement policies consistent with those of the WTO. Policies such as Export Control Reform Act (ECRA) 2018 and the Foreign Investment Risk Review Modernization Act (FIRRMA) 2018 can be used to minimize the forceful stealing of American technology by its trade partners.
Conclusion
The Sino-America trade war is a big concern to the two largest economies in the world. Besides, its effects threaten to cause a ripple effect on the global economy. I believe that the trade war is significant in the future economic relations between the U.S., China, East Asia, and the whole world. The mentioned solutions will strengthen the regulation of international trade relations per the WTO standards and ensure that Free Trade Agreements safeguards both intellectual property and patent rights of various nations globally. Lastly, increased American co-operation with its economic allies will ensure massive economic growth not only for America but also for the entire world. Economic co-operation through well-structured mechanisms will ensure that the international activities of trade, foreign investments, and transfer of technologies are done in line with the requisite international standards. Moreover, through co-operation, states can amicably settle trade disputes to avoid future trade wars.
Works Cited
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UNCTAD. “Trade War Leaves Both US and China Worse Off.” Trade War Leaves Both US and China Worse Off, 6 Nov. 2019, https://unctad.org/en/pages/newsdetails.aspx?OriginalVersionID=2226.
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