Donald Trump was elected President of the United States in November of 2016. During his inaugural address in January of 2017, he proclaimed his America-First doctrine. This doctrine puts America’s interest foremost in dealing with another country. Trump complained consistently about China taking advantage of the U.S. economically and vowed to impose tariffs to reduce the trade imbalance between the two countries. In 2018 the United States imposed phase 1 tariffs on certain imports from China. The tariffs increased Chinese import duties by 19.3%. It covered about 66.4% of Chinese imports into the United States from China, which was approximately 335 billion of trade.
Chinese Policies That Prompted The 2018 Tariff
1. Intellectual Property Theft The U.S. has complained for years that China is actively engaging in intellectual property theft. U.S. companies operating in China are subject to constant counterfeiting of their products and software pirating. Foreign companies have little recourse against these practices. The legal system in China is controlled by the government, which has little incentive in prosecuting counterfeiting and pirating cases. The lack of IP enforcement by the government only emboldens bad actors. 2. Joint Ventures and Force Transfer of Technology U.S. companies operating in China are forced into joint venture agreements and forced transfer of technology as a condition of operation. This is not the same for Chinese companies operating in the United States. Multinational companies have complained that these joint ventures and technology transfer is a backdoor means by which Chinese companies learn, copy and steal technology. These Chinese companies ultimately set up independent companies and undercut the parent United States company. Also, China’s economic model is such that the state owns some of the joint-venture companies. A joint venture with a United State company ultimately leads to proprietary technology landing in the hands of the Chinese government.
3. Access to Market Sectors The Chinese government has a policy of protecting its domestic industry by limited access to certain market sectors. U.S. E-commerce and technology companies such as Amazon, Facebook, and YouTube have been restricted or almost none existent in China. The Chinese government systematically restricts foreign entrance into these sectors while heavily subsidizing its domestic company. Therefore, while TikTok flourishes in the United States, YouTube is almost nonexistent in China. The U.S. is not the only country that complains about such practices. European companies have been complaining for decades about these restrictive practices. 4. High Tariffs on U.S. exports China’s average tariffs on U.S. imports are higher than the United States imports tariffs on Chinese exports prior to the 2018 section 301 tariffs. The United States has maintained that the duties should be the same both ways since both economies are advanced economies. President Trump argued that China manipulates and undervalues its currency, makings its exports cheaper to other countries. By the same token, it has made United States exports to China more expensive. These actions, coupled with China’s massive subsidies to its state-own companies, give China’s export a huge advantage.
What can the United States do?
As China marches towards its 2030 vision of becoming the most dominant economy in the world, there isn’t any appetite for it to change or alter the policies that have led to its economic prominence over the past two decades. If this is the case, what does the United States do to level the playing field? The below options may be helpful.
1. File a complaint with the WTO The normal course of action for any WTO member who feels aggrieved is to file a complaint. But the Trump administration felt the WTO was too slow in its adjudication of cases and thus went forward with tariffs on specific Chinese imports. The goal was to target certain products in the hopes of getting China to take action on the numerous complaints raised above and escalate the tariff if appropriate actions weren’t taken. What happened instead was that China imposed a retaliatory tariff on a wide number of U.S. exports to China.
2. Diversify Away from China U.S. companies could also diversify away from China. The initial decision by U.S. Companies to set up shop in China was driven by cheap labor, skilled labor, and good infrastructure. However, since China joined the WTO in 2001, other counties in Asia have built up their economic infrastructure. Vietnam, Malaysia, Cambodia, and Indonesia have built up their logistics infrastructure. Their labor cost is cheaper and the skill of their workers is getting better. We are seeing companies moving gradually away from China to these countries. And the trend is likely to continue 3. Onshoring Most companies are beginning to realize the move toward cheaper labor costs that drove offshoring can have devastating consequences. The covid-19 Pandemic and the accompanied supply chain gridlock which is ongoing have accelerated the move towards onshoring to avoid the disruption in manufacturing that has impacted companies that relied heavily on component imports. The renaissance of factories in Mexico and the United States is in a large part due to this trend. The passage of the new United States-Mexico-Canada free trade agreement has also helped.
International trade is complicated. Most countries try to gain an advantage through trade. Others simply want their products sold in global markets. International trade has brought efficiencies as countries enjoy cheaper products, sell their products in a global market, and import badly needed goods they cannot produce or produce cost-effectively in their own countries. However, International trade has also led to the loss of jobs when factories shut down and relocated to cost-efficient countries. Some countries have weaponized and used it to sanction countries they have disputes with. The United States has to tread carefully with its current tariff war with China. The world cannot afford the two largest economies escalating a tariff war as its effect may affect innocent dependent countries.