USA vs China: trade war or something else?

Problems of bilateral economic relations are growing like a snowball

The theme of a possible US-China trade war due to the growth of the huge trade deficit with China in 2017 (375.2 billion dollars against 347 billion dollars in 2016) is on the front pages of mainstream Western media agencies in recent weeks. The growing interest of the media is clear: if the two giants, occupying together a third of the world economy, start a battle, the whole world will be involved in it (including Russia, which is highly dependent on the conditions of global markets).

Some experts believe that the trade war has already begun. In October 2017, the U.S. Department of Commerce announced the introduction of protective duties in the amount of 97 to 162% on several types of Chinese aluminum foil. In January 2018, Washington imposed anti-dumping duties on imported washing machines and solar panels, which main producer is China. The US President will make a decision on restriction of import of steel and aluminum (the largest producer is China) until April 20.

The US representative at trade negotiations R.Leitheiser must finish investigation of China's violations of rights of American intellectual property by mid-August 2018. In the case of violations on the part of China, R.Leitheiser in accordance with the law may impose protective duties on certain Chinese goods or take other restrictive measures. With consideration of probable commercial damage from unfair China’s practice, these measures may become the largest in U.S. history. According to the Commission on the Theft of American Intellectual Property, co-chaired by the current US Ambassador to Russia (former Ambassador to China, expelled for interference in internal affairs and the organization of protest actions) John Huntsman, the American economy loses from 225 billion to 600 billion dollars annually for this reason.

Of course, the US actions don’t remain without an answer. China, which is the main importer of American agricultural products, has already taken preventive measures to restrict its importation. Moreover, China did it extremely elegantly within the framework of WTO norms (Russia should learn from the Chinese this art of defending own interests without hysterics).

In December the Ministry of Health of China reported that it had identified the weeds in U.S. soybeans, and it will study carefully those parties, which contain more than 1% impurities (yellow soybeans, which are the most common type of this culture, usually contain up to 2% of impurities). At the same time, Chinese companies have begun negotiations on increase of soybean procurement in Brazil and Argentina. As a result, due to complaints by Chinese breeders about the decrease in protein levels in American soybeans, the volume of import from the USA in January 2018 fell by 14% compared to the same month in 2017 (from 6.6 to 5.8 million tons), and it increased to 2.07 million tons from Brazil, which is 720% more than a year ago.

Thus, the Chinese are well aware of how to strike back the US administration painfully from an economic and political point of view. Firstly, delivery volume of soybeans from the USA to China has reached 14 billion dollars in 2016 or 37% of total exports of grain from the USA. Secondly, the eight states of nine producing soy have voted in the presidential election for D.Trump. Decline in their support undermines the prospect of re-election of the current president for the second term.

In February the Ministry of Commerce, PRC has launched an investigation into sorghum grown in the United States, reaching 4.76 million tons in 2017. On February 20, the Ministry announced that it is planning to impose protective duties on the U.S. styrene, as it was delivered to China at dumping prices (China imported 3.2 million tons of styrene from the USA for more than $ 4 billion in 2017).

Bloomberg Agency in January, citing sources in Beijing, announced the intention of the PRC authorities to reduce purchases or even start selling bonds of the US Treasuries. Given the fact that China is the largest (19%) foreign holder of the U.S. public debt (1.2 trillion dollars or about 9% of the total volume of issued “US Treasuries” – 14.5 trillion dollars), the statement of Bloomberg caused fleeting panic on the stock and currency exchanges of the United States. Reduction in demand for “US Treasuries” will make it difficult for the U.S. government to finance the budget deficit, which could grow to $ 1 trillion dollars taking into account the adoption of the new tax code. In addition, the government has to to raise bond yields for investors. This will not only increase public debt, but will also force the FRS to raise interest rates. Accordingly, other types of debt, such as mortgage loans, will become more expensive, which will slow the country's economic growth.

At first glance, the facts show the beginning of trade war between the United States and China, but there is one factor that strongly distinguishes the current US-China trade dispute from the usual trade wars, for example, between the US and European countries. This factor is that the USA considers economic ties with China not only in terms of reducing the trade deficit, but also in terms of national security. And the rapid growth of the China’s economic potential poses a threat to its national security.

In order to introduce protective duties on imports of steel and aluminum, the US government is going to use Section 232 of the Trade Expansion Act of 1962, which was adopted during the cold war in order to ensure national security in the case of military conflict with the USSR by restricting the supply of goods from the countries of the Soviet camp. Now the Ministry of Commerce is planning to differentiate anti-dumping duty on exporting countries. It is going to introduce higher fees against China (53% for steel and 23.5% for aluminum), but China is not even among the ten largest suppliers of these metals in the USA (the supply of Chinese steel in the USA over the last three years fell to 72% due to increase in fees by President Obama in 2014).

Washington has significantly complicated admission of Chinese capital into high-tech sectors of the American economy. In September 2017, the White House banned the sale of the American company for the production of semiconductors Lattice Semiconductor to the Chinese, in December it banned the sale of the company of Internet payments MoneyGram International, and in January 2018 it canceled the contract of Chinese Huawei with the American Corporation AT & T by the reason of the national security threat.

The deal with MoneyGram International was blocked due to the fact that the Chinese investors may have access to personal data for millions of US citizens using online payments. Huawei's contract with AT & T was blocked due to the fact that Chinese phones may contain source codes recorded in operating systems with the function of data tracking. At the same time, there are a lot of rumors spreading against Huawei: for example, this private company is closely connected with the Chinese government as it was founded in 1988 by a retired officer of Chinese People's Liberation Army Ren Zhengfei.

After Edward Snowden's revelations about the information-gathering activities of the NSA in China (electronic intelligence), the Chinese government in its turn excluded American companies Cisco and Apple from the previously approved lists of suppliers to government agencies.

Washington is increasingly applying sanctions against China. On February 23, the government announced the imposition of restrictions on Chinese shipping and transportation companies as part of counteracting North Korea's nuclear and ballistic program.

There is a campaign of espionage against the PRC in the USA which is a true sign of the upcoming problems of a higher political order. Recently in New York was arrested a former CIA field agent Jerry Chun (Shin Lee), who was an alleged spy and gathered information for Beijing about US intelligence operations against China. As a result, Chinese security arrested a few CIA agents among local citizens.

Problems in bilateral economic relations are snowballing and require extraordinary efforts to resolve them. However, it is not likely that the parties will be able to resolve them in the near future.

China USA economics