USA and China, besides being the two leading economies of the world, have also been engaged in highly dependent bilateral trade relations. However, with the White House accusing the Chinese government of theft and unfair trade practices and Beijing responding with retaliation on these claims, the two largest players in international trade have been locked in a bitter battle over tariffs.
The US trade deficit reached an all time high of $4 billion in 2018. This created an alarming situation for the US. It had already lost over 35% of its manufacturing units due to stiff competition from Chinese imports in the past decade.
To prevent this situation from escalating further, the US responded to this development by replacing its traditional “open economy” approach with a protectionist policy following a series of tariffs and quotas that gave birth to the infamous “US-China Trade War”.
At present, with the election of the Biden administration, the fate of this Trade War hangs in balance as the new American government has “reviewed” and retained the existing tariffs. But was this trade deficit the only trigger to this accelerating trade war?
The Currency War
Labelling China as a “currency manipulator”, USA exposed the central bank of the country – The People’s Bank of China (PBOC) for maliciously devaluing the Yuan so as to maintain the cheap prices of Chinese exports in global markets despite increasing tariffs.
Interestingly, a similar tactic was pulled off by the Chinese government in 2013 at the time of President Xi Jinping’s designation. As the Chinese economy faced its lowest growth rate in decades, the yuan was also steadily appreciating against the US dollar, accounting for a 33% appreciation between 2005-2015. In an attempt to boost Chinese exports, the PBOC devalued the yuan by over 4% in 2015.
Conventionally, international trade involves two currencies that have a self-correcting mechanism. Under this system, when a country exports more, it receives multiple payments in foreign currency. As the supply of foreign currency rises, the value of domestic currency appreciates against foreign currencies. Consequently, exports become costlier as compared to foreign imports. Gradually, this is translated into fewer exports and greater imports and the initial system reverses.
However, in China’s case, the PBOC intervenes to prevent the value of the yuan to appreciate despite increasing exports, thus maintaining China’s competitive position in the international market. As a result, the dollar’s foreign exchange rate is higher than the yuan and allows PBOC to collect large FOREX reserves of the dollar which it uses to buy bonds and treasury bills in the US.
Over the years, China has managed to buy large shares of the US debt providing it with significant political leverage as one of America’s biggest bankers. This dependence of US on China poses a threat to US.
The Intellectual Property Rights Scramble
Then American president Donald Trump laid emphasis on this issue by making a statement about “China repeatedly attempting to steal American intellectual property”.
This is how the claim unfolds – China’s foreign ownership restriction laws require foreign businesses to form joint ventures with Chinese domestic companies to sell their products in China, often including some type of technology transfer that exposes international firms to theft.
In fact, as per reports by the US Trade Representative, such alleged Intellectual Property (IP) theft has cost them a tremendous damage of about $600 billion annually.
Subsequently, this was a pivotal issue addressed in phase one of the US-China agreement signed last year, where China was asked to strengthen its legal framework to protect the IP of foreign firms dealing in its domestic territory against forced technology transfer and other malpractices; in an attempt to call truce on this tariff war.
The current impact
The truth of this trade war boils down to damaging the economies of both these nations, with China losing its biggest export market and several US companies facing major setbacks due to disruption of their Global Value Supply Chains that originate through China.
In fact, this trade war has caused economic pain on both sides and led to diversion of trade flows away from both China and the United States as growth slacked, business investment froze and employment levels fell.
While the two sides agreed on some respite from this clash, at an ornate signing at the White House, only time will tell whether the innovations on agreement in enforcement will succeed where others have failed by ensuring both countries hold up their part of the agreement.
Undoubtedly, as this tariff battle is now unfolding on a global scale, every action and its counter-action is expected and inevitably, bound to create ripples in the international trade market.
Stay updated with all the insights.
Navigate news, 1 email day.
Subscribe to Qrius