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THE BOTTOM LINE

US is prima facie losing the trade war

Washington

THE Trump administration is going about its trade war with China all wrong. Its strategy and tactics are muddled. If Donald Trump were a general watching the battle unfold, what he'd see is his troops getting slaughtered, while the enemy, though suffering casualties, was holding most of its positions.

Mr Trump has two goals, says Bill Reinsch, a trade expert at the Center for Strategic and International Studies (CSIS), a nonpartisan think tank. The first is to reduce the United States' huge goods trade deficit with China, which was US$419 billion in 2018. As Mr Reinsch notes, most economists discount the importance of this. If the deficit declines through temporary purchases from the United States, the effect may fade with time.

Mr Trump's second goal is more significant. It is to suppress the most anti-competitive aspects of China's state capitalism, which aims to make Chinese firms the world leaders in most high-technology industries. These include robotics, pharmaceuticals, autonomous vehicles, biomedicine, semiconductors and others. Here, the talks have failed.

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The United States has claimed that China has rigged the competition in favour of its firms through government subsidies, the theft or coerced transfers of new technologies and outright discrimination against foreign firms doing business in China.

Consider semiconductors as a case in point. These are the tiny computer chips that govern virtually all digital services.

At present, US firms are the world leaders in semiconductor design and technology, accounting for roughly half of all world revenues in chip sales (46 per cent in 2017), according to data from the Semiconductor Industry Association (SIA), an industry trade group.

Other countries lag, the SIA reports. South Korean firms are second with 22 per cent of world sales, followed by companies from Japan at 10 per cent, the European Union at 9 per cent, Taiwan at 6 per cent and China at 5 per cent. The United States also has a trade surplus in semiconductors, which is the fourth largest US export, behind aircraft, refined oil products and crude oil. In 2018, the US trade surplus in semiconductors was US$4.5 billion, says SIA.

But China has vowed to expand its global market share by constructing new semiconductor plants (called "fabs") and embracing the latest chip-making technologies. It's unclear how much, if at all, China's plans rely on technologies stolen or coerced from US firms. Late last year, the Justice Department indicted a Chinese firm, Fujian Jinhua, for allegedly stealing trade secrets from a major US chipmaker, Micron.

The US industry fears that a surge in subsidised Chinese chip-making fabs will create surplus capacity that will drive down prices and profits, putting unsubsidised foreign firms at a huge disadvantage. That has been the pattern in older technologies such as steel, says the CSIS's Mr Reinsch.

LITTLE HEADWAY

The trade negotiations have apparently made little headway in resolving these issues. Meanwhile, the tariffs that the United States have imposed on China's exports may hurt US consumers. So far, the Trump administration has announced 25 per cent tariffs on US$250 billion of Chinese exports to the United States and has threatened higher tariffs on another US$300 billion, covering virtually all China exports to the United States.

The crucial question is who bears the burden of the higher prices created by the tariffs. According to Gary Hufbauer of the Peterson Institute for International Economics, US consumers ultimately shoulder most costs. The tariffs simply get embedded in the products' final prices. Mr Hufbauer estimates that if US$500 billion in Chinese exports are hit with a 25 per cent tariff, the annual cost for a three-person household would be US$2,200. The existing tariffs cover about half of that. Mr Hufbauer's estimate also assumes that, shielded from import competition, US-based firms would raise some domestic prices.

What the United States should have done is to create a global coalition of major trading countries - the United States, the European Union, Japan and other advanced societies - that would negotiate limits on subsidies, coerced technology transfers and a level playing field for competition between domestic and foreign firms. If China violated the rules and refused to join, the other countries could take action against its exports.

But this sensible approach was virtually eliminated when President Trump decided to pull out of the Trans-Pacific Partnership, a trade agreement that could have done just that. Instead, we have a system that, through high tariffs, imposes the equivalent of a tax on American citizens to implement a trade policy that favours China.

On the evidence so far, we're losing this trade war. WP

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