Following months of tit-for-tat tariffs between the world’s two largest economies, the world is slowly discovering that the confrontation extends far beyond a lopsided trade balance.
In this fourth and final instalment of the Trade War Series, Smartkarma shines the spotlight on two lesser-known factors that have indelibly contributed to escalating the US-China trade feud.
1) The Crackdown on IP Theft
Ongoing trade tensions appear to spring partly from a spillover of US intolerance toward corporate espionage conducted by China.
This hard line was clear to see in November 2018. The US Department of Justice (DOJ) indicted Chinese DRAM startup Fujian Jinhua Integrated Circuit, Taiwanese foundry United Microelectronics Corporation, and three former employees of US semiconductor giant Micron Technology.
All were charged “with crimes related to a conspiracy to steal, convey, and possess stolen trade secrets” of Micron for the benefit of Jinhua, a company controlled by the Chinese government, according to a statement released by the DOJ.
But this ruling carries a broader significance that might not be obvious to most people following the saga.
“This latest decision by the DOJ marks a major setback for China’s ambitious plans to develop an indigenous semiconductor industry,” writes independent semiconductor analyst William Keating in an Insight published on Smartkarma.
“Jinhua represents a US$5.5 billion investment bankrolled by state coffers to build DRAM chips in a bid to bolster the country’s self-reliance when it comes to critical semiconductor chips.”
But there were others, too.
In a separate indictment, the DOJ accused Chinese intelligence officers of conspiring to break into the computer systems of aviation and aerospace companies, targeting confidential information of jet engines for commercial airliners.
The wide-reaching scope of the operation zeroed in on US, UK, and French companies. China planned to use this stolen knowledge to engineer and manufacture its own commercial aircraft.
“No country presents a broader, more severe threat to our ideas, our innovation, and our economic security than China,” said FBI Director Christopher Wray in a statement.
“The Chinese government is determined to acquire American technology and they’re willing [to] use a variety of means to do that – from foreign investments, corporate acquisitions, and cyber intrusions to obtaining the services of current or former company employees to get inside information.”
With the recent spate of crackdowns, it looks like the dog days of summer have arrived for the IP thieves of China.
2) Battling Mercantilism
President Trump has often been criticised for his overt view of international trade – directed mostly at China – as a zero-sum game, alluding to how cheap imports threaten the very survival of his great nation’s homegrown enterprises.
To a certain extent, he’s right.
Industrial subsidies, an undervalued yuan, and enhanced capital controls, among other state-induced measures, demonstrate the concerted manner in which China allocates resources to create wealth and employment at the expense of other economies.
The dramatic loss of domestic market share caused by the invasion of cheap solar imports from China is one such example. It was highlighted in detail in a previous article (see: Trade War Series: Tariffs Spark a Global Supply Chain Reaction).
Few market observers realise these unfair trade practices actually reflect an outright “mercantilist” approach to economic growth, which has expanded significantly since China’s accession to the World Trade Organization.
This winner-take-all attitude poses a big problem for the existing global trade order.
“International trade in subsidised goods produces inequitable outcomes in the destination country that then erode the moral foundation of capitalism,” asserts Stewart Peterson, who publishes on Smartkarma as an independent Insight Provider.
“The survival of market-orientated economics depends upon restoring the sense that the outcomes it produces are fair and trade made with a mercantilist China makes this impossible.”
In this light, perhaps protectionism should be seen as an economic response aimed at helping nations level the playing field at home when faced with unfair foreign competition.
A Silver Lining?
Intensifying scrutiny on the world stage has all but forced China to re-examine its foreign economic policies.
Once seen as the world’s exporter, the world’s number 2 economy is now on a charm offensive to promote itself as the opposite.
President Xi reinforced this stance at the 2018 China International Import Expo. He said the event “demonstrates China’s consistent position of supporting the multilateral trading system and promoting free trade.”
And furthermore, “it is a concrete action taken by China to advance an open world economy and support economic globalisation.”
The US can certainly learn a thing or two from China’s measured response. Rather than muscle trade partners into submission, a commitment to resolving trade disputes via dialogue might prove more favourable in the grander scheme of preserving diplomatic ties.
After all, good relations are a prerequisite to negotiating new trade deals. And as such, vital to reducing the current US trade deficit.
Finger Pointing Is Pointless
So who really started this trade war? After considering the aforementioned arguments, the answer to this seemingly simple question is still a tangled web.
True, it was President Trump who first provoked Beijing, leaving them little choice but to retaliate. He might have even overstated the significance of the US’ enormous trade deficit with China in an effort to drum up mass support for his aggressive tariff measures.
Closer examination of the surrounding circumstances, however, reveals the trade deficit has merely been a symptom of larger, more entrenched issues at play.
There’s more to this US-China trade war than meets the eye. Before casting blame, it’s time free-trade advocates took a step back and saw things for what they are.
For the full picture, read the Trade War Special Report: The End of Fair Trade.