The huge budget deficit of the United States has irked many American politicians and citizens alike for decades, as today the world’s biggest economy is also the world’s most indebted one. With the current US national debt standing at over $21 trillion, the American economy, with its enormous GDP of $19 trillion, is indebted at a rate of 106 per cent of its value and has a trade deficit with the rest of the world that is estimated at $568 billion, most of it with China.
In an attempt to reduce these figures that may prove costly in the long run, US President Donald Trump has imposed $60 billion in tariffs on Chinese goods entering the US, citing breaches of intellectual copyright as one of the reasons for this surprising move. The $60 billion will be made up of tariffs of up to 25 per cent on a list of goods that is to be unveiled shortly.
These may include Chinese exports related to robotics, aerospace, maritime equipment, rail equipment, electric vehicles and biopharma products. They represent, according to Chinese President Xi Jinping, the key to the Chinese aim of dominating the Chinese domestic and to a certain extent world high-tech industries in a strategy entitled “Made in China 2025”. The new US tariffs thus appear to have more to do with American attempts at containing the Chinese strategy of trade domination than a reaction to the alleged intellectual property thefts of which the Chinese have been accused.
The astounding US trade deficit with China stands at some $375 billion despite the Chinese market being the third-biggest for American products. For nearly two decades, the Chinese have managed to dominate the US market with a wide variety of goods that have beaten back competition with US local industries in many areas. The free-market laws of the United States have exacerbated this phenomenon, eventually meaning that areas in which the US once enjoyed a clear advantage, including electrical appliances, electronics, clothes, toys and even heavy industries such as vehicles, have all seen declines.
The tariffs will likely cause major price hikes in the US market, as Chinese products known for their affordability will increase in price. There will be a decrease in competition on prices in the US markets, and this will be bad news for consumers.
Relations between the US and China has been complicated for decades. American companies have invested massively in the Chinese market, and many American brands have manufacturing plants in China from where they export their products to Europe and other parts of the world, benefiting from cheap labour, huge infrastructure, and a proximity to US ports.
While this has been incredibly successful for both US and Chinese businessmen, local industries in the United States have suffered tremendously from shipping American jobs offshore. Nevertheless, the Chinese have invested heavily in the US economy in many industries, and more importantly they have invested hugely in US government treasury bills, notes and bonds to a staggering amount of $1.17 trillion, or 19 per cent of the $6.26 trillion foreign debt of the USA.
This amount is considered to represent huge leverage for the Chinese, which they may be tempted to use if the trade feud escalates further. Moreover, the US tariffs may send all sorts of wrong signals to investors and trade partners in the US if attempts at appeasing them are not undertaken. It is for this reason that the US has been neglecting possible similar complaints against EU, South Korean and Japanese exports to the United States, even though these have also alarmed US politicians.
For the moment, the US administration has focused on rallying allies against China instead of opening up a multi-front trade war that the United States risks losing. The US also plans to file a complaint against China at the World Trade Organisation (WTO) on alleged Chinese intellectual property violations, and it wants the support of other economic powers to isolate China.
However, Sino-American interests have in the past mostly been served within the context of free-trade rules, and these have led to a win-win situation in most cases. But the rise of the massive production abilities of the Chinese over the past two decades has turned China into a threat to American interests rather than just a trading partner. This was especially the case when the Chinese shifted their export production from cheap products such as toys, home utensils and clothes to high-tech mobile phones, TVs, computer components and vehicles.
Today, even US technology giants such as Apple produce their mobile phones utilising Chinese-made motherboards along with others that have followed the same path of utilising Chinese components in their products. The US has also not only focused on curbing the rise of Chinese products in US markets that have led to the staggering $375 billion deficit in China’s favour, but it has also opted to look into using anti-dumping regulations against many Chinese products as well.
In response, China has announced that it will defend its trade interests, and it has already placed $3 billion in tariffs on 128 American products imported into Chinese markets. This is a small amount compared to the $60 billion in tariffs imposed by Trump on Chinese products, but it could be the beginning of retaliation by the Chinese. The US tariffs will put a dent in Chinese plans for global trade hegemony and their ambitions for the Chinese yuan to replace the US dollar as a global currency.
With the world’s two largest economies skirmishing with punitive economic measures and counter-measures, recent developments could lead to a trade war that would be brutal in terms of its ramifications on both countries and on the rest of the world as well.
The writer is a political analyst and author of Egypt’s Arab Spring: The Long and Winding Road to Democracy.
*This article was first published in Al-Ahram Weekly