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The US – China Economic Relations: The Inevitable War Research Paper


Economic relations between the United States and China developed tremendously over the past decades. It became possible despite the opposite ideological systems of the two countries due to the set of reforms made by the Chinese government in the 1970s (Morrison, 2018a, p.1). As a result, China has become one of the rapidly developing economies in history, and the U.S. is one of its primary trading partners.

However, the latest events in the trade sphere between the two countries are far from being cooperative. As Trump’s administration is raising tariffs on imports from China, the responsive measures are taken right away.

Nowadays, the whole world is watching the development of these tensions characterized as a trade war. It is understandable that other countries take interest in this issue, as the outcome of this conflict is already affecting the economies of other states. The UAE as one of the most important strategic partners for both China and the U.S. could be put in an awkward position as this situation of instability continues between the two states.

Historical Context

China Before Economic Reforms

The development of U.S. – China relations was largely founded by the socio-political changes in the latter state. After adopting a communist ideology in the middle of the 20th century, the Chinese government turned into a centrally planned type of economy (Morrison, 2018a, p.2). such factors as prices and production levels were controlled by the state. The goal was to make the country self-sufficient and independent from foreign suppliers.

Moreover, the second half of the 20th century in China was characterized by rapid industrialization (Morrison, 2018a, p.2). However, the absence of market mechanism left workers and enterprises not interested in raising their productivity or the quality of work. The GDP growth rates were insignificant, as other countries in the region left China far behind in this category. The economy was stagnant, most households were poor, and many companies could not compete internationally due to the low quality of their products.

Trade Relations from 1979

By the end of 1970s, the government realized that the situation had to be changed. As a result, in 1978 the idea of economic reforms was introduced, providing that market principles would be implemented over time, and the opportunities of trade with the Western countries would be created (Morrison, 2018a, p.4). The liberalization of trade helped China to grow its economy very intensively.

The reforms introduced by the government also helped to re-establish the ties with the U.S., which had been frozen for the previous decades. In January 1979, the two countries began their diplomatic relations, and in July the bilateral trade agreement was signed (Morrison, 2018b, p.2). In 1980, China was 24th in the list of American largest trading partners, and the total amount of exports and imports reached nearly $4 billion (Morrison, 2018b, p.2). The United States was not the only country that recognized the new opportunities. The growing impact of China as a major economic player had predicted the reforms that allowed it to enter the WTO.

U.S. – China Economic Relations: 2001 – The Present

China and the WTO

Attempting to conquer the international market, the Chinese government changed laws at the end of the 20th century regulating the trade sector. For instance, the Anti-Dumping Regulations and the Competitive Bidding Law were introduced in 1997 and 1999 correspondingly (Lee & Lu, 2016). They became some of the measures for showing the world that China was moving away from the planned type of economy, and foreign companies could engage in trade and investment operations on its territory on the market rules.

Despite the gradual integration in the international trade in 1990s, the country experienced issues while trying to enter the WTO. It took China around 15 years for becoming a part of the organization due to concerns shared by other member states (Lee & Lu, 2016). Firstly, its huge production potential was regarded as a source of high competition for the U.S. and the European Union between exported and domestic goods. Secondly, some members were not satisfied with the idea of the governmental support for some local industries.

The concerns became the reason for China entering the WTO on strict terms and having to comply with a set of obligations. They included, for instance, creating more possibilities for foreign companies to import their goods to the country, and increasing the level of market access in such sectors as banking, insurance and communication technologies (Lee & Lu, 2016). Other obligations concerned providing greater transparency and better IPR protection.

Considering the exclusively strict terms for China entering the WTO, there are opinions providing that those commitments are discriminatory, as some regulations apply solely on it (Lee & Lu, 2016). Given the fact, it is not surprising that the state finds it difficult to comply with some of the obligations nowadays, which has become one of the issues behind the current trade war.

Trade Patters with the U.S.

The importance of China as a trade partner for the U.S. has changed considerably over the past forty years. As the country’s economy was growing, it began exporting great quantities of various goods overseas. Since signing a bilateral trade agreement in 1979, China has moved being number 24 to becoming the first on the list of American trade partners, having the balance of $636 billion in 2017 (Morris, 2018b, p.2). Both countries provide strategically significant markets for each other, buying and selling merchandise essential for various purposes.

China is more important to the U.S. economy as it may seem at first glance. Statistics suggest that American exports to China have increased by 491% since 2002, making it the third after Canada and Mexico in 2017 (Morris, 2018b, p.3). some of the most important products exported to China include aerospace products, oilseeds and grains, motor vehicles, semiconductors, electronic components and others (Morris, 2018b, p.3).

At the same time, China is the primary source of import to the United States, having computer equipment and communications, miscellaneous manufactured commodities, apparel, and electronics among the most significant product categories (Morris, 2018b, p.6). The types of products imported to the U.S. have also changed over the years. In the past, the “Made in China” label was perceived as a sign of labor-intensive product with low value like clothes or consumer electronics. However, currently, China is becoming a source of technologically advanced goods.

The U.S. trade deficit with China has been one of the major concerns for the American government over the past decades. In recent years, it has been much greater than with any other trading partner of the United States, reaching $375 billion in 2017 (Morris, 2018b, p.9). There are thoughts regarding this matter providing that the existing situation has become possible due to the unfair relations between China and the U.S., which negatively affects the economy of the latter. However, the changes that have occurred in the sphere of global production sites and supply chains that have happened in recent decades are the most likely cause of this trade deficit.

Global Shifts

The first event that has caused China to rise as the primary importer for many countries is the transfer of production to it from the Pacific Rim states. In the past, countries like Japan, Hong Kong, South Korea Taiwan and others were the major source of goods for the U.S. For instance, the level of import from Japan has fallen from 23.8% in 1990 to 7.0 in 2017 (Morris,2018b, p.11). The overall number of products from China and the Pacific Rim remained similar over the past decades.

Another trend in the global economy is shifting production sites to countries that possess technologies to manufacture high-quality goods, but their workforce is cheap. The combination of these two factors has made China an appealing option for Western corporations. Usually, the country is a place for assembling final products or creating only parts of them on certain stages. As a result, American and European companies enjoy high profits resulting from selling goods at high prices while spending little on their production. However, the situation may soon change as the Chinese nation becomes wealthier and the wages gradually increase.

Trade Issues

As trade volumes between the U.S. and China increased dramatically, the economies of the two countries became mutually dependent. It became a source of concerns for many American officials who believe that the current state of relations has a negative effect on the United States. Chinese industrial policies, problems with intellectual property rights, and failure to comply with the WTO obligations are named among the greatest issues that have led to the current tensions widely know as a trade war.

Chinese industrial policies

The past several decades were marked by China moving towards the liberalization, allowing market forces to shape its economy. However, the influence of the government on this sphere is still very significant. For instance, there are several industries important to the country and thus enjoying a set of preferences provided through various policies. Such sectors as transportation, banking and insurance, construction, IT, and several others were identified as strategically important and requiring full or dominating control of the government (Morris, 2018b, p.31).

It has been done as a part of the national program aiming to transform China into a worldwide center for innovation and high-tech goods production. An important element of this goal is to make the country independent from foreign suppliers of technology.

The strategy has become a cause of several policy provisions that have been rated as discriminatory. For instance, in 2009, the Chinese government passed a rule that required companies to become a part of the “indigenous innovation products” accreditation (Morris, 2018b, p.34). The regulation provided preferences for domestic companies, excluding foreign players. By 2011, the government made a visible effort to step away from this practice under the pressure of U.S. stakeholders. However, the real situation could remain discriminatory towards foreign companies in this industry. Moreover, there is a concern of systematic technology theft under the course of this strategy.

Some of the policies have been designed as a part of improving national security. For example, in 2014, the regulation was passed, making all companies installing IT equipment in banks to disclose the encryption code (Morris, 2018b, p.37). Several other laws passed in the following years provided that state security representatives must have access to encryption codes and user data, and the new technologies implemented in various institutions must follow national standards. Such rules are evaluated as unfair by foreign firms as they limit their access to the Chinese market and create possibilities of tech theft.

Intellectual property rights

One of the key concerns of the U.S. companies regarding trade with China is the failure of the latter to ensure the proper level of cybersecurity and protection of IPR. The issue is recognized as well from the Chinese government, which claims that the actions are taken to improve the situation which also damages the domestic market. A national study revealed in 2014 that only 58.7% of all products offered via the internet were genuine (Huang, 2015). However, as the government thrives to turn the country into a place for producing high-technology goods, it tends to disregard the frequent cases of piracy if it helps to reach the goal.

Implementing the WTO obligations

The most significant issues of the current U.S.-China trade war have developed from the conflict caused by the obligations dictated by the WTO. The Chinese political and economic model contradicts with many of the rules that the organization enforces on its members. Joining an international organization, even as powerful as the WTO, cannot be enough to make fundamental changes to a system that has been strong for more than half a century.

The process for China entering the WTO was more difficult than for any other member. Apart from the standard set of rules, the country was supposed to sign an additional list of provisions that extended the existing trade regulations (Morrison, 2018b). Some of the key agreements included rules on tariffs, subsidies, non-discriminatory style of treatment for foreign companies, as well as various changes in sectors such as banking, insurance, and telecommunication.

Some of the obligations included clear goals determined by numbers, while others were rather vague and merely offered a direction for development. For example, China was supposed to have its industrial goods tariffs lowered from 17% to 8.9% (Morrison, 2018b). Subsidies in the agricultural sector had to be limited for production and eliminated for exports. Foreign trade and investment partners were to be treated the same way as domestic firms.

However, these obligations imposed on China have contradicted with the country’s governmental system, which naturally resulted in the numerous cases of non-compliance. The largest issue, by far, is the Chinese state-led type of economy. The WTO rules were designed to support and promote the market principles of trade, as initially it was not expected that a country with another system would join the organization. In 2001, when China was accepted as one of its members, the obligations were viewed as a tool for liberalizing the economy and implementing market principles.

However, joining an international organization cannot be enough for making such a tremendous system shift. Another obstacle for China for meeting the obligations is the size of its territory and the governance type. A centrally-planned economy leaves little space for independent actions from lower-level administrations, thus all directions are given from Beijing. At the same time, such a system does not allow to effectively control distant regions of the country (Lee & Lu, 2016). As a result, even when a decision is taken at the highest level, local administration officials may act differently according to their interests.

In the beginning, China followed the strategy of liberalizing its trade system and making it open to foreign states. For example, it was committed to gradually decreasing its simple average tariffs, which were 9.9% in 2018 (Morrison, 2018b). The most significant cut was seen in the automobile sector, where the rate fell from 80-100% to 25% six years after the WTO accession. Some of the administrative changes also took place as a part of the new strategy.

In the telecommunication sector, for instance, the governance model was re-shaped to make it more independent from the state control. The new agency was created that expanded and consolidated the area of regulation and allowed splitting controlling and operating functions. There were also numerous events like S&ED and JCCT meetings, Obama-Xi summits, and other proceedings, which resulted in declarations of commitments.

Nevertheless, the practice shows that for more than a decade China was introducing policies opposite to its WTO commitments. The trade regime became more restricted in 2008 and continued to be discriminative towards foreign companies (Morrison, 2018b). The general trend can be described as China trying to implement policies that would give its domestic firms a competitive advantage. For instance, the government limits the number of licenses issued to foreign movies per year to benefit the local film industry. Another example includes the restriction for all non-Chinese e-payment services for entering the market.

The issues with products and services are strengthened by national security policies in the ICT sector and the practice of corporate piracy. These factors make China an unattractive place for foreign companies, as they often have to share technologies and agree to other unfair terms to gain an opportunity to enter this market. Finally, the country’s government often fails to adequately publish its legal documents regarding this sphere, including the frequent absence of translation to one of the WTO languages. This fact adds to the problem of the lack of transparency.

The issues with the Chinese policies contradicting the WTO obligations may also be determined from the series of dispute settlement cases that took place in the organization in different years. On the overall, the U.S. has filed 23 claims against China, some of which are currently pending a decision. Many of them are associated with policies providing subsidies for domestic companies in various fields, which contradicts with one of the WTO obligations. For example, the 2007 case showed that the government issued subsidized various import and export positions (Morrison, 2018b). China agreed to eliminate the issue by the beginning of the following year.

However, the similar problem appeared again as the country introduced export subsidies associated with the “Famous Chinese” campaign. Some of the industries associated with the issue included wind power equipment in 2010, automobile manufacturing in 2012, and aluminum production in 2017. All dispute cases resulted in China agreeing to remove policies contradicting with the WTO rules. Nevertheless, the U.S. side was not satisfied with the quality of reporting regarding the results. This is true for most of the cases, as the majority of disputes ended in China agreeing to change the policies, yet there was no substantial proof of those claims.

Despite the obvious violations made by China regarding their obligations, a note must be made on the issues inside the WTO itself to understand why the organization does not have enough power to cease the developing trade war. Firstly, China is still considered a developing nation, which gives it certain preferences like the smaller amount of commitments (Lester & Zhu, 2018, p.1). Such a position of a country that has one of the strongest economies in the world seems unfair to other WTO members, making them question the ability of the organization to ensure balanced relations.

Moreover, the China’s unresolved status of a non-market economy makes its trade with the U.S. to be followed by a set of restrictions caused by this factor (Bown, 2016). The issue is one of those that the WTO has to resolve. However, the trade war between the two countries has shown that the organization has little power for conflict settlement. Researchers suggest that if other nations follow the steps of China and the United States, it will seriously undermine the WTO as a balancing system and weaken its legitimacy (Lawrence, 2018). The current situation is a possibility for the organization to be reformed to meet the modern needs of the international trade members.

The overview of the obligations made by China under the WTO accession, as well as its further actions of implementing discriminative policies towards foreign companies allows making conclusions about the power of the organization to force significant reforms. It is evident that, despite a moderate market liberalization that happened at the beginning of the 2000s, the country has kept its state-led type of economy.

Moreover, China’s trade sector became even more governmentally controlled over the past few years. The state keeps developing policies that would provide a competitive advantage for domestic firms and make the country independent from foreign technologies. The WTO not only failed to promote market principles and stimulate their development in China, but also could not ensure its own rules are followed.

Moreover, there is a broader conclusion from the situation, which implies that international organizations have little power to make significant changes to its members’ internal politics. The conflict between China and the U.S. was inevitable from the start in such conditions, since the two countries follow contradicting principles regulating their trade practices. As long as the WTO fails to ensure its regulations are followed equally by everyone, such issues are most likely to arise in the future. Finally, it is evident that the laws of the economy are the most powerful tool in resolving such problems, unlike international organizations that tend to benefit only one system.

Trump’s Actions on Trade with China

The first half of 2017 was marked by the developing trade relations between China and the United States. The administrations of the two countries implemented several steps to open their markets to more imported products (Morrison, 2018b). However, the following events associated with the IPR violations by the Chinese firms gave a start to the current trade war. The Section 301 case became one of the most important elements characterizing the tensions between the countries.

The process began when Trump decided to evaluate the extent of harm done by trading with China regarding this matter. The office of the U.S. Trade Representative upon his request investigated the Chinese practices that could be violating American IPR (Lovely & Liang, 2018). After seven months, the USTR concluded that Chinese policies and activities had an adverse effect on the American technology industry. As a solution to the issue, the office proposed to raise tariffs on certain imported products by 25% (Lovely & Liang, 2018). China responded with a similar measure on $49.8 billion of American exports.

However, this step does not benefit any side of the conflict. Researchers admit that the competitiveness of the U.S. business relies on international supply chains, and the new tariffs would automatically raise manufacturing prices (Lovely & Liang, 2018). One of the ways for the United States to resolve the IPR issue is to target individual Chinese enterprises (Hufbauer & Jung, 2018). Otherwise, both countries may find themselves in a situation of a slowed economy.

Influence of the U.S. – China Trade Relations on Other Countries

Currently, china is not the only country experiencing the American policies of raising tariffs. Over the present year, the U.S. administration has imposed similar measures on various product categories imported from Canada, Mexico and the EU. It is especially troubling since the former two states are the primary strategic partners of the U.S. being the members of the NAFTA. This character of the trade war development may be showing that the IPR violations in China were merely the excuse for imposing tariffs. Otherwise, the American government would not have acted similarly towards its trade partners with no such issue.

The true reasoning behind Trump’s policies may be the attempt to hold back the rise of China as the largest world economy. The history suggests that similar processes took place between countries with a changing power status, leading to a conflict (Bergsten, 2018, p.1). As the U.S. is moving away from its role as a global leader, it may encourage other countries including China to take its place (Bergsten, 2018, p.2). At the same time, the withdrawal of the United States from international coalitions may lead to the re-grouping of the remaining members.

For instance, the research of the scenario for the Trans-Pacific Partnership (TPP) without the U.S. claims that including new countries to the agreement may widely benefit them, specially regarding the establishment of new supply chains (Petri, Plummer, Urata & Zhai, 2017). As a result, the current policies of the American administration may lead to the isolation of the U.S. instead of improving the situation on the local market.

UAE and the Trade War

The United Arab Emirates is among the countries that are the most sensitive to the trade war, as it has developed economic relations with both China and the United States. For example, it is a member of the “Comprehensive Strategic Partnership” tier with the Chinese government, upgraded in 2018 (Webster, 2018, p.1). Just as it is for the U.S., China remains the biggest trading partner for the UAE, followed by India, the U.S., and Saudi Arabia (John & Rezvi, 2018).

The tensions between China and the U.S. have caused instability of the oil prices. It is especially troubling for the UAE since a significant portion of its economy relies on this product. Specialists admits that geopolitical concerns and protectionism policies have become the driving force behind determining oil prices instead of simple supply and demand schemes (Abbas, 2018a). Another issue is the 25% increase of tariffs on steel and aluminum that the U.S. government plans to impose on the country after the similar actions towards other states.

The UAE’s Minister of Economy explained that it would be an inadequate measure due to the trade balance that benefits the United States (Abbas, 2018b). Currently, the UAE is one of the primary suppliers of the U.S. with steel and aluminum. Thus, the trade war between China and the United States has a direct effect on the UAE, as well as other countries.

Conclusion

Liberalization of the Chinese economy that took place in the 1970s and onwards made it possible for the country to join the WTO and to become one of the most important members of the international trade. However, issues with discriminative policies and the failure to ensure IPR of foreign firms and to comply with a set of obligations has become the basis for conflict between China and the U.S., and the latter currently attempts to restore its competitive advantage.

The trade war has forced many countries to undertake responsive measures and to seek ways to operate in the changing conditions. Moreover, the legitimacy of the WTO as a place of settling international trade is currently questioned, as the organization has failed to resolve the discussed issue. The UAE as one of the most important economies in the world is trying to balance between its two strategic partners while seeking opportunities to enter the new markets.

The direction of the situation remains unclear as related reassuring and alarming events happen simultaneously. Just as the two presidents negotiate a 90-day truce to the war during the 2018 G20 summit in Buenos Aires, one of the CFOs – the daughter of the founder of Chinese leading technology firm, Huawei was arrested in Canada and faces extradition to the U.S. based on allegations of violating American sanctions against Iran (Sample, 2018). The scale of the trade war is so big that it has the potential to significantly change the balance of powers in the trade market in upcoming decades.

References

Abbas, W. (2018a). . Khaleej Times. Web.

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Huang, Z. (2015). Chinese government study based on shoddy data claims 40% of China’s online products are shoddy. Quartz. Web.

Hufbauer, G., & Jung, E. (2018). . East Asia Forum. Web.

John, I., & Rizvi, M. (2018). . Khaleej Times. Web.

Lawrence, R. Z. (2018). . In 18-1 US-China economic relations: From conflict to solutions (Chapter 3). Web.

Lee, Y. S., & Lu, X. (2016). China’s trade and development policy under the WTO: An evaluation of law and economic aspect. China and the WTO Review, 2(2), 339-360. Web.

Lester, S., & Zhu, H. (2018). . CNBC. Web.

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