US-CHINA TRADE WAR: AN ANALYSIS FROM THE VIEWPOINT OF U.S.

ECONOMY

A RESEARCH THESIS FOR THE PARTIAL FULFILLMENT OF THE DEGREE OF

SUBMITTED BY RESEARCH GUIDE

NAVJOT SINGH PROF. LAKHWINDER GILL

DEPARTMENT OF ECONOMICS, PUNJABI UNIVERSITY PATIALA (2019)

Vladimir Lenin, a Russian revolutionary, philosopher and political economist once remarked
that politics is the concentrated expression of economics. Continuing in the same vein, Carl
Von Clausewitz, a Prussian general and military strategist said that war is continuation of
politics by other means. Thus, in the last analysis, the cause of war and politics is to found in
economic causes and undercurrents of a particular time. It is in this context that US and China
trade war and escalating tensions between the two superpowers must be seen. This is a
classic example of a conflict between the old and the new, already existing and fast emerging
powers of the world. Such conflicts have occurred regularly ever since the dawn of the 20 th
century, sometimes exploding in outright wars [ read, the first and second world wars, the
cold war etc..] and often times continued silently but surely.

The present tensions between the two nations have a special significance, in that it is for the
first time in more than 70 years that the US hegemony of world economy is being brought
into question. The theory of several economists regarding turning of imperialistic tensions
into control by the US ‘Empire’ a la Michael Hardt, Antonio Negri and our very own Prabhat
Patnaik has been smashed into bits and pieces. China is increasingly asserting its claim along
with Russia to what has been hitherto America’s kingdom.

The trade war between these two superpowers need to be seen not merely as an isolated
case of two countries conflict with each other or the vying for power but as a complex web of
relations in which both China and US find themselves entangled not merely with each other
but other nations as well. Much less, should it be viewed as a certain individual’s lunacy, as
the whole of the world media has been trying to portray it ever since the US slammed its
initial tariffs on Chinese imports but as a situation that resulted logically from socio-economic
conditions that exist globally.
HISTORICAL BACKGROUND

Since the 2008 crises, China has continuously gained ground on the USA, in terms on
economic control of the world. At the same time, US is reeling from the effect of the recession
which does not seem to stop, thus leading to increasing layoffs, unemployment and
shutdowns. In this backdrop, Donald Trump rose to power claiming to ‘Make America Great
Again’. One of his proposed ideas was bringing back jobs and manufacturing centres back to
America from countries such as China to bolster employment of the US people, claiming that
outsourcing was hurting America’s progress. While campaigning for the Republican party’s
candidacy for president, Trump remarked at a rally” We can’t continue to allow China to rape
our country and that’s what they’re doing. It’s the greatest theft in the history of the world.”
This though, based on flawed economic logic accurately captured the mood and sentiments
of the American public.

Donald Trump was elected as the president of the US on January 20, 2017. He did not take
action as soon as he took over, though he did conduct several meetings with the Chinese
premier Xi Jinping in the course of a year. The US economy though showed very few signs of
recovery. The US public’s increased frustration with Trump not following through on his
promise and China’s ever increased penetration into the US market forced Trump into some
action.

On the pretext of China’s unfair trade practices, scant respect for international agreements
on intellectual property rights and the issue of national security, The United States Trade
Representative or USTR initiated an enquiry into whether aluminium and steel imports hurt
national security and Chinese government’s attitude towards intellectual property rights and
innovation etc., This set forth a chain of events which culminated in an on and off trade war
(with constant danger of escalating into something bigger) between China and US.
On February 7,2018 under the veil of ‘Global safeguard tariffs’, US imposed a 30% tariff on
solar panel exports except on those from Canada, while placing a 20% tariff on washing
machine imports. Barely after a month, Trump signed a memorandum directing the following:

1) Filing a WTO case against China for discriminating in their licensing practice
2) Restricting investment in decisive technology sectors
3) Imposing tariffs on high tech Chinese products such as machinery, information
communication technology and aerospace.

Immediately on the next day, US slapped a 10% import tariff on aluminium goods (aside from
Argentina and Australia) and 25% import tariff on steel goods (sparing Argentina, Australia,
Brazil and South Korea). China retaliated 10 days after on April 2 by imposing a tariff ranging
from 15-25 percent on fruit, wine, pork, recycled aluminium etc., totalling 128 products worth
US$3 billion. Afterwards, both countries released several lists overtime proposing to impose
tariffs on various goods if the situation is not sorted according to their demands. The
releasing, adding and editing of lists continue until on July 6, 2018, The US Customs and
Border protection began to impose a 25% tariff on 818 Chinese products totalling US$34
billion, in accordance with List 1 of tariffs proposed by the US. In accordance with China’s own
list it imposes a 25% import tariff on 545 goods from the US. Several lists were released in
the aftermath by both countries proposing to impose tariffs on several other goods. The US
was particularly keen in targeting the high tech Chinese imports. Meanwhile, China lodged an
official complaint with the WTO. Despite several discussions between the two nations, on
August 23, US targeted 279 goods from china by slapping a 25% tariff in accordance with its
list 2. China took immediate retaliatory measure by imposing a 25% import tariff on 333 US
goods in tune with its own list 2. It also filed a second WTO complaint. In the aftermath of this
both countries released their proposed list 3s which were implemented on September 24
after talks in the meantime could not result in a fruitful conclusion. The US in accordance with
list 3 hit US$200 billion worth of Chinese goods with an initial 10% tariff proposed to be
increased to 25% in 2019. China retaliated by targeting US$60 billion worth of US imports.

After escalating tensions, a cooling off point of sorts came in December when both countries
agreed to drop off the plan of further tariffs by 90 days. These talks have been fruitful so far
and the deadline for increasing tariffs has been further delayed.
As of now, US has targeted US$ 253 billion worth of Chinese imports. On the other hand,
China has imposed tariffs on US$130 billion worth of US goods. US further proposes to target
around US$267 billion worth of Chinese goods. Though, the goods that US has targeted range
from handbags to steel goods to solar panels, the real target seems to be the high tech goods
like aerospace, pharma, etc., because that is where the crux of US dominance over the world
lies, in technology, innovation and R and D. on the other China being the manufacturing hub
for various American enterprises is threatening it with qualitative measures that would
seriously impact the ease and smoothness by which these companies do and would like to
transact their business in China, which is the prime site for cheap and skilled labour in the
world.

As of now, the leaders of the two respective countries Xi Jinping of China and Donald Trump
of U.S., seem to have reached an agreement of sorts, the announcement of which is due is
the next few days. Despite this, the world economic climate remains ripe for trade skirmishes
and trade wars at the movement and it is not a moment too to take a step back and study a
particular case (U.S.-China) to look at some of the generalizing features that form the basis
for commencement of trade tensions and disputes of sorts.

RESEARCH GAP AND SIGNIFICANCE OF THE STUDY

The U.S.-China trade war is a very recent issue for the economic field and literature as a whole.
The trade skirmish between the two countries started after Trump’s ascension to power but
showed signs of turning into a trade war only in the early months of 2018. The trade tensions
after some early soft blows reached its peak in September of 2018 but has since reached a
sort of agreement though chances of the trade war flaring up at any time remain incredibly
high. Despite the phenomena being very recent the subject has been of vital interest to
economists around the world due to the involvement of two big players namely the U.S.,
reigning emperor of the world economy and China, its heir apparent. A lot of diverse studies
have been made on the various aspects of the trade war, discussing relative gains and losses
to each economy, welfare losses to residents of both countries, the loss and gain to other
competitors from this trade war, impact on the global economy emanating from this and so
on. Various researchers have tried to locate the exact items between the three tariff lists
which actually mean the most to both countries’ economies and are the major motive forces
of the trade war. Along with this, several authors have tried to come up with an exact theory
of what is causing this trade war and what generally causes trade wars. Comparative studies
of relative benefits and losses of protectionist regimes and free trade regimes has also been
attempted since the signs have appeared pointing to a probable trade war.

A comprehensive study of the trade war keeping the U.S. economy as the sole focus as an
attempt to explain the trade war has been lacking. This is important from three perspectives.
First, it is U.S. that started the trade skirmishes and secondly it is the one which is least
interested in withdrawing its tariffs despite several reassurances from China. Third and
perhaps the most important point that several economists have widely accepted is that
Chinese retaliation is at best random while the U.S. tariffs are aimed particularly at attempting
to safeguard its knowledge and technology advantage which gives it the advantage it holds in
the global economy. It is keeping the U.S. economy in the centre and particularly its
desperation to protect its knowledge sector that has not been made the crux of a
comprehensive explanation of the trade war. To make sense of the present circumstances
and to move towards a comprehensive cause and effect explanation of the trade war, it is
necessary to begin right at the beginning, the beginning being the point of origin of the trade
war, which is the United States of America.

In this light, the present study is significant in trying to fill some of the research gaps
particularly in the direction of making an analysis from the point of view of the U.S. economy,
the causes of initiation of trade skirmishes, why the tariffs are looking to protect the
knowledge economy and to move towards general objective motivations behind the trade
war as viewed from the angle of the U.S. economic spectrum.
AIMS AND OBJECTIVES OF THE STUDY

In view of the research gap indicated beforehand, the present study as its objective aims to
take as small step in the following direction-:

1) To analyse the U.S.-China trade war from the perspective of its originator i.e., U.S. and
the sector which it is actively looking to protect via its tariffs on China, namely the
Knowledge and Technology Intensive sector.
2) To analyse what the Knowledge and Technology Intensive sector means for the global
economy and the relative position of the big economic players in these sectors
because it is the KTI sector which the U.S. has looked to protect with its tariffs.
3) To look into why the U.S. tariffs are aimed to protect the KTI sector by analysing what
the KTI sector actually means for the U.S. economy in terms of output share,
employment share, profitability and contribution to technological advancement as
measured by Research and Development (R&D) expenditure.
4) From the perspective of the U.S. analysing the relative impact the tariffs will have on
its net corporate profits.
5) To study in depth slogans such as ‘protect manufacturing’ and ‘bring jobs back to
America’ that the Trump administration has used to ideologically justify the trade war
and how much water do these claims hold in face of empirical evidence.
6) To expel the myth that the imposition of tariffs are just monumental mistakes of a
madmen possessed by crazy ideas and provide a working explanation as to the
objective causes of why the U.S. administration is pursuing the tariff policies and what
are the motive reasons of the trade war.
METHODOLOGY

This study is based mainly on secondary data. The main sources of data have been -:

 Goldman Sachs Investment Reports

Besides these sources published reports from various government and non-government
institutions have been utilised in the study.

The presentation of data has been done mainly in tabular and graphic form.

For the sake of analysis, simple mathematical techniques such as percentages, proportions,
growth rates, index numbers have been used.
 SUMMARY

In the study that I undertook to focus on the reasons for why U.S. was acting so forcefully to
shield its Knowledge and Technology intensive industries from the Chinese onslaught. In this
sphere it was thus, necessary to focus on the present balance of power between the two
nations and to see in which direction are the economic forces taking shape. This analysis also
led to studying the importance of Knowledge and Technology intensive sector in the global
economy. Since, the U.S. was the initiator of the tariffs, it was paramount to understand what
the Knowledge and Technology intensive sector meant for its economy’s growth,
employment and most importantly the private players. What economic causes or forces
actually lead to Trump applying these tariffs and threatening to apply some more in the near
future if the situation was not rectified according to the terms of the United States of America.
The main results of my study in this direction are-:

1) The KTI sector is of vital importance in the global economy. It accounts for roughly
33% of the total Gross Domestic Product of the world. So, a position of dominance in
this sector would mean the control of the world economy.
2) The commercial knowledge intensive services and High tech manufacturing
contributes together about 25% of the total industrial output, 19% total private sector
employment and a whopping 79% of the total R&D expenditure (of which the High
Tech manufacturing sector alone contributes 50%) of the U.S. economy. The R&D
expenditure in the present economy directly correlates to the position of a country’s
economy in the global economic hierarchy. Global information technology services, a
part of KTI sector, has accounted for an addition of 1.6 million jobs in the U.S. job
market for the time period 2010-2018 and currently employs in the U.S. about 11.6
million people. It is important to keep in mind that this job growth has come in the
aftermath of the global recession of 2008 after which almost all other sectors have
actually shed jobs or shifted operations elsewhere. This amply sums up the very vital
position that the Knowledge and Technology Intensive sectors hold for the U.S.
economy.
3) Examining the current scenario and balance of powers in the world economy in the
vital KTI sector, particularly the Commercial knowledge intensive services sector and
High tech manufacturing sector plus the current situation of R&D expenditure (both
absolute and as a share of G.D.P), technological advances as measured by intellectual
property indicators and lastly, the productivity of workers in various countries. The
U.S. currently is in the leading position and that too by a huge margin. The productivity
level, measured by output per worker, of China is merely 20% of the U.S. productivity
level. The U.S. is the global leader in total R&D expenditure by spending around
US$463 billion annually compared to China’s annual expenditure of US$377 billion. In
the vital sector of High tech manufacturing, U.S. accounts for 31% of the total world
output while China accounts for 24%. Similarly, U.S. is the world leader in providing
commercial knowledge services as well and provides for 1/3 of the total global output.
The cause of worry for U.S. is not the current position but the much quicker growth of
China in all these categories.
4) Instead of the trade barriers being protective to the interest of U.S. economy and
investment, the trade war could very well result in an overall loss to the U.S. economy
particularly its foreign investment. Using the data furnished by the U.S. Bureau of
Economic analysis, it can be clearly seen that the share of profits from foreign
operations in net corporate profits is much more than the share of profits of U.S.
exports. In addition to this the net corporate profits from overseas operations are
growing at a rate of 2.6% per annum as compared to 1.7% per annum of net profits
from exports. Tariff imposition would certainly lead to retaliatory measures by China
and other nations and China will certainly target U.S.’ companies operating at home
thus, impacting the more important source of profits for U.S. business and economy.
5) Analysing the official justification that the Trump administration has dished out for the
trade war with China, namely that manufacturing the traditional stronghold of U.S.
economy is collapsing, the employment is being lost out to cheaper manufacturing
sites in China, it was found that instead of manufacturing sector collapsing it is actually
doing quite well. Manufacturing sector actually contributes around 35% of the U.S.
G.D.P and is currently enjoying an output level which is an increase of a full 100% over
manufacturing output in 1980, regarded widely as the golden age of U.S.
manufacturing, with an employment level of 50% compared to 1980. This represents
 a staggering increase in productivity. Secondly, the employment level in
manufacturing has reduced relatively as mentioned above giving a basis to make the
claim that jobs have shifted out of U.S. and gone to China, Vietnam etc. Contrary to
this opinion, Krugman found that this (searching for cheap labour) is not the major
reason that manufacturing jobs have been lost but rather the ineffective recovery that
has proceeded the 2008 recession. G Carchedi in a working paper has shown how U.S.
investment has grown more and more biased towards capital as its average rate of
profit has fallen. Anna Wharton and Michael Roberts separately reached the same
conclusion that it was the capital bias of technology that was causing the loss of jobs
in the manufacturing sector and not the search for cheap labour sites.
6) The study went further to look into the claims that free trade is slowly dying out in the
present protectionist regime and should be revived to benefit the masses. This
argument was found to be unsubstantiated by facts on both counts. Goldman Sachs
world trade openness indicator clearly showed that over the years, trade has actually
opened up and not the other way around. On the point that free trade would actually
lead to benefitting smaller businesses, Goldman Sachs’ data once again proved to be
a proverbial thorn in the sides of such arguments. It found that in the realm of
Commercial KI services and High Tech manufacturing sector the top 5 firms accounted
for more than 60% output and a lion’s share of profit as well. So there is no such
question of a protectionist regime leading to concentration at the top in such
industries. Even before the slapping of the tariffs, the industries are very much top
heavy.
7) In the end an alternate explanation, backed by facts, is given as to the reason of the
trade war initiated by the U.S., which is the continuous fall in the rate of profits of in
the U.S. economy. Since 1948, average rate of profits in the U.S. economy have fallen
23-33% depending on which cost measure is used. The rate of profit remains
abnormally high in the KTI industries especially the Commercial KI services and High
tech manufacturing sector. It is this profitability that U.S. and Trump is looking to
protect for profits are the main drivers of increasing R&D expenditure, expansion of
economy and the position that U.S. occupies in the world economy. Politics being the
concentrated expression of economics, U.S. is politically supreme only because it is
economically supreme and it is economically supreme only because its economy still
enjoys abnormal profits in key sectors of Knowledge and Technology Intensive
industries.

POLICY SUGGESTIONS

As the analysis in the study has all been made keeping the U.S. economy as its focus,
the policy suggestions offered here would actually be limited to suggestions regarding
the U.S. trade policy in particular -:
1) U.S. should further encourage technological innovation so that it can continue to
stave off the impact of Chinese economy in the department of intellectual
property and knowledge sectors.
2) The gateway to the throne of world economy goes through the doors of
knowledge economy. To further solidify its position in that sector, the U.S. must
further increase its R&D expenditure as a share of G.D.P.
3) The imposition of tariffs though might protect some industries but overall would
lead to worsening position of the U.S. foreign trade as a whole because a larger
share of net corporate profits of the U.S. comes from overseas capital investments
as compared to exports.
4) U.S. government rather than taking pseudo measures such as ‘bringing back
manufacturing’, which cannot be brought back should focus on state intervention
to attend to the basic welfare needs of the people.
5) The problem that is at the base of the U.S. economic crises namely the falling rate
of profit is a problem with which many economists dating back to the classicists
such as Adam Smith, Ricardo then John Meynard Keynes, then presently figures
such as Joseph Stiglitz, Thomas Piketty and Paul Krugman have been grappling
without finding a suitable solution to. The author of the present study believes a
la Marx, that this is the principal cause of the recurrent crises in the current epoch
and a permanent solution to it is actually not possible in the capitalist mode of
production.