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The USís trade war fallacy

By Murray Hunter - posted Tuesday, 17 September 2019


The current trade war between the US and China is a fallacy. There is no trade war going on here. A real trade war exists when a country tries to protect its industries by placing tariff barriers on the import of cheaper goods from foreign countries, or provides subsidies to local manufacturers to artificially lower production costs in order to compete with imported products. Trade wars are about protectionism. These rounds of tariffs on goods from China are not protecting any US industries.

In the current case many of the goods imported into the US are made by US corporations in China. Of the US$539 billion exports from China to the United States, about 50 percent are from US companies. Another 20 percent are OEM products produced for US corporations. The tariffs are not paid by China. They are either absorbed by US corporations which either reduces profits, or passed onto consumers who pay higher prices for goods, which adds to inflation.

According to estimates made by JP Morgan Chase, the tariffs will cost the average American family around US$1,000 per year. This is expected to deeply dampen Christmas spending. The major US retailer Macy's share value dropped by 13 percent late last week. Share prices of other US retailers also fell.

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The only thing that will hurt China is a reduction in demand for goods bound to the US, thus reducing some employment. However, China is reducing the value of its currency, the Yuan to compensate for the new tariffs.

Trump's tariffs may put pressure on companies exporting to the US from China to relocate to third countries. This is something that has been already happening due to rising labor rates in China. This could be seen as Trump's "scorched Earth" move. If the US can't produce the goods destined to the United States, China shouldn't produce those goods. The motives of Trump's advisors should be questioned on this.

The consequence of continuing this action is more retaliation from China, a drop in worldwide aggregate demand and a recession which will hurt the United States, corporations, and everyone else. Some already see the signs of the US slipping into recession where bond markets are giving warnings.

It was the US Corporations that moved to China

Between 1990 and 2017 US corporations invested more than US$250 Billion into China. Initial investments didn't go that smoothly. Chinese authorities later eased the processes required for foreign investors, opened special economic zones and partly opened the domestic market, bringing US corporations in droves. US corporations moved to China for lower labor and operational costs and manufacture under less stringent regulatory regimes, increasing corporate profits immensely.

There was also the expectation that US companies would be able to enter the very quickly growing Chinese domestic market, as demand in the US has already matured.

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As a result, manufacturing jobs dried up in the US. The promise of better jobs didn't materialize. Only low-paid menial service, warehouse and retail jobs became available, which had absolutely no career paths. Those jobs were for the lucky ones, as many became unemployed. The middle class began to shrink, as did purchasing power and the tax base. Eventually a trade imbalance between China and the US occurred, partly brought about by US products, which now became imports.

Corporations made higher profits for their shareholders at the cost of a loyal workforce that became redundant. A generation of manufacturing skills was just discarded, along with cities and towns that once housed the manufacturing facilities of these corporations. Many of these factories became warehouses and condominiums, ironically bought up by Chinese, which inflated the housing market.

After more than 30 years of capital and production capacity flight, China is now a manufacturing economy, and the US is not. US manufacturing has declined to around 11.5 percent of GDP against 40 percent post WWII.

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This article was first published in Asia Sentinel.



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About the Author

Murray Hunter is an associate professor at the University Malaysia Perlis.

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