China and the U.S. – Global Cooperation and Competition - PowerPoint Presentation

China and the U.S. – Global Cooperation and Competition Mark S. LeClair Fairfield University

To obtain slides: Go to www.faculty.Fairfield.edu/mleclair Look for link at top of webpage

The U.S. Chinese Economic Relationship Cover: Magnitude of trade and mutually beneficial aspects of relationship Why China-US trade is now problematic What is unique about China’s approach to world trade? Opening salvos in trade conflict – who fired first? In what ways has the U.S. been helped and harmed? Fixing the problems before they develop into a full trade war

How Big is the Trade Relationship Between the two Countries?

Trade deficit still widening Will end up larger than $400 billion in 2019 if figures hold for rest of year – possibly much larger Momentum is difficult to work against once patterns are in place Contracts that are multi-year will lead to continued large deficits for several more years

How does Relationship Benefit U.S. Basics of Comparative Advantage(Ricardo) If the same combination of capital and labor can produce 60 shirts or 4 computers in the U.S. Versus 60 shirts or 2 computers in China Then…..producing a computer in the U.S. costs 15 shirts. Producing the same computer in China costs 30 shirts Computers are “cheaper” in the U.S. in terms of lost shirts

Flipping to shirts – the U.S. must give up 1/15 of a computer to produce a shirt China only gives up 1/30 of a computer Therefore, nations should specialize and both will be made better off

Conclude – U.S. Benefits by not Having to “Waste” resources on goods produced better elsewhere Chinese dominates markets in electronics, fabricated metals, and textiles and apparel We get cheap goods and China gets employment that lifts population out of poverty

Tie in to Global Supply Chain Success of goods like Smart Phones not possible without inexpensive labor Same goes for higher-end athletic shoes (Nike) Question (however) – Plenty of countries have abundant labor (e.g. India) Don’t need to utilize Chinese labor if not in our interests

Downsides to Relationship Massive trade imbalance leads to outflow of dollars China “sterilizes” these to manipulate the value of the Yuan Keeping it under-valued to stimulate exports

Graphically

Currently holds nearly a trillion dollars in U.S. t-bonds Creates a geo-political problem for the U.S. If China decides to dump these, the impact on U.S. markets would be severe Note that China could buy even more U.S. assets to use devaluation to offset any tariffs…….

Unique Aspect of Chinese Participation in WTO Entered in 1994 under Bill Clinton Obvious benefits to both China and world An engaged China less likely to continue pursuit of Communism and support of insurgency movements By 2004, acceded to GATT/WTO and begins export processing from seven major cities Also sets off mass migration within China (91 million workers and their families)

From Beginning Insisted that businesses that exported to China produce part of product in China Not part of any part of GATT/WTO agreements in past – in fact, violates the basic tenets of the WTO as intellectual property inevitably stolen Nation begins “lifting” production and technological processes from foreign firms Begins to dominate electronics and fabricated metals sectors

Problematic for U.S., as has hollowed-out significant part of U.S. industrial base Chinese imports are a tiny percentage of exports (18%) so no commensurate growth in U.S. industries Agricultural goods, aircraft and machinery

Why Maintain the Relationship? Nearly all nations in world receive Most Favored Nation (MFN) status from U.S. Only countries we are in conflict with are excluded Would be an enormous political statement to withdraw MFN status and impose much higher tariffs Trump approach Impose heavy tariffs in the absence of a new trade relationship Notice that China has not sued the U.S. under the WTO

China’s Response has been to Tariff the few Goods it does Import Highly ineffective to tariff agricultural products Market is “amorphous” – Suppose China doesn’t buy U.S. goods (switches to Paraguay for soybeans) Nations that bought from Paraguay then buy from U.S. Although China feels it must respond, the path it has taken doesn’t make sense

Other Major Issue with Chinese Trade and Geopolitics Belt and Road – Reforming of old Silk Road trade routes Nation has developed preferential trade arrangements with nations in Africa, Europe and Asia

In practice, through “predatory” lending to African nations, secures permanent control of natural resources May leave West scrambling to find other source of key minerals Gave away intentions in 2010, when it embargoed Rare Earths (e.g. Iridium) It is believed they might try this again

Final “Salvo” from China Manipulation of Yuan (in past, somewhere between 40 and 70 percent below its true market value) Everything looks cheap if you halve the value of your currency This explains why China cannot actually go through with a threat to dump U.S. treasuries The Yuan would soar in value The entire Chinese model of trade-based development would unravel

Fixing the Relationship? Is it Possible Two sides do not want to acknowledge the problems the other is enduring China seems not at all interested in the effect on the U.S. middle class of industrial hollowing out The U.S. seems to be oblivious to the potential for political unrest that exists if the current model of trade is undone Might help for each nation to concede the other’s concerns

Some Distressing things Underway in China at the Moment Social credit system Access to benefits, ability to travel now tied into how “compliant” a citizen is Monitored through cell phone (which you cannot turn off or you lose your social credits) Xi’s cult of personality Throwback to Mao Suppression of Uigurs

A reflection of a “failing” economic model China moved over 90 million workers and their families off the farm Rapid economic growth a necessity to avoid a serious dislocation and potential political unrest U.S. consumer market is essential to keeping everyone employed and “happy” No other market can provide the necessary demand for their products

Change in Trade Relationship Elimination of technology transfer requirement when U.S. firms export to China Transition to a freely-floating Yuan It is a reserve currency after all – why is it fixed Compliance with normal accounting and other rules in determining cost of production We don’t know if China is conducting predatory pricing, as the numbers are not usable

Thank You!