The Escalating US-China Trade War, Part 1

By William Tucker
Columnist, In Homeland Security

This is the first of two articles on current U.S.-Chinese economic issues.

In response to new U.S. tariffs on $600 billion worth of Chinese products, Beijing responded by levying tariffs of its own on $200 billion of U.S. goods. The bilateral trade is so unbalanced that China cannot match the U.S. in tit-for-tat measures, so Beijing is now threatening to cut off sales of rare-earth elements to the U.S.

The problem with this move is that China would undermine its own industry. Though China controls nearly 80 percent of the global rare-earth market, the U.S. does have the ability to source the materials elsewhere. In fact, the U.S. Department of Defense has requested additional funds to purchase rare-earth elements elsewhere to make up for any potential shortfall.

Admittedly, limiting the supply would put a strain on the market for these elements, but the challenge is not insurmountable. Beijing has offered other nations the chance to increase their purchases of rare-earth elements if their offers are reasonable. China may be preparing for an eventual shortfall in sales to keep pace in the trade war, but the U.S. remains China’s largest market for its goods.

Beijing’s Willingness for Bilateral Talks Shows China Recognizes Its Dependence on US Trade

China knows it is dependent on the U.S. economy; Beijing’s early willingness to hold bilateral trade talks in spite of Washington’s tough demands demonstrates this succinctly. The recent round of talks fell through because China, erroneously, believed that the U.S. economy was weaker than advertised and that China could rely on weak U.S. economic data to undermine President Trump’s reelection effort.

Though Trump can certainly lose his reelection bid, it does not change the fact that Chinese currency manipulation, trade secrets thefts, forced technology transfers and domestic subsidies harm the U.S. Any person sitting in the White House would be forced to grapple with this issue eventually. Politicians and pundits may argue over the use of U.S. tariffs, but ignoring this issue is not an option.

In addition to unsavory trade practices, China’s intimidation of its neighbors only serves to escalate the issue, not just in Washington, but also among the nations in the East Pacific. In attempting to buy time by implementing creative economic measures or threatening the use of force, China forced the very issue it sought to avoid.

China’s against a Trade War with US But Doesn’t Fear It

In a recent press briefing, Chinese vice foreign minister Zhang Hanhui said, “We are against the trade war, but we are not afraid of it.” Zhang then added, “This premeditated instigation of a trade conflict is naked economic terrorism, economic chauvinism, and economic bullying.”

It is natural for Zhang to act as if China is innocent of the very measures it accuses the U.S. of using, but it also demonstrates desperation. Again, China is fully aware of its weaknesses and has taken measures to bolster domestic consumption so that the nation is not so dependent on exports. But Chinese consumers are saddled with debt and social obligations.

For instance, many Chinese workers between the ages of 20 and 40 face a problem Beijing calls 4-2-1. This means that children without any siblings (which applies to much of China due to its former One-Child Policy) must eventually care for two parents and four grandparents in addition to themselves. The One-Child Policy may have alleviated the overpopulation problem in the short term, but it created another long-term problem that, at the moment, seems insurmountable. It is difficult to increase domestic consumption when a large portion of your population lacks disposable income.

China’s Debt Problem Cannot Be Calculated in Dollars and Cents

China is in debt, significantly. Part of the problem is that it is difficult, if not impossible, to assign a figure to the debt. There are Chinese statistics for official debt, but following the 2008 economic crisis, China implemented new restrictions on lending. Over the past decade, those restrictions have shifted from one type of loan to another so Chinese citizens get creative with how they borrow money for business purposes or to purchase property.

Furthermore, the economic crisis took “shadow lending” to new heights. Shadow lending can include everything from organized crime to banks obfuscating the purpose of a loan or peer-to-peer lending. China cracked down on this lending practice too, but the debt amount is significant and official numbers do not typically include shadow lending.

Some estimates show shadow lending eclipsing all other loan forms for the past three years. Coupling the demographic problem with overwhelming debt and an unrelenting reliance on the U.S. creates a bleak outlook for Chinese economics.

Coming up: The Escalating Trade War, Part 2 – The Huawei Problem.