Several issues that need to be further clarified about Sino-US trade frictions (Part II)

6. Can trade protection make the ‘return of manufacturing industry’ to the US possible?

Since the Trump administration came to power, it has put forward the proposal of “buying American goods and hiring American workers”, emphasizing the “return of manufacturing industry.” Some people in the US offered preferential policies to enterprises that came back to the US to set up factories. For those enterprises that moved their factories abroad, they were threatened with tariffs, forcing enterprises to return to the US for production. Can these trade protectionist practices really enable the US to achieve a “return of the manufacturing industry”?

Whether the “return of the manufacturing industry” can be achieved depends first on the reasons behind the outflow of manufacturing in the US.

From the perspective of the US domestic economy, its manufacturing outflow is determined by how the American economy works. In the process of economic globalization, US multinational companies have transferred more and more industries to developing countries to achieve maximum profitability. Through industrial transfer, they reduce costs, expand markets, divert pollution, and increase the profitability of capital. At the same time, more and more capital has left the real economic sector with lower profit margins, and turned to the financial sector to engage in financial speculation, leading to the hollowing out and virtualization of the US economy.

From the perspective of foreign economy, the manufacturing outflow of the US is determined by the rules of the international economy. In the existing international economic system, the US dollar belongs to the world currency and is in a hegemonic position. Based on this, the operating pattern of the world economy is formed. Its main features are: The US supplies the US dollar currency, and other countries, especially developing countries, including China, supply material products. A large number of imports have created a trade deficit in the US, and other countries have exported in large quantities, forming a trade surplus. This means that trying to reduce the trade deficit through the return of US manufacturing is likely to damage the hegemony of the US dollar. In fact, in 2018, the value added of manufacturing in the US accounted for only 11.4 percent of its GDP, while the proportion of financial insurance, real estate and leasing in GDP was 20.7 percent. The degree of de-industrialization and financialization was even higher than that in 2007, which is the year before the international financial crisis. It can be seen that it is not easy for the US to realize the return of the manufacturing industry.

The industrial production index, which reflects the output of industrial products in the US, shows that after the seasonal adjustment, the entire industrial sector and the manufacturing sector were basically in negative growth in the first four months of 2019, down by 1.3 percent and 1.6 percent, respectively, from the end of 2018. The capacity utilization rates of industrial and manufacturing industries reflecting the degree of prosperity of the US industrial industry were 77.9 percent and 75.7 percent in the first four months of 2019, respectively, which were lower than that of the average of 79.8 percent and 78.3 percent from 1972 to 2018. Therefore, the US manufacturing industry has not re-prospered in the trade protection policy on the whole.

The global division of labor in manufacturing is the extension of the socialization of production in the world, and it is the general trend of productivity development. Although this trend could be affected by the policies of some countries, it will never be reversed. The incumbent US government hopes to provoke economic and trade frictions by imposing tariffs and erecting high trade barriers. It requires US-funded multinational companies to return to the US, by using the tricks of labeling them as “traitors” and threatening tax increases. These practices will not help achieve the desired results. Instead of realizing the return of manufacturing industry, it will seriously undermine the global value chain, impact global resource allocation, generate widespread negative spillover effects, and reduce the efficiency of the global economy.

7. Can economic and trade frictions promote US economy prosperity?

Since 2019, the employment rate and the market value of the US stock market have remained high. In the first quarter, the actual GDP annualized quarter-on-quarter preliminary value was 3.2 percent. Since the introduction of economic and trade frictions by the US against China, the US economy seems to be doing well. This has made some people in the US confident about constantly escalating trade frictions with China. But to objectively evaluate the so-called “prosperity” of the US economy requires a comprehensive and rational analysis.

Based on some indicators, the US economy is prospering. However, whether it will continue to prosper depends on the state of capital accumulation. In the first quarter of 2019, the seasonally adjusted fixed-capital investment growth rate of the US private sector was only 1 percent, significantly lower than growth rates in 2017 and 2018. According to US official data, US durable goods orders fell 2.1 percent from the previous month in April 2019, surpassing the expected 2 percent decline. Shipments of core capital goods - a leading indicator of economic expansion - fell by 0.9 percent in April. From the perspective of development trends, economists are very unsure about the prospects of the US economy. According to a recent survey released by the National Association for Business Economics, many economists predicted that the possibility of a recession in the US economy by the end of 2020 will almost double, mainly due to the US government’s trade protectionist policy.

Many studies have shown that the US economy is in a downward phase of the so called “long wave”, a steady decline instead of rise. Many scholars, including former US Treasury Secretary Lawrence Summers, described the economic performance of the US as “long-term stagnation”. There is no strong evidence currently available that the US medium - and long-term economic fundamentals - have improved. Although some in the US continue to brag about “the best economy ever,” the facts speak louder than words. The average annual GDP growth rate in the US was 4 percent from 1950 to 1979, 3 percent from 1980 to 2007, 2.2 percent from 2010 to 2016, and 2.55 percent in the past two years. Obviously, the growth rate in the past two years is significantly lower than the so-called “golden age” after World War II and the “Clinton prosperity” in the 1990s. It is basically on the same level as that in the middle and late period of Obama’s administration, and it is far from achieving the goal of more than 4 percent.

The effect of tax cuts on economic growth in the US is limited, while its pressure on the fiscal sector is enormous. In recent years, the US federal budget deficit has risen rapidly. In February this year, data released by the US Treasury showed that the size of US public debt has reached $22.01 trillion. Jeffrey Gundlach, chief executive officer at DoubleLine Capital, also known as the new “King of Bonds”, said that the growth of the US economy is only the growth of debt. US-based Citibank also warned that the market was worried that the “fatal moment” of US solvency was coming. This “fatal moment” is likely to come early as the Sino-US trade friction escalates.

Sino-US economic and trade frictions will have a serious negative impact on the US economy. It will become a heavy burden that drags down the US economy. From the perspective of production, Sino-US manufacturing is highly interdependent. Many American manufacturers rely on China’s raw materials and intermediates. Adding tariffs to each other will inevitably increase the production costs of US companies and reduce corporate profits. From the perspective of consumption, the addition of tariffs will lead to an increase in the domestic price level in the US. Consumers will pay more for the same number of commodities so that there will be a decline in demand at the current income level. From the perspective of import and export, the mutual tariff increase between China and the US will directly lead to the decline of US exports to China. At the same time, due to the increase in production costs of US companies, the international competitiveness of US products will decline and exports will be affected.

In the era of economic globalization, trade protectionism is a poison rather than a good prescription. There is no winner in engaging in economic and trade frictions, and hurting others means also hurting yourself. An important reason for the worldwide economic depression during the 1930s was the high tariff barriers and the big trade wars in powers such as the US and Europe. The lessons of the past are right there.

8. Are additional tariffs in the interest of the American people?

When the US government escalated economic and trade frictions, a ridiculous argument of self-deception was floated by some in the US. It was claimed that “additional tariffs were good for the US.” From last year’s “trade war is very good”, it is has now come down to that China is paying huge tariffs to the US ... These huge taxes will be directly handed over to the US Treasury, and tariffs will bring more wealth to the US, even more than traditional trading. This claim goes completely against the common sense of economics. It is just the rhetoric of some in the US to hide the dangers of trade wars and fool people.

As far as the essence of trade protectionism in capitalist countries goes, a great economist has revealed that the protective tariff system that the capitalist class implements in the name of the state and the nation is merely a means of artificially “creating factory owners, exploiting independent workers and capitalizing the production materials and living materials of the people”. In fact, while trade protectionism harms the interests of other countries, it also harms the interests of the American people. It is a redistribution of interests that benefits only a few large monopoly capitals in the US.

Trade frictions harm the interests of ordinary American consumers. A large part of China’s exports to the US are ordinary consumer goods, and the price elasticity of demand is small. Therefore, according to the tax-transfer principle, when the US imposes tariffs on Chinese goods, most of them will eventually be passed on to US consumers. A study from Goldman Sachs, a famed investment bank, believes that after the US government imposed tariffs on Chinese goods last year, Chinese exporters did not lower their prices somewhat “to compete in the US market.” Therefore, tariff costs were mainly passed on to American companies and households, resulting in the rise in consumer prices. It has pushed up the core inflation rate in the US.

Economic and trade frictions are not conducive to the employment of American workers. Adding tariffs will lead to an increase in the reproduction cost of labor for American workers, restricting the demand on labor for enterprises, thus restricting the growth of employment. US companies also will have to bear higher raw material prices. The resource allocation efficiency will drop as some of the resources in the economy shift to taxable areas. Well-known American economist Paul Krugman’s commentary in The New York Times pointed out that the US administration has no strategy behind the trade war, and the additional tariff burden will be mainly passed on to the downstream producers in the US, which will eventually make the US lose the trade war.

But one man’s loss is another man’s gain, there will always be some people who could benefit from raising tariffs and become supporters of tariff increase. Who are these people? Of course, they cannot be ordinary Americans, but the minority of monopoly capitals in the US. Professor Jeffrey Sachs, a renowned American economist, sharply points out in an opinion article that China is not the source of American economic problems, US corporate greed is. The real battle is not with China but with America’s own giant companies. American business leaders and wealthy groups are actively promoting tax cuts, expanding monopolies, and outsourcing manufacturing to countries with low labor costs. They do so in order to increase profits, but they are very opposed to policies that help promote fairness in American society.

The ultimate consequence of economic and trade frictions is that only a handful of Americans will benefit, and most Americans will suffer.

9. Can the Sino-US trade frictions crush the Chinese economy?

The US has continuously escalated Sino-US trade frictions and used trade bullying and various other measures against China, which will undoubtedly adversely affect the production and operation of Chinese enterprises and people’s consumption and expectations, and increase the downward pressure on the economy. However, if we take a long-term, comprehensive and fundamental view to calmly and objectively examine it, rather than being caught in the short-term economic fluctuations or the consideration of gains and losses for the moment, we can draw the conclusion that the impact will be generally controllable and positive. The good trend is unchanged, the comprehensive advantages are obvious, and the means of regulation are sufficient. There are more opportunities than challenges.

The impact will be generally controllable. In 2018, the dependence of China’s growth on exports was only 18.24 percent, and the impact of exports on China’s economic growth is gradually decreasing. Since the beginning of this year, in spite of the slowdown in world economic growth and international trade, China’s economy has started well, and the main economic indicators have remained within a reasonable range. China is optimizing its economic structure, changing its development mode, and improving its quality and efficiency. Chinese economy is well poised to keep the healthy trend of stable growth. Sino-US economic and trade frictions seem to affect public expectations, driving investors to make irrational choices. However, since 2018, thanks to the influence of a series of the central government’s policies to stabilize employment, finance, foreign trade, foreign investment, investment, and expectations, China’s economy has been running steadily and healthily. The policy tools available in China are diverse, mature and reliable, and can be used at any time. The US side should not underestimate China’s policy, ability and experience in dealing with economic and trade frictions.

The good trend is unchanged. Although the Sino-US economic and trade frictions have added new uncertainties to China’s economy, the long-term positive trend of China’s economic development remained unchanged. The good supporting foundation and conditions for sustained growth have not changed, and the upward trend of economic restructuring and optimization has not changed. China has nearly 1.4 billion people, of whom 900 million make up the labor force. China has 170 million highly educated and skilled human resources, and the world’s largest middle-income group, as well as more than 100 million market entities. As the world’s largest manufacturing country, China has an independent and complete industrial system and national economic system. It is the only country in the world that has all the industrial categories of the UN industry classification. The domestic demand-led economic development model has become a powerful weapon for China to resist foreign trade risks. In 2018, the contribution rate of domestic demand to economic growth reached 108.6 percent, of which the final consumption contribution rate touched 76.2 percent. Consumption has become the main engine for economic growth. The new driving force represented by strategic emerging industries and sharing economy has continued to grow, injecting new vitality into China’s economic development. In 2018, China’s R&D investment ranked second in the world, technological innovation capability continued to improve, new industries and business models flourished, and the economy showed a good momentum of high-quality development.

The comprehensive advantages are obvious. As a large developing socialist country, China has a special advantage in its economic development from the perspective of the overlap of time, space and institutional advantages. First, in the process of accelerating industrialization and urbanization, the factors of production are transferring from agriculture to industry, and all economic sectors and various social undertakings will see explosive growth, which is the general law of the transformation and upgrading of the newly developing economies. Second, as a large country, it has an advantage in terms of population, space, domestic demand, and capital accumulation. This will provide strong resilience, potential and room for maneuvering. Third, it has obvious institutional advantages, given the combination of socialism and market economy that can fully mobilize the enthusiasm of all parties and make effective use of various resources. The three overlapping advantages have created a miracle in the Chinese economy, and now the advantages continue to expand rather than decrease.

There are adequate measures for adjustment. Entering a new era, China adheres to the new development concept, firmly grasps the fundamental requirement of high-quality development, takes supply-side structural reform as the main line, continuously innovates and improves macro-control, and has gained valuable experience. China has formed a comprehensive macro- regulation system, which integrates government and market, short-term and medium- and long-term targets, economic output and structure, domestic and international co-ordination, reform and development coordination. Now, there’s plenty of room for adjusting fiscal policy, monetary policy, income policy, industrial policy, and science and technology policy, as well as investment policy. China is fully qualified, capable and confident in responding to various risks and challenges.

There are more opportunities than challenges. The world today is facing unprecedented changes not seen in the past 100 years. Faced with the severe challenges of Sino-US economic and trade frictions, the political superiority of the CPC’s strong leadership and concerted efforts to carry out major tasks will be further demonstrated. It will surely unite the people’s forces, turning the crisis into an opportunity for development and turning the pressure of development into the power of high quality development. We are more soberly aware that China still has obvious shortcomings in key technology in core fields. Key technologies are not buyable. We must firmly grasp the initiative of innovation and development. We continue to increase investment on research and development in key core technology areas, bring together more high-end talents, enhance the ability of scientific and technological innovation, and get us out of the predicament wherein core technology is controlled by others. We are more clearly aware that we must grasp the general trend of the new industrial revolution and the scientific and technological revolution, grasp the opportunities of digitalization, internet, and intelligent development, explore new technologies and business models, and explore new growth engine and development paths. We will strive to lead the world at the forefront of new technologies, enhancing China’s ability to withstand various risks and challenges.

10. China’s position and attitude toward China-US economic and trade frictions

Since some people in the US provoked the Sino-US economic and trade frictions, the two sides increasingly took divergent approaches to this issue. That is, should it be taken as a zero-sum game or based on mutual benefit, being addressed through confrontation or cooperation? Should the countries stay enclosed or open-up, maintaining a monopolistic or competitive market? Should the countries stick to unilateralism or multilateralism? All these differences are underpinned by the ultimate question of whether the world is governed by the old way of hegemonism, or a new approach by building a community with a shared future for mankind. China’s position and attitude toward these major fundamental issues is clear, firm and consistent.

Faced with the economic and trade frictions provoked and escalated by some people in the US, China does not want a trade war. However, the country is not afraid of a trade war and will fight one if necessary. Proceeding from safeguarding the common interests of the two countries and the world trade order, China has responded to the concerns raised by the US with great sincerity. China overcame various difficulties, proposed practical solutions, and conducted 11 rounds of high-level economic and trade consultations with the US, which demonstrated China’s sincere desire of not fighting a trade war. However, the US has continuously challenged China’s bottom line and overstepped the red line of norms governing international relations, attempting to sacrifice China’s rights to development and even damaging China’s sovereignty and dignity. This can in no way be accepted by the Chinese people. China expects the two sides to reach a win-win agreement based on mutual respect, equality and reciprocity. China’s sincerity is consistent, while its principle is firm. China will not fear any threat or oppression from the US side to escalate the economic and trade frictions. China has no choice or line of retreat, but to fight resolutely to the end. No one or any force should underestimate the iron will of the Chinese people and their strong resilience for a protracted war!

Facing the unilateralism and protectionism pursued by the US government, China is committed to mutual benefit and win-win progress, striving to build a community with a shared future for mankind. China will continue to play its role as a responsible major country, firmly uphold global and regional strategic stability, promote mutually beneficial and win-win cooperation with other developed countries and developing countries, unswervingly follow the path of peaceful development, and work for the building of a community with a shared future for mankind. As a permanent member of the UN Security Council, China will continue to work together with the international community, to resolutely safeguard the international system with the UN as the core based on the basis of international law. China will work to build a new type of international relations featuring mutual respect, fairness, justice and win-win cooperation, and will work to build an open, inclusive, clean and beautiful world that enjoys lasting peace, universal security and common prosperity. China will further promote high-quality development of the Belt and Road Initiative, follow the principle of extensive consultation, joint contribution and shared benefits, and strive to achieve policy consultation, infrastructure connectivity, trade promotion, financial cooperation and people-to-people exchanges. China will build a global connectivity partnership, create new development opportunities for all countries, and move forward toward a community with a shared future for mankind.

Facing continued challenges and disruptions to the existing international order by some people in the US, China has firmly upheld the multilateral trading system and actively participated in leading the reform and development of the global governance system. As a firm defender and builder of the current international order, China has worked hard to make the global governance system more just and equitable, which meets the general needs of all countries. The reform of the global governance system should better reflect the changes in the international landscape, and reflect the will and interests of most countries – especially the emerging markets and developing countries – in a more balanced way. Advancing the reform of the global governance system does not mean to scrap the old system or rebuild a new one. Rather, it means to keep the global governance system up with the times, and improve it with innovation. As the world’s largest developing country, China firmly abides by and upholds the WTO rules, supports an open, transparent, inclusive and non-discriminatory multilateral trading system, and backs necessary reform of the WTO. China sticks to the road of opening-up, integration and mutual benefit, strives to build an open world economy, strengthen cooperation within the G20, APEC and other multilateral frameworks, promote trade and investment liberalization and facilitation, and address global economic problems of imbalance and inequality, promote economic globalization toward more open and inclusive, balanced and win-win development.

In the face of the adverse impact of Sino-US economic and trade frictions, China will stick to its independence and self-reliance, deepen reform and opening-up, unswervingly follow the path of high-quality development, and earnestly run its own affairs well. Regardless of past, present and future, China will develop the country and the nation by mainly relying on its own strength, maintain national dignity and confidence, and stick to its own path. China will speed up the process of enhancing its independent innovation ability and strength, strive to independently control the core technologies, and firmly grasp the initiative of innovative development.

No matter how the situation develops, China earnestly runs its own affairs well. The fundamental way to deal with economic and trade frictions is to develop itself through reform and opening-up. China will continue to deepen reform and opening up. China will not close its door, but rather open it even wider. In his keynote speech of the opening ceremony of the Second Belt and Road Forum for International Cooperation, President Xi Jinping announced that China will adopt a series of major reform and opening-up measures to strengthen institutional and structural arrangements and promote higher-level openness, including widening market access for foreign capital, strengthening international cooperation in intellectual property protection, increasing imports of goods and services on a larger scale, implementing international macroeconomic policy coordination more effectively, and paying more attention to the implementation of the opening-up policy. The more China opens up its door, the better it will interact with the world and contribute to progress and prosperity for both China and the world.