China and the U.S. – Global Cooperation and Competition

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

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

3. 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

4. How Big is the Trade Relationship Between the two Countries?

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. Graphically

12. 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…….

13. 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)

14. 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

15. 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

16. 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

17. 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

18. 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

20. 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

21. 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

23. 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

24. 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

25. 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

26. 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

27. Thank You!