The trade war between the United States and China has faced mass criticism within the US with both Republicans and Democrats criticizing the President’s motive for starting it. But from an economic standpoint, this shouldn’t be a topic of debate. For years, China has been taking advantage of the United States economically with their unfair trade policies, theft of intellectual property, and currency manipulation.
Destructive Trade Policies
China has long promoted the concepts of free trade and open markets, but when it comes to access to their own markets, they do not practice what they preach. As the US opened its markets to China and adopted free trade policies toward them, China did not reciprocate.
Every year, US free trade policies allow $506 billion worth of Chinese goods to enter the US market. The lack of US trade barriers allows Chinese companies to operate freely in our country.
But it isn’t the same story in China.
Chinese trade barriers make it nearly impossible for American companies to operate and compete in China. China has become committed to deterring foreign businesses from entering their market through the use of trade barriers.
A great example of China’s unfair trade policies can be seen in the electrical appliance industry. Chinese tariffs on American electrical appliances have ranged anywhere from 6% – 30%, while US tariffs on the same goods hover around 3%. As a result, there is a massive trade deficit within this industry. As the US opened its electrical appliance market to China, China didn’t, and the results have shown in the Chinese electrical appliance industry thriving, as US companies find it impractical to compete.
An even harsher example of China’s anti-free trade policies can be seen in the tech industry. China has banned American tech companies from the country, barring these companies from doing business in the Chinese market. Major US tech firms such as Apple, Facebook, Uber, Amazon, and Google have all been denied access. The lack of US competition has allowed Chinese tech companies to thrive.
China’s unfair trade policies can be seen across many industries and have resulted in an annual $375 billion trade deficit, which only continues to grow and hurt the US economy.
Theft of Intellectual Property
Chinese companies illegally steal anywhere from $225 billion to $600 billion worth of intellectual property from United States businesses every year. Instead of allowing American companies into their markets, China creates their own companies that mimic American goods and offerings, robbing US corporations of their business models and intellectual property.
Just ask all the American tech companies aforementioned. Rather than opening their markets to Apple, China created their own version of Apple, Xiaomi. Xiaomi imitated Apple’s business model and with limited competition, dominated the Chinese tech industry. Today, the Chinese tech company is valued at $46 billion and its success can be directly attributed to its ability to rob Apple of its business model. The case of Apple’s is not unique in any way. The same has happened with Google, Facebook, Uber, and Amazon, with Chinese companies Baidu, Renren, Didi Chuxing, and Alibaba, respectively, all copying their American counterparts’ business model. Today, Baidu, Renren, Didi Chuxing, and Alibaba are cumulatively worth close to a $1 trillion worth of market value and compete with American companies globally. The Chinese decision to exclude US tech companies from their markets in favor of homegrown companies has meaningfully cut into the growth opportunities for US businesses.
As part of its mandate, China’s central bank manages the external value of its currency within a very tight band. By constant intervention, the central bank devalues its currency in the markets and ensures that Chinese goods stay competitive. This has resulted in years of a heavy trade surplus for China with the US. This has forced China to buy massive amounts of US bonds with the dollar inflows that have happened in order to compensate for its trade surplus. Historically the central bank has used the exchange rate as a strategic tool to support Chinese industry in the export markets as well as deter foreign competition in the domestic market.
The Chinese currency manipulation also incentivizes US corporations to move production to China and benefit from lower cost of production and cheap wages translating into higher profit margins. Thus, jobs are moved to China at the cost of US workers.
A Necessary Ordeal
China’s destructive trade policies, theft of intellectual property, and currency manipulation have been hurting the US economy for years now, while simultaneously allowing the Chinese economy to prosper. These unfair practices needed to stop and the President is right in raising this issue which has gone uncontested during the last four presidential terms and deal with this very critical issue head-on.
However, the President may not have been right to tackle this issue with a trade war. In a future article, I will discuss the trade war and its possible implications.
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