The US fired the first shot in a trade war with China.
The US has initiated an investigation into China's theft of US intellectual property (IP) using Section 301 of the Trade Act of 1974.
What that boils down to is that the US just fired the first shot in a trade war with China.
"On Monday, President Trump instructed me to look into Chinese laws, policies, and practices which may be harming American intellectual property rights, innovation, or technology development," said ambassador Robert Lighthizer in a statement on the US Trade Representative website.
"After consulting with stakeholders and other government agencies, I have determined that these critical issues merit a thorough investigation. I notified the President that today I am beginning an investigation under Section 301 of the Trade Act of 1974."
China sees the use of Section 301 as an act of aggression because it allows the American president to act against the Chinese economy without consulting the World Trade Organization (WTO). China has been a member of the organization since 2001. The use of Section 301 fell out of fashion around that time because US leaders didn't see the point of using it anymore as the WTO's framework had more legitimacy. Even allies were complaining about its use.
"The law hasn't been used in 15 years and there's a good reason for that," economist Chad Bown of the Peterson Institute for International Economics told Business Insider. "We built a brand-new trading system so we didn't have to use this law."
Chinese warnings
China has been warning the Trump administration against bypassing the WTO since January. And even though initiating a 301 investigation is not a violation of the WTO in and of itself, earlier this week Chinese state media was alive with condemnation of the Trump administration for even considering it.
"Section 301 has been denounced by other nations for its unilateralism since it came out," said a Chinese Foreign Ministry spokesperson. "The US has made promises to the international society, noting that it will execute the section in a way that accords with WTO rules. The US should keep its promises and not become a destructive force that undermines multilateral rules."
That isn't to say that the US doesn't have a legitimate grievance; experts around the world pretty much agree that China has a problem with stealing companies' trade secrets.
"They're going to be mad, but I think at the same time they
Anybody who has ever followed popular trends forecaster Gerald Celente's work will know his popular catchphrase:
"Currency wars, trade wars, world wars".
It can be said that the global financial powers have been fighting a currency war for several years now in the post-GFC new financial world with the various financial blocks taking turns to depreciate their currencies through competitive devaluation and quantitative easing programs.
These range from the United States' QE programs, to the Bank of Japan's (BOJ) easing and subsequent asset purchasing programs, to the European Central Bank (ECB) bond buying programs and the Bank of England's Gilt purchase program. [1]
Even before Trump ran as a serious candidate and injected nationalistic-protectionist ideas into the US political discourse, there were concerns that the global currency war had the potential to devolve into a tit-for-tat trade war.
Inspired by trends forecaster Gerald Celente and his constant coverage of the currency war, here is an article I wrote for an old Wordpress blog I briefly had back in the day:
Currency wars, trade wars, world wars
As I wrote back in 2014, I thought there was potential for a trade war to kick off in early 2014 as a result of US foreign policy and their intervention in Ukraine against Russian interests in the region. [5]
It now seems that we may have progressed to the next stage of the sequence with the Trump Administration's introduction of trade tariffs on aluminum and steel imports. [2].
Announced last Friday, Trump has announced that he will place a 25% tariff on steel imports and a 10% tariff on aluminum imports into the United States. [2] Trading partners of the US, including the European Union, China and Canada have raised concerns over the tariffs with Canada and the European Union floating the idea of retaliation to counter the tariffs. [2]
Here's Canada's Prime Minister Justin Trudeau eloquently summarising the situation:The European Union has identified Harley-Davidson, Bourbon and Levi's jeans as possible US products that it can launch retaliatory tariffs on. Unfortunately, the likely consequences of these tariffs is higher consumer prices as these tariffs will be passed onto the end consumers of the products.
The US has often highlighted China as its main competitor in global trade and regularly accused them of cheating in international trade. It is surprising then to learn that these tariffs will mostly affect Canada, which exports 90% of its steel production and 41% of its aluminium to the US. [3]
Personally, I hope that Trump walks back these tariffs. I know some people are theorising these may be an 'Art-of-the-deal' negotiation tactic. I don't know how he back flips out of it though without looking like a flip-flopper.
I think the US can reinvigorate their economy and resume their global economic dominance through more productive measures; like the continuation of tax and regulation cuts. They also need to shrink the size of their government, stop crowding out their private sector and redirect funds and resources to the private sector from the over bloated and inefficient government sector.
All these measures can help the US grow their economy and their global competitiveness, without them taking us one step closer to a trade war.
Trump's tariff plan has received some support from Matteo Salvini, the leader of the Northern League party in Italy. [4] This really comes as no surprise though, as Matteo Salvini is the Italian version of Donald Trump and is currently leading a populist campaign to be elected Prime Minister of Italy in coalition with Silvio Berlusconi's Forza Italia party. [4]....
know the game that they're playing and they're going to be mad about being caught more than anything else," said Brian O'Shaughnessy, an IP attorney at Dinsmore & Shohl LLP and president and chair of the Board of the Licensing Executives Society, an organization for IP professionals. "There's no question they're manipulating the IP system."
But again, it's how the US is going about doing this that is offensive not only to China but to US allies watching too. Even without anti-globalist Steve Bannon in the White House (he was fired Friday), many in the Trump administration will carry on his ideology through policy, including the president.
"There is no winner in a trade war," Hua Chunying, a representative for China's foreign ministry, said in a press conference on Thursday. "We hope the relevant people can refrain from dealing with a problem in the 21st century with a zero-sum mentality from the 19th or the 20th century."
US products
All this makes even our allies nervous about their dealings with this administration, and according to reports they are prepared to fight fire with fire. China is ready too, of course, and it has quite a lot of fire.
From 2001 to 2016, US imports from China increased by a factor of 3.5, while US exports to China increased by nearly a factor of six — but never mind that.
China consumes a ton of products made by Trump's base. It is the largest market for US soybeans (62% in 2016) and airplanes (25% of Boeing passenger planes in 2016). It the second-largest market for US cotton (14% in 2016), auto (17% in 2016), and semiconductors (15% in 2016). But never mind them, and never mind any of that.
And then there's what a trade war would do to the cost of things Americans buy. The Institute of International Finance touched on this in a recent paper:
"A trade war between US and China will hurt not only Chinese manufacturers, but also upstream suppliers and downstream distributors such as US retailers. Per China's Ministry of Commerce, the final US retail price of imported Chinese goods can be several times of their imports prices.
"For example, a regular down jacket selling for $200 in US retailers usually costs only $40 to import from China. Retaliatory measures from Beijing will also hurt China-based US businesses, which made $517 billion in revenue and $36 billion in profit in 2015."
If China retaliates, the price of American goods will go up, and markets that were once open to us may start to close.
In light of Bannon's interview, revisit China's clearest warning to Trump since his election
On Monday, President Donald Trump signed a measure to begin exploring an investigation into China's theft of US intellectual property (IP). In the international business community, it's no secret that in China there is little respect for trade secrets.
But the way the Trump administration is handling the issue ignores a clear warning that the Chinese government gave to the US in January. It's using Section 301 of the US Trade Act of 1974, a law that hasn't been used in decades and would allow Trump to put a tariff on Chinese goods without congressional approval.
In an interview with Prospect.org, Trump adviser Steve Bannon seemed gleeful about the grave implications of Section 301. He confirmed reports that at least some in the administration had planned to skip the exploratory process for the investigation and proceed more aggressively, but the conflict with North Korea slowed down the process.
"To me," Bannon said, "the economic war with China is everything. And we have to be maniacally focused on that. If we continue to lose it, we're five years away, I think, ten years at the most, of hitting an inflection point from which we'll never be able to recover."
What this tells us is that Trump doesn't care about the red lines that China set down at the beginning of his administration. That will have consequences.
In a rare interview with NBC in January, Chinese foreign ministry spokesman Lu Kang said in no uncertain terms that the Trump administration should continue to use the World Trade Organization to settle trade disputes.
"China and the US are already members of the WTO, so within the WTO framework there are already rules governing these disputes," he said. "And I don't want to specify here, but it's not very difficult for any people to get a conclusion of what kind of reaction might be from the Chinese side [if Trump decides to put up tariffs against Chinese goods unilaterally]. That said, I want to reiterate that we don't want to see this kind of scenario that will do harm on both sides."
In other words: Work through the WTO, or we'll act against the US economy. Of course, Bannon and officials who think like him within the administration, like National Trade Council head Peter Navarro, have no respect for the WTO.
You can see where we have a problem here.
What's yours is mine
None of this is to say that something shouldn't be done about China's IP theft.
"They're going to be mad, but I think at the same time they know the game that they're playing and they're going to be mad about being caught more than anything else," said Brian O'Shaughnessy, an IP attorney at Dinsmore & Shohl LLP and president and chair of the Board of the Licensing Executives Society, an organization for IP professionals. "There's no question they're manipulating the IP system."
O'Shaughnessy says that US companies find that when they go to China there is only the veneer of respect for IP. In reality there is no right to privacy, especially when it comes to technology, and part of that is cultural difference. Many in China see it as the government's duty to patrol the internet.
Of course, at the same time, this is also because in China "technological dominance, they understand, is dominance."
So yes, this expert agrees this is a problem. But other experts — the trade experts — believe that using Section 301 is not a solution.
"The law hasn't been used in 15 years and there's a good reason for that," economist Chad Bown of the Peterson Institute for International Economics told Business Insider on a phone call. "We built a brand new trading system so we didn't have to use this law."
That system is adjudication through the WTO.
What's ours is the world's
And that brings us back to NBC's interview. I can't stress how rare it is for a Chinese official to be as candid as Lu was here.
"We are not prejudging anything, but I can tell you that while we have to prepare for the good to protect our national or our legit national interests ... we always try our best for the good," he said.
Institute of International Finance.
The "good" would be continuing the deep trading relationships between China and the US. Over the past decade, China's imports from the US have grown twice as fast as its exports to the US and three times as fast as China's total exports, according to a recent paper from the Institute of International Finance.
So if things get bad it really matters to the US, and especially to Trump's own voting base.
More from the report:
China last year imported 62% of American soybeans, 14% of its cotton, 17% of auto, 15% of semiconductor, and 25% of Boeing passenger planes.
China is the largest market for US soybeans and airplanes and the second-largest market for auto, cotton, and semiconductor products.
And so here we are, defying a warning from a key trading partner to follow the rules of an organization the US helped to found. We wrote the rules of global trading, and now we want to pretend they don't exist.
I'll leave you with a word from Lu.
"Worldwide, people were interested in his slogan ... 'America First.' My personal opinion, it's fair for President Trump to place the American national interest at the top of his agenda," he said. "All the state leaders should put the interest of their people, their public at the top of the agenda. But the problem is that today's world is quite interdependent, countries are quite interconnected. So while trying to pursue the interest in your country you'll have to keep in mind the implications worldwide, and these kind of implications might come back to the policy issues at your own home."
Here's why:US-China trade war is brewing as trade deficit sticks at $25 billion, asset manager warns
• "We may be brewing up for a trade war," warns Jim McCaughan, CEO of Principal Global Investors.
• Tariffs on Chinese steel imports would be bad for markets and could trigger a wider trade war.
• China maintained its trade surplus with the U.S. of around $25 billion in July.
• A trade war between the U.S. and China is brewing and could be the biggest risk for global investors, a prominent asset manager told CNBC.
• "We may be brewing up for a trade war because of the mistaken way that many policymakers interpret the trade issues. I don't believe that the U.S. trade deficit is as big a problem as many say," said Jim McCaughan, CEO of Principal Global Investors, to CNBC Tuesday.
• President Donald Trump has repeatedly voiced his concerns about his country's trade deficits with several countries including China, and his administration is attempting to open up China's economy to U.S. companies.
• Since the president's inauguration there have been fears a trade war may begin between the two countries, which would involve the introduction of tariffs and quotas on imports. Trump's Commerce Secretary Wilbur Ross has previously said the president will take "bold action" to address Chinese steel imports entering the market.
• McCaughan says this kind of tough talk appeals to the president's base, but he added that Trump would "blame someone else" in the event of a trade war and any negative consequences.
•
• Alexey Avdeev | E+ | Getty Images
• "That's what politicians always do," he said. "U.S. assets abroad tend to be very high return … Whereas foreign investment into the U.S. is in Treasury bonds. So the income from the American assets is way bigger than from the liabilities - if you look at it that way the capital account is structurally in surplus – you can't have a trade surplus as well," he added.
• The world has been teetering on the brink of a trade war for some time and this could be the biggest risk for investors, McCaughan also added. He says tariffs on steel imports would be bad for markets.
• "As far as the market's concerned, tariffs on steel would be very bad news, because it would run the risk of setting off a trade war," he says.
• "If the administration gets riled up by its base into tariffs, then you have anti-trade agenda winning."
• Limited action from US?
• China is the focus of trade deficit concerns because it is the U.S.'s largest trading partner and accounts for around half of the U.S. trade deficit. However, the administration may be limited in what it can do to China, according to a report by risk consultants Control Risks.
• "Trump's options for inflicting severe and widespread economic pain on China are inhibited by legal, regulatory and legislative practicalities, including U.S. commitments under the World Trade Organization," the consultancy said in a report published in February.
• "They are further constrained by the high likelihood of effective retaliation by China, particularly if he pursues more unilateral and unconventional options."
•
• Carlos Barria | Reuters
• President Donald Trump interacts with Chinese President Xi Jinping at Mar-a-Lago state in Palm Beach, Florida, U.S., April 6, 2017.
• McCaughan's comments come after trade data from China disappointed markets. In July, exports from China grew 7.2 percent in dollar terms from a year ago and imports rose 11.0 percent in dollar terms. Both were much lower than expected.
• Despite weaker-than-estimated growth, China maintained its trade surplus with the U.S. of around $25 billion. This trade gap is closely watched due to growing tensions between the two countries.
• "Chinese trade data for July disappointed market consensus expectations. Both yearly export and import growth moderated in comparison with the previous month, against expectations for remaining just as strong," said Susan Joho, economist at Julius Baer, in an email to CNBC.
• "Export growth to the U.S. almost halved amidst tensions over China's large trade surplus with the U.S."
Debt problems
The reason for the relatively lackluster trade growth indicated that China is failing to switch the focus of its economy from manufacturing to consumption, according to McCaughan.
"The reason growth is where it is in China has a lot to do with continued construction activity and that is not something that is long-term sustainable," he said.
"You run into debt problems very quickly if construction is what's driving the economy."
There would be no winners in a US-China trade war.
China said the US would bear the brunt of one, but that’s misguided.
Chinese Premier Li Keqiang just issued a strong message to Donald Trump: You really don’t want to start a trade war with us.
Speaking at a news conference on Wednesday, Li cited an article from “an authoritative international think tank” showing that “should a trade war break out between China and the United States, it would be foreign-invested companies, in particular US firms, that would bear the brunt of it.”
“We don't want to see any trade war breaking out between the two countries. That wouldn’t make our trade fairer,” he added.
Is Li right that US companies would end up hit harder than Chinese companies in the event of a trade war?
It’s true that a lot of US companies like Apple that rely on manufacturing their products in China would take a big hit from a dramatic escalation of tariffs, or border taxes, on goods flowing from China to the US.
But saying that those companies would really bear the brunt of a trade war eclipses a few important points. The first has to do with something called “import substitutability” — the ease with which the US can find substitutes for what it imports from China.
The reality is that companies like Apple or big US clothing companies would ultimately be able to move their operations to other countries with cheap labor such as Thailand or Mexico.
In fact, given that China’s swiftly rising manufacturing wages are approaching levels seen in Europe, a lot of foreign firms in China are already starting to make that pivot. So slapping tariffs on goods flowing from China to the US would accelerate a dynamic that’s already taking hold.
By contrast, Chinese companies importing key goods from the US won’t necessarily be able to find a substitute nearly as easily. Daniel Rosen, a founding partner and economic analyst at the research firm Rhodium Group, says that China would struggle to find replacements for huge quantities of agricultural goods and high-end technology that China sources from the US.
“The Chinese can’t buy replacement parts for a Boeing from other countries,” he explains.
In other words, many US companies can be more agile in their response to tariffs than Chinese ones. But more broadly speaking, it’s probably not better to think of trade wars between two countries whose economies are as tightly interwoven as the US and China as having winners and losers. It’s best to think of it as an “everyone loses situation.”
The conventional wisdom is that China relies more heavily on the US to keep its enormous export operation going, so it would suffer a bigger wound from a trade war. This analysis points to the fact that China exports a lot more to the US than the US exports to China.
The US goods trade deficit with China — that is, the amount by which its imports from China exceed its exports to China — is close to $370 billion. And the growth of the Chinese economy overall relies much more on trade than US economic growth does.
But the US also needs China, and aggressive tariffs on American goods going into China would be hugely damaging to its economy. Since the turn of the millennium, China has leapt from the 11th-largest export market for the US to the third-largest export market. The large volume of exports to China helps employ Americans — about 1.8 million of them, according to an Oxford Economics report published in January.
The US also benefits economically from the cheap Chinese goods that the US opens itself up to. Trade with China saves typical American households up to $850 a year, and that extra money gets spread across the economy and helps keep people employed in a variety of domestic industries.
Services that the US provides to China would also take a hit. Chinese restrictions on students and travelers coming to the US would hurt the revenues of higher education institutions and the tourism industry. “You can’t really find any American city that has a big tourism sector that’s not chomping at the bit to make China a bigger part of their game plan,” Rosen says.
Given the huge cost for both the US and China that would result from a trade war, it’s best to think of it as an event that would have no true victors — and thus something that should be avoided at all costs.