Since the open-door policy initiated by Deng Xiaoping (鄧小平) in 1978, the Chinese economy has been growing rapidly. China’s GDP increased from US$218 billion in 1978 to US$13.058 trillion last year, a 60-fold jump, or an average annual growth rate of 9.5 percent. China has been the world’s second-largest economy in terms of nominal GDP since 2010.
The major source of its economic growth is its export sector. China’s total merchandise trade exports registered only US$9.8 billion in 1978, but reached US$2.157 trillion last year, a 220-fold increase, an average annual growth of 14.4 percent, or a doubling every five years.
China is the largest export country in the world, accounting for 20 percent of global trade.
Despite its remarkable GDP growth and trade miracle, the US, Japan, Canada and the EU do not recognize China as a market economy, accusing Beijing of market distortions. They claim that its centrally planned economy is to preserve the Chinese Communist Party’s control of politics and the economy, and that it is fundamentally against a free-market economy and fair competition.
The foundations of China’s economic success are mainly unfair trading practices, including manipulation of foreign-exchange rates; theft of intellectual property, technology and trade secrets; forced technology transfers; imports controls; and unsustainable foreign investment.
The yuan exchange rate was set at 3 yuan to US$1 at the beginning of China’s economic reform in 1978. However, it depreciated to 6.37 yuan by 1993 before China devalued its currency by 30 percent in 1994 to 8.28 yuan. It later bound the yuan to the greenback for 10 years, immediately gaining an exports edge from devaluation.
The US and 28 other developed nations in 2005 called on China to increase the value of its currency to curb its advantages. Under the pressure, China slowly appreciated the yuan’s value to 6.83 by 2009 and it has risen slightly to today’s ratio of 6.68.
By 2014 China had emerged as a trading heavyweight after accumulating US$3.1 trillion in foreign-exchange reserves from international trade. The value of its currency presumably should be appreciated substantially, but Beijing has manipulated its currency to keep it undervalued.
This is the key issue in the US trade talks. The administration of US President Donald Trump has repeatedly asked China to sign a workable exchange-rate agreement to appreciate its currency to reduce the US trade deficit. However, the Chinese counter-offer is buying more soybeans from the US, which is apparently a bid to satiate US demands, but avoid altering the yuan’s value. The trade talks are ongoing.
Many companies in the US have accused Chinese spies and hackers of stealing intellectual property, cutting-edge US military technology in fighter planes and ships, and company secrets. National security experts in the US have said that Chinese spies stole trade secrets from US defense contractors and subcontractors, national laboratories, public universities, think tanks and the US government itself.
China requires technology transfer through foreign direct investment schemes and joint ventures. Under state economic planning, China closes off some important sectors of the economy to foreign companies. To access those sectors, it forces foreign companies to enter joint ventures with state-owned enterprises. China also forces US companies that want to do business there into transferring technology and trade secrets before being allowed market access.
After becoming China’s paramount leader in 2013, President Xi Jinping (習近平) launched the world’s largest economic project — the Belt and Road Initiative — which is to build a “new Silk Road” to revitalize the Chinese economy by increasing exports. The Chinese government and state-owned enterprises play a key role in implementing the plan, which is believed to be a way to extend Chinese influence at the US’ expense to achieve China’s quiet bid for regional, or even global, hegemony.
US Secretary of State Mike Pompeo has pointed out that Chinese leaders bribe senior national leaders in other countries in exchange for infrastructure projects. They promote investment and trade in 70 countries in Asia, Oceania, Europe, Africa and South America via the Asia Infrastructure Investment Bank, which is set up and mainly financed by China. Most of the benefits would flow to China, while most of the costs would be borne by the host country, which harms their people.
In light of China’s unfair trade practices, US trade in goods with China has been consistently in deficit. The trade deficit was only US$6 million in 1985, before jumping to US$103 billion in 2002, US$315 billion in 2012 and a record US$382 billion last year. The total trade deficit for the US in trade in goods with China was a staggering US$5.1 trillion from 1985 to last year.
The trade tensions arose even before China’s admission to the WTO in 2001, but past US administrations, from those of former US presidents George H.W. Bush to Barack Obama, failed to solve the problem. To keep his campaign promises to fix the China problem, Trump began charging a 30 percent tariff on foreign solar panels, which mainly come from China, on Jan. 22 last year, followed by 10 to 25 percent tariffs on other Chinese products.
To date, the US has levied tariffs on US$250 billion of Chinese products and has threatened an additional US$267 billion if talks fail. China has imposed tariffs on US$110 billion of US goods and is threatening qualitative measures.
The Trump administration indicated that the tariffs were essential to protect intellectual property and to help reduce the huge trade deficit.
To counter China’s global influence, Trump is undertaking a major expansion of foreign aid that will bankroll infrastructure projects in Africa, Asia, the Americas and the Pacific by establishing a new foreign aid agency — the US International Development Finance Corp — giving it authority to provide US$60 billion in loans, loan guarantees and insurance to companies willing to do business in developing countries.
Like previous US foreign aid initiatives, the corporation expects loan recipients to implement reforms and respect certain rights and values. It wants those that receive loans to become equal trading partners. On the contrary, China favors loans that include unsustainable financing that mortgage a country’s future.
The Trump administration developed a comprehensive plan to crack down on foreign investment in the US, which was aimed mainly at making it harder for China to gain access to US technology and trade secrets.
To reduce Chinese products in the North American market, President Trump renegotiated NAFTA with Mexico and Canada, and signed a new free-trade agreement called the US-Mexico-Canada Agreement in October last year to strengthen his position in economic disputes with China. For the same purpose, Trump also revised the US-South Korea Free Trade Agreement and is negotiating a new US-Japan deal.
In response to the US measures, China threatened to sell its holding of US$1.1 trillion of US Treasuries. However, the Japanese government indicated that it would purchase the bonds if Beijing was serious about selling. China also proposed establishing Hainan as a “free trade island” to divert some of its exports to the US. In addition, China sponsored the Imports Expo 2018 in Shanghai to increase domestic consumption to counter the impact of the trade dispute.
China’s GDP growth has slowed dramatically since the trade dispute began, as has growth of its huge exports industry. The weakened Chinese economy is affecting its stock market, which last year shed US$2.3 trillion. Also, unemployment is mounting due to bankruptcies and the withdrawal of foreign direct investment; an estimated 6 million Chinese workers have returned to their home provinces; government debt is ballooning as a result of local overinvestment in industries and real estate; and state enterprises are gobbling up struggling private companies, causing widespread concern about the future of the Chinese private sector.
Moreover, loan recipients from the Belt and Road Initiative, including Sri Lanka, the Maldives, Laos, Kenya, Malaysia, Pakistan and Venezuela, are in dire financial straits resulting from the so-called debt-trap diplomacy, reflecting the problem of the infrastructure project’s sustainability.
China indeed needs structural changes to solve its problems.
The US-China trade dispute is a long and complicated process, but the US will prevail, because it demands an economic relationship with China that is free, fair and reciprocal — no more, no less.
Lee Po-chih is a professor emeritus of economics and a former vice president of National University of Kaohsiung.
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