Simple Breakdown: US vs China Trade Spat

My Simple Breakdown:  U.S. vs China Trade Dispute

The U.S. and China trade dispute was inevitable and supposed to happen.

Ever since becoming the world’s largest economy, America has rightfully encouraged third-world countries—with attractive policies—to adopt both free-market and democratic principles so that these countries would not only prosper more financially but also align more closely with America’s interests.  Therefore, in the past, America made international deals that benefited China more economically because these deals still benefited America—still win/win deals.

Now that China’s economy has surged from $360 billion in 1990 to $12.24 trillion in 2017 to become the 2^nd largest world economy, former trade practices that benefited China more than America must be revisited to become more equitable (fairer).¹  If people perceive imbalances (unfairness) to agreements or customs, then friction forms—just like it does for any entity—family, company, country, trade partners, etc.

I believe the U.S. has a much stronger negotiating position:

Perception favors America’s position because most people would conclude that our trade relationship tilts in favor of China—an imbalance or unfairness exists.  And perception creates future policies—public opinion has great influence.

America is based on free-and-open market principles.  America allows international companies (including China) great access to our “free market” with minimal barriers and tariffs to sell their products.  China, on the other hand, is not a free market system and imposes many barriers and tariffs for international companies (including U.S.) to sell products to China.  Therefore, an imbalance exists.

China has been pirating anywhere from $180 billion to $540 billion per year in intellectual property and U.S. Trade Secrets.²  This is wrong and must be addressed.  Therefore, an imbalance exists.

America has more tools in its toolbox than China.  America now imports about $350 billion to $400 billion more Chinese goods than China imports of American goods.  In other words, America imports about $500 billion from China and China imports about $100 billion from America—America imports about 5X more.³  Therefore, simply put, America can easily out-tariff China.

Remember:  It is to the benefit of both countries to avoid tariffs.  It is to the benefit of both countries that each country prospers.  Through capitalism, financial markets, and international trade—countries’ interests align.  This is the beautiful thing about capitalism and the financial markets—aligned interests perpetually grow.  China now has huge investments in America and is dependent upon America’s economy.  Likewise, America has large investments in China and needs China to do well.

As America is increasing tariffs on China, it is creating a more equitable starting point to negotiate a quid-pro-quo agreement.  Because, currently, it must be quite uncomfortable for China to negotiate giving more than receiving—who likes to do that?  I believe reason will prevail as it always does in the long run—things will be fine.

Sources:

¹ World Bank

² CNN Money

³ The United States Census Bureau