China-United States Trade Wars 1

China-United States Trade Wars

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 China-United States Trade Wars 2

Date: November 23, 2020.

To: The United States Trade Representative

From: John Doe.

Subject: Leniency towards China on Trade Tariffs.

Introduction

The United States-China trade tension began in 2018 when President Trump raised

various issues citing unfair trade practices, including the increasing trade deficits, currency

manipulation, theft of intellectual property, and practices regarding the transfer of technology

and innovation (Huang, Lin, Liu and Tang, 2018). As a result, the Trump Administration

implemented trade barriers and tariffs on Chinese imported products with the hope of weakening

the competitiveness of Chinese companies and forcing the Chinese government to enact policies

that would be more favorable to U.S. firms. While several factors have been cited as the cause of

the ongoing U.S-China trade conflicts, the underlying driver is the pursuit of global

technological leadership. The U.S. has criticized China's trade policies and practices regarding

the transfer technology transfers and cyber spying that has seen the country wage war on Chinese

technology giant, Huawei Technologies Company. China retaliated by imposing trade tariffs on

American imports. The trade confrontations between the U.S. and China hurt both countries'

economies as they are profoundly interested in exporting goods and services on a bilateral basis,

and they are likely to lose more than they can gain. As a result, the incoming United States Trade

Representative in the new presidential administration should be more lenient to China going

forward to achieve global business interest.

 China-United States Trade Wars 3

Background of the Trade Wars

China’s trade practices and policies related to the transfer of technology, IP, and

innovation are at the center of the ongoing trade confrontations with the U.S. In 2018, the Trump

administration raised four key concerns regarding the Chinese regulation of information

technologies of American IT firms in business with their Chinese counterparts (Huang, Lin, Liu

and Tang, 2018). The findings of the 2018 Office of the U.S. Trade Representative Report and

investigations by Section 301 identified foreign ownership restrictions as the first concern

regarding technology transfer. The report outlined that China had restricted foreign ownership of

IT firms in joint-venture relationships with Chinese firms by requiring or pressuring them to

transfer technology from American to Chinese companies. Secondly, the Trump administration

alleged that China has enacted stringent technology regulations that forced American firms to

seek technology licenses on terms that favored Chinese counterparts. Thirdly, the U.S. alleged

that China has strategically invested in American technology companies with the sole intention

of acquiring cutting-edge technologies and IP. Lastly, the U.S. Trade Representative stated China

was participating in cyber theft and accused Huawei of theft and cyber intrusion into U.S. firms'

computer networks to give the Chinese government illegal access to American trade secrets and

sensitive commercial data (Huang, Lin, Liu and Tang, 2018).

Huawei found itself at the center of the U.S. - China trade confrontations due to its links

to the Chinese government. Due to allegations of espionage that began in 2012, the American

congressional panel concluded that both ZTE Corporation and Huawei posed a national security

threat. In 2018, a hearing by the Senate Intelligence Committee warned of possible security

threats and discouraged American firms from conducting business with the two technology

companies (Huang, Lin, Liu and Tang, 2018). American intelligence agencies alleged that
 China-United States Trade Wars 4

Huawei devices contained surveillance applications that allowed the Chinese government to spy

on Americans. Lacey (2020) in the lecture material states that while speaking at the Edmund

Burke Foundation's National Conservatism Conference, the Former National Security Advisor,

John Bolton, attacked Huawei by stating that the United States was not going to pretend that the

company was a private entity when it was a state-owned enterprise spying on Americans as

instructed by Beijing. The war targeting Huawei escalated when its chief financial officer,

Sabrina Meng, was arrested in Vancouver, Canada, on a request by U.S. authorities on claims of

shipping products manufactured in the U.S. to Iran, thereby violating the U.S. export and

sanction regulations. Meng is a top executive in the company and the daughter of its founder,

Ren Zhengfei. In May 2019, President Trump issued an executive order that led to Huawei being

placed on Entities List, implying that it was subject to specific license requirements for the

export of its products (Lacey, 2020). As a result, Verizon stopped selling Huawei phones, and the

company’s research and development in Silicon Valley were clipped. In addition, the Trump

Administration asked U.S. allies such as Italy, Japan, and Germany not to use Huawei's 5G

technologies, citing espionage concerns.

Most of the U.S. - China confrontations in technology emerge due to the former’s

concerns of the latter’s ambitions to become a global technology leader. Notably, the U.S. views

the industrial strategy, Made in China 2025, intended to expand the high-tech industry in areas

such as robotics, aerospace, and information and communication technology as a threat to the

American global leadership (Kapustina, Lipková, Silin and Drevalev, 2020). The Trump

Administration has since described the policy as economic aggression. Another primary reason

for this technology race is that many Chinese next-generation technologies have military and

civilian applications, thereby posing security concerns. However, experts have warned that the
 China-United States Trade Wars 5

willingness of President Trump to use Huawei as leverage in the trade conflicts with China has

blurred the country's pursuit for global technological leadership. The internal strife between the

two groups in President Trump's trade team has further complicated the situation by presenting

different views about the wars (Kapustina, Lipková, Silin and Drevalev, 2020). The Secretary of

the Treasury, Steven Mnuchin, and the director of the National Economic Council, Larry

Kudlow, have always supported free trade between nations. However, they have shifted their

global outlook view since joining the Trump Administration. On the other, Peter Navarro,

President Trump's trade advisor, and the U.S. Trade Representative, Robert Lighthizer are

interested in the long-term decoupling of U.S. interest from China. Notably, Navarro's book,

Death by China, suggests that the U.S. ceasing trade, technology, and capital flow to China

would make American technology and IP less vulnerable to forced transfer and theft. In turn, this

would help the Trump Administration to limit China's global leadership in technology

(Kapustina, Lipková, Silin and Drevalev, 2020). However, economic experts have warned that

economic decoupling would lead to the U.S. suffering severe consequences than China, as

discussed in the next section.

Consequences of the U.S.-China Trade Wars

Both the U.S. and China are set to lose significant trade gains if the confrontations persist

for the unforeseen future. Lacey (2020) in the lecture material shows that the estimated potential

value of imports subject to Chinese and U.S. tariffs are $53 billion and $267 billion, respectively.

If exports to each country are reduced due to the high import tariffs, China’s GDP will suffer

direct and indirect effects of at least 0.43% and 1.12%, respectively, while the U.S. GDP will

suffer a loss of 4%. Simultaneously, China's investment market will suffer because the

actualization of the industrial policy, Made in China-2025, is at risk of failure due to slow
 China-United States Trade Wars 6

technological development in the country. The country has invested heavily in research and

development, but still lags behind the United States, with the latter having an R&D share of

2.8%, while China is ranked at 2.1% (Kapustina, Lipková, Silin and Drevalev, 2020).

Conduit, Gray and Findlay (2019) indicate that companies of all sizes from both China

and the U.S. are likely to be affected by these struggles since international trade is responsible

for increased innovation and productivity due to access to inputs from the world through

offshoring and exports. With the exception of the American companies such as McDonald's and

KFC having a strong presence in China, other manufacturing companies consider the country to

be their manufacturing powerhouses due to its low taxes and duties and competitive currency

practices. As a result, companies like Apple have included China in their supply management

because of the low labor costs and the rapidly growing Asian demand market. Trade conflicts

may cause such companies to exit the Chinese market, resulting in increased labor costs and

reduced profitability (Conduit, Gray and Findlay, 2019). On the other, Chinese companies such

as ZTE will suffer because it acquires its chips for telecommunication equipment from the U.S.

Huawei is already experiencing the negative impact since it has been subjected to stringent

regulations and Verizon has stopped selling their devices.

Kapustina, Lipková, Silin and Drevalev (2020) indicate that while the two countries are

expected to suffer economically, economic experts have warned that the U.S. will suffer more

than China. This is because China is the leader of the Comprehensive Progressive Agreement for

Trams-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership

(RCEP), with nations that make up 50% and 30% of the global GDP, respectively. China may

leverage this mega-union to take a leading role in global trade. On the other hand, when

President Trump-led America in the withdrawal from the Trans-Pacific Partnership (TPP), the
 China-United States Trade Wars 7

country missed a great opportunity to enhance its influence in prescribing trade rules that are

vital in the 21st-century trade and to respond to China's trade practices that are not addressed by

the World Trade Organization (WTO). Therefore, the U.S. government's recent actions have

resulted in self-inflicted wounds to its global technological leadership and economy. For

instance, the raising of U.S. tariffs has increased the price of inputs for domestic manufactures,

making the end products expensive for local consumers and less competitive globally. Besides,

retaliatory tariffs from China are already hurting the competitiveness of U.S. agricultural

products (Kapustina, Lipková, Silin and Drevalev, 2020).

A Solution from the American Perspective

The two counties should find a solution that would enable each side to claim victory.

However, the U.S. should find a short-term solution that includes being lenient and persuading

China to limit its trade barriers and open its market to American investors. To advance this goal,

the incoming administration should renew its efforts for the bilateral investment treaty that has

been under mediation since 2008. Lacey (2020) suggests that the negotiation process's handlers

should borrow lessons from the conflict between Xinhua News and Dow Jones in January 1996

when the former introduced new orders on foreign economic information news services. The

American delegation should identify that one has to be extremely persistent and creative to find a

solution that will benefit both China and its investors. Secondly, when one is in conflict with

China and trying to find a solution, he or she cannot embarrass the system. As a result, the trade

team should not go ahead to point out the adverse trade practices implemented by China during

the negotiation process.

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Conclusion

In 2018, the Trump Administration proposed to enforce tariffs on up to $53 billion of

Chinese imports leading to concerns of the trade struggles between the two nations. The

underlying cause of the trade war has been cited as practices regarding intellectual property

technology transfer and innovation. The trade confrontations between the U.S. and China hurt

both countries' economies as they are profoundly interested in exporting goods and services on a

bilateral basis, and they are likely to lose more than they can gain. Besides, experts have warned

the confrontation is likely to be more devastating to the American economy than China because

large American firms such as Apple and Mcdonald's have a large presence in China (Kapustina,

Lipková, Silin and Drevalev, 2020). Therefore, the U.S. will suffer more consequences such as

economic losses and losing its global position as a technological leader if a solution is not found,

As a result of these dire consequences, the incoming United States Trade Representative in the

new presidential administration should be more lenient to China going forward to achieve global

business interest.
 China-United States Trade Wars 9

References

Conduit, J., Gray, N. and Findlay, C., 2019. Benefits of Trade: An Organizational Perspective.

Huang, Y., Lin, C., Liu, S. and Tang, H., 2018. Trade linkages and firm value: Evidence from

the 2018 US-China trade war. Graduate Institute of International and Development

Studies Working Paper, (11-2018).

Kapustina, L., Lipková, Ľ., Silin, Y. and Drevalev, A., 2020. US-China Trade War: Causes and

Outcomes. SHS Web of Conferences, [online] 73(1), pp.1-13. Available at:

<https://www.shs-

conferences.org/articles/shsconf/pdf/2020/01/shsconf_ies_2019_01012.pdf> [Accessed

23 November 2020].

Lacey, S., 2020. International Trade: Strategies & Opportunities.

Lacey, S., 2020. Technological Decoupling, System Fragmentation and the Breakdown in

International Economic Cooperation.

Lacey, S., 2020. Trade Tensions and the Global Technology Industry.