China warns Donald Trump against a trade war

Chinese Commerce Minister Zhong Shan
Contributed by Joe Montero

China has given American president Donald Trump a warning against pursuing a trade war.

Commerce Minister Zhong Shan told the parliament in Beijing that if tariffs are imposed on Chinese goods, it would be a breach of cooperation and that the only right choice is for the two countries to work together to resolve differences.

This is the second warning against a trade war within a week.

Trump has accused China of resorting to unfair trade policies to steal American job opportunities. The accusation is false, because the loss of industries and jobs has occurred for home grown reasons. Most of what is imported from China is made by American companies that chose to relocate, because the return on their American operations had fallen too much.

The unfettered market has led to a decline in the returns on investment, due to the cost of capital inputs, relative to the price that can be realised. Admittedly, this is a somewhat truncated way of explaining a more complex problem. Unfortunately, there is no room to go into it here. It is mentioned only to show that there is another explanation.

The same problem is what has made the American currency less stable. The quantity of American dollars in circulation is in greater than it should be. This is because, the export of currency has been used to alleviate the pressure at home. In a real sense, the United states has been partially exporting its crisis to other nations that are less able to act in their own defense.

The flexible exchange rate based on the American dollar was imposed on the world by the United States when it was the unchallenged global economic power. These days have gone.

Tension with China is in part due to Beijing’s refusal to let go of controls over its own currency, to link it more closely to domestic conditions than to its relationship with its American counterpart. This suits China’s interests. China’s exports are cheaper and imports more expensive.  A flow on from this is that the internal Chinese market continues to favour the local made product.

there are also import controls that protect certain Chinese industries. This might restrict American imports. But China has the problem that the volume of American investment coming in has caused a major imbalance in the economic relations between the two countries, to the advantage of the United States.

China now holds roughly a third of the supply of American dollars in its reserves. It is not good for China, because these reserves are dead investment that is not being put to economic activity and it reduces the potential for the Chinese economy.

But releasing the currency would pull down the value of the American dollar enormously and disrupt the global economy. By acting with restraint and responsibly China is preserving stability at its own cost.

The United states and some other countries do have some problems with Chinese manufactured products coming in and causing disruption. At least Beijing has recognised the problem and is applying a policy to wean from excessive reliance on exports and towards greater reliance on building the domestic market, as the principle engine for economic growth. However, change will take a little time before it has a major impact.

The response from the United states can only be either patience or conflict.

If a serious trade war becomes a reality, both nations hurt.

A trade war will slow down the application of solutions. This is not an argument between a superpower and a small nation that will eventually be pushed into submission. China is too big for this and the consequences will be enormous.

History has shown that this sort of trade war causes major economic and political havoc and brings about the risk of turning into a shooting war. It threatens all nations.

To genuinely resolve the issues, a joint approach is needed that will find ways to reduces the excess of American dollars, overcome difficulties between the two nations, and create a better and fairer international trade regime.

Rather than sabre rattling, the world needs a good dose of sanity.

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