US-China trade war is being driven by fundamental problems of the American economy

Contributed by Joe Montero

Although a bit on the media back burner for now, the trade War between the United States and China is continuing

Having declared a ceasefire two weeks ago didn’t put a stop to it. All it did was tone down the aggressive language. Behind this the trade war continues.

A number of people have requested some explanation about what is going on. This is a big topic and it is obvious that this cannot be properly dealt with in a short space. I have tried my best and just touched on a few relevant topics, quite a few of which warrant further investigation.  My hope is that this can contribute something to this.

An explanation as to why this has come about is important. Not only for these two countries. It is important for those others that are or will also be affected – like Australia.

The US has imposed tariffs on $250 billion worth of Chinese imports, which have fallen by 7.8 percent, or $39.4 billion.  China has hit back and imposed tariff on $110 billion of US imports into China.

Photo from Stringer/Reuters: Workers load goods for export onto a crane at a port in Lianyungang, Jiangsu province.

Neither country is going to fall to the mat over this. They are too big. The danger lies in what it could lead to as the tensions mount.

As always, there is a close interrelationship between economics and politics, and this has given rise to China being accused of stealing American secrets and of insisting that companies operating there must share their knowhow. It is said that this puts the United States at a disadvantage.

What is really going on?

A significant portion of research and development in The United States is being carried out by Chinese nationals working theres. When they return to China, they take their knowledge with them. This happens because investment in training experts has fallen dramatically in the United States, while it has had a major increase in China. And China encourages many of its students to go overseas to study.

China’s government does insist that foreign companies transfer their knowhow when in China, and in many cases this takes the form of joint foreign and Chinese owned enterprise on a 50-year agreement.

The upside for the foreign investors is that they can extract a profit, in a climate where other alternatives are less attractive. That’s why they invest in China. The downside is that there is the loss of a fair amount of control and having to share this profit.

The position of the United states is that this arrangement creates a block in the free flow of capital.

Nevertheless, these two accusations are not the most serious issue. This happens to be that the United States is far less dependent on trade in goods and services, than it is on the export of investment capital.

The biggest portion of multinationals by far are well known American brand names, and importantly, includes most of the major global trading banks. Control over the global financial system is both a necessary component of pe-eminence as an exporter of investment capital and a sign of the strength of this pre-eminence. It is no accident that the American dollar is the dominant global trading currency.

This dominance in the world of finance that has provided the United States with much of its wealth.

Photo from AP: trading investment has become the mainstay of United States’ economic activity

But the shift from a manufacturing economy to s finance economy and at such as scale, has come at a price. It is the inability to generate enough new value to bring in a sustainable return in the longer run.

Doing business has become far too dependent on circulating money, rather than operating in the real economy. Not enough real increase in wealth is being generated to cover needs, and the consequence, has been a growing dependency on credit. This is unsustainable.

This growing gap between finance and the real economy is the real problem. It has its domestic impact, echoes around the world and zeros in on China.

One of the affects has been the shift to global production, as a means of finding new areas for profitable investment. Manufacturing in China has provided the means to bridge some of the gap between finance and the real economy.

The problem is that as China modernises, becomes more capital intensive and real wages rise, the advantage for the United States economy begins to erode.

Photo from Xinhua: Technicians inspect Fuxing bullet trains in Shanghai that travel at speeds up to 350 kilomtres an hour

China has suffered its own disadvantage in the form of an excess of American capital, which cannot easily be put to work and transforms itself into a cost. The answer is diversification and finding new trading arrangements with other countries, where American dollars can be offloaded.

This does not suit the interests of the United States, because the release of American dollars deflates the value of the currency. Retaliatory action takes the form of blocking access to Chinese investment to the United States and those countries within its sphere of influence.

The trade war I accompanied by an investment war.

It doesn’t stop here. War on the economic front is always accompanied by war on the political and military fronts. Hence the rise of political aggression and a propaganda war to villainise everything Chinese, that even takes on barely hidden racist tones.

Poster from around the time of the United States
Chinese Exclusion Act of 18182. Anti-Chinese racism is entrenched in the histry of the country

This is met by the Chinese calling the American predators, intent on meddling in the internal affairs of other countries. Internally, there are clear signs that the Chinese government is pressuring companies working that and gradually taking more control over their affairs.

It doesn’t stop here.

On the military front, China is almost surrounded by a wall of fire, and from time to time, there is a standoff in the South China Sea and other places.

The propaganda barrage stigmatises China as a violator of human rights. The current accusations are that people are imprisoned in China, that the Uyghur are being repressed, and that democracy is being violated in Hong Kong.  

Before accepting these on face value, the right thing would be to become a little informed and form an opinion that looks at the matter form all sides.

Taking the accusations one at a time.

The reality is that China’s prison population is by far a smaller portion of the population than that of the United States, and less highly skewed towards the poorest, black people and Latinos. They do not lock immigrants in camps.

This doesn’t justify imprisoning people anywhere. But it does suggest considering things in their proper perspective. At the very worst, China is not unique in mistreating people. Ignoring this is to misrepresent the real situation.

Uyghurs, who mostly live in the northwest border province called Xinjiang, have experienced a long history of mistreatment. Ethnically they are Turkic and most are Muslims. Xinjiang has also been lagging most of China in its economic development.

These conditions have provided an opportunity for Islamic State and related groups,to carry out the usual bombing activity in Xinjiang and other parts of China.

Their mission is to break away the province, which they call East Turkestan, and integrate it, with the dream of the intended Turkestan caliphate and build a major power on the other side of the border to Turkey and beyond.

Half-truths and distortions have muddied the waters and turned these issues into weapons to target China and justify the use of trade, political and even military war. This is the reason why it’s wrong.

One doesn’t have to be pro-China to recognise this.

The world would be a much safer place with a pull back from the chest beating. Where there are differences, they must be talked through in good faith. This is especially crucial when it involves the world’s two biggest economies.

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