Monthly Article

August 2017 Monthly Article – China and the U.S.

On August 15, China lobbed a warning shot at the U.S., after the Trump administration indicated the desire for an investigation into China’s technology practices. The U.S. is accusing China of violating global rules by forcing foreign companies operating in that country to transfer technology to local partners. China requires foreign companies to work with local firms in strategic alliances or joint ventures. Many U.S. businesspeople have accused China of dangling access to markets in exchange for technology, and are in favor of the latest move by Washington, D.C. In response, China stated that it would strongly defend its interests, and claimed that it was the U.S. that was violating its trade commitments. China threatened retaliation if any Chinese companies were negatively impacted by the Trump administration’s actions.

Continuing the North Korean saga, on August 22 the Trump administration slapped sanctions on 10 companies and six individuals from Russia and China, claiming that they had conducted business with this rogue nation that allowed it to speed up its missile program. China immediately declared that it was fully following U.N. sanctions and demanded that the U.S. rescind its own sanctions, or that U.S.-Chinese relations will be put at risk.

Historically, China has been accused of violating trade agreements by allowing practices such as the dumping of products priced under their cost of production in foreign markets, and intentionally restricting foreign competition in its local markets. Based on the latest U.S. accusations, China may very well be violating the rules it swore to uphold as a member of the World Trade Organization. Calling out this country if it is following illegal trade practices would be a natural reaction.

Since acquiring the presidency, the Trump administration has threatened, attempted to bully, or grated on the nerves of several U.S. trade partners. Many would argue that this is an integral part of Trump’s strategy to soften up countries with which the U.S. runs a trade deficit or has trade agreements that it wants to change. Others would argue that these strategies have resulted in the opposite effect of weakening the U.S.’s negotiating position.

Given the tense relationship the U.S. recently has developed with major trading partners, proceeding with caution should be urged on both sides. China seems to have had enough of the attempted bullying and is threatening the U.S. right back. As the tensions with China heat up, the U.S. is currently engaged in the renegotiation of the North American Free Trade Agreement (NAFTA) with Mexico and Canada. At his August 22 campaign rally in Phoenix, Trump again threatened to cancel NAFTA. Mexican officials quickly shrugged off this latest rhetoric as simply a “negotiation tactic.”

This may be true, but there does exist the risk that through these tactics, the U.S. backs itself into a corner with its trading partners, which are important to the country’s economy and future. Countries that trade very rarely have major conflicts, because these can severely damage the revenue of local industries and exporters, and thus the overall income to the countries. This usually makes the stakes too high to start a trade war. In this sense, trade wars generally generate losers, not winners. Industries can be affected unevenly and consumers will eventually bear the brunt of their government’s actions.

When communication between countries degenerates to the level of back-and-forth threats and insults, a dangerous point has been reached. Under NAFTA, an arbitration panel made up of members from the three North American partners was created to settle trade disputes. This allows a forum through which parties involved in a dispute can present their case and seek a resolution. The Trump administration wants to do away with this system and replace it by having the U.S. directly remediate and make judgements on disputes. While this may sound good at face value, it can have the unwanted effect of putting the U.S. government in an antagonistic position with the governments of the other two NAFTA partners, thus creating a path to escalation of more severe disputes.

In a time in which new foreign policy is evolving under the Trump administration and our trade partners are attempting to separate the rhetoric from reality coming from the U.S., we are in a very tenuous period in which overreaching and misinterpretation of our nation’s intentions can set a negative course for the U.S.’s trade interests for years to come. Communicating with our trade partners in a respectful and clear manner can help chart a more efficient course and avoid unnecessary conflicts that could lead to trade wars.