Trade War with China? No, It’s Worse

Trade War with China? No, It’s Worse

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For the past several months now, the US media is obsessed with dire predictions of a calamitous trade war between China and the US, following numerous statements by  president Trump that the Chinese trade surplus is intolerable. Indeed, at $506 billion of Chinese exports against only $130 billion of US ones, it does look very unfair. However, things look a bit different if looked at from a different angle. The Chinese value added, for instance is only 45%, which means that 55% is first imported there to be assembled and re-exported. The US value added is 92%, India’s 87%. Secondly, German trade surplus with the US is not far behind China’s and, unlike China, which fills the aisles at Walmart with cheap goods, Germany produces and sells large numbers of expensive automobiles. Germany and the EU are certainly guilty of large scale protectionism of their agro markets, but their auto exports are highly competitive.

 

The problem with China is, thus, not its surplus per se, but rather the economic system that produces it and here it is the communist system and not free trade that are clearly to blame. After three disastrous policies instituted by Mao Tse Tung (Hundred Flowers Bloom, the Great Leap Forward and the Great Proletarian Cultural Revolution) that collectively cost at least 65 million lives, Deng Xiaoping introduced a version of state capitalism for small and medium enterprises and, most importantly, did away with the ‘leader for life’ tenure of the communist leader. Capitalism, albeit constrained, did what it usually does and lifted 250 million Chinese out of poverty. Deng was communist first, though, and did not hesitate to kill tens of thousands when he thought that party rule itself was threatened as at Tiananmen thirty years ago.

 

Since then, things have gotten a lot worse under Xi Jinping. The communist party has reasserted itself with a vengeance. Xi is now declared leader for life, people are being stopped from travel abroad or buying a train ticket on account of a poor ‘social credit’ system and Mao’s crimes are no longer to be criticized. Not to mentions a million Uyghurs in re-education camps in Xinjiang. Just in time for the 70th anniversary of the publication of George Orwell’s, ‘Ninety eighty four’ communist dystopia is alive and well in China.

It is as a reflection of the communist party retrenchment that Chinese trade practices must be seen. Trade is just a way of increasing the power of the CCP. Everything that contributes to its aggrandizing is fair and widely practiced – technology theft, discrimination against foreign companies, preferential loans/subsidies to state-owned enterprises, currency manipulation etc.

 

It is a fool’s paradise though with China’s economy beset with problems that defy easy solutions. The most serious of those is the transition from a low economy to a moderate wage producer, which involves a dramatic cut in productivity. China has not had any productivity gains since 2007 that does not bode well. There are also problems in the country evolving into a high-tech producer. It is still unable to master the production of high end chips and must import billions worth from the US. There are, in some estimates, 700,000 missing cadres necessary to produce the chips and there are nowhere to be found. There are further serious problems with the huge indebtedness of the economy ($12 trillion to a $32 trillion economy with a 15% non-performing). To say nothing of the huge structural problems caused by the policies of the CCP, such as the barbarous and inhumane one-child policy. With a Total Fertility Rate (TFR) of 1.6, 25% of the population nearing 60 years of age by 2030, no social security and looming 44% dependency ratio by 2050, China is clearly on its way of getting older before it gets rich.

 

Finally, it is not clear at all that the Chinese population, having tasted middle class status, will remain quiescent forever. The recent million-strong anti-government demonstrations in Hong Kong may be a sign of things to come.

 

By Alex Alexiev

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