There is an ongoing war without guns between the United States and China. When China responded to a pre-emptive strike from the U.S., the U.S. declared it was firing its shot. The center of interest has focused on whether the U.S.- China trade war will end soon or lead to a long-term conflict, and whether it will intensify or find a way to compromise. We are especially concerned about how it will affect us. If we look at why the U.S. waged a trade war and how China is fighting back, we can predict its future direction.
There are three main reasons why the United States is putting trade pressure on China. The first is economically motivated: resolving the huge trade deficit with China. Last year, the U.S. trade deficit with China was $375.2 billion, accounting for 47.1 percent of the total U.S. trade deficit.
Since China joined the World Trade Organization in 2001, the U.S.- China trade deficit has been increasing exponentially, worsening the situation in the United States. During negotiations in early May, the U.S. demanded that China purchase an additional $100 billion worth of U.S. products each year for the next two years to reduce its trade deficit by $200 billion by the end of June 2020.
The second reason is a political, and it is believed that the U.S. is putting pressure on China to help the majority Republican Party prevail in the upcoming November midterm elections. If that is the case, the trade war will end after the midterm election.
The third reason for trade pressure is a strategic move to check the rise of China as a member of the Group of 2.* The U.S. utilized this strategy to counter the rise of Germany and Japan in the past. The underlying assumption is that if the U.S. and China maintain their current rate of growth, China’s economic power will surpass the U.S. economy in the mid-2020s to late 2020s.
In particular, it is an important goal to block the pursuit of technology in China. For this reason, the “Made in China 2025” plan, one of China’s central policies, has been targeted out of concerns about security, intellectual property rights and technology infringement. At the same time, the U.S. is strictly regulating the mergers and acquisitions of American information technology companies by Chinese companies.
China seems to have three responses to these U.S. strategies. The first is negotiation. China maintains that its basic position is to solve the problem through negotiations, the idea being that the stabilization of U.S.- China economic relations is ballast for bilateral ties. From this standpoint, China seems to accept America’s demands based on economic reasons.
Second, China, which is celebrating its 40th anniversary of reform and opening up, will accelerate reform by opening up the domestic market, while at the same time, reducing U.S. trade pressure. Recently, China drastically cut tariffs on automobiles, consumer goods and pharmaceuticals. Also, it announced the schedule for opening up the financial market, and took steps toward dramatically reducing the level of foreign investment restrictions.
However, as it will take some time for China to open up, it is asking the U.S. for patience. Of course, the U.S. is currently urging China to speed up the process. For example, the U.S. is demanding that China’s tariff level be reduced to the United States’ current tariff level by July 2020.
China’s third approach is to respond strongly to the sanctions to the extent they are based on U.S. strategic moves to contain China’s rise. In this regard, China is strongly opposed to U.S. pressure to block the “Made in China 2025” plan. Moreover, China is taking forceful action to avert having the trade war expand into Taiwan and the South China Sea, as well as prevent other countries and the United States from cooperating to impede China’s central policies.
It is difficult to predict how the trade war between the U.S. and China will develop in the future. If there is a trade war for economic reasons, it is likely to reach a cease-fire through negotiations. This is a possible scenario if China promises to increase imports of U.S. products, expand the opening up of the domestic service market, strengthen intellectual property rights protection, and reduce subsidies for “Made in China 2025.” It is also a possible scenario if the U.S. accepts China’s promises as well as the “Made in China 2025” plan to some degree.
However, if the U.S. is engaged in a trade war for strategic reasons, this fight is likely to continue to grow and be prolonged. If the U.S. and China cannot reach a compromise over “Made in China 2025” economically, there is a possibility that the conflict will become an all-out war beyond the tariff battle.
On July 6, the United States began imposing a 25 percent tariff on $34 billion worth of Chinese products, and China, too, imposed an additional 25 percent tariff on the same amount of U.S. products. The U.S. will shortly impose an additional 25 percent tariff on Chinese products worth $16 billion, and China plans to impose additional tariffs equal in value.
To match China, the United States has again announced an additional 10 percent tariff list worth $200 billion. With this latest announcement from the U.S., China has filed a complaint with the WTO, and is refraining from responding to the U.S. directly. It seems that China will level-up the negotiator and face the U.S.
In any case, the U.S.-China trade war does not help the world economy or our economy because these two countries account for 36.7 percent of our exports and 38.1 percent of our overseas investments. As a result of the trade war, Korean machinery parts and electrical and electronic parts sectors will find it difficult to export to China.
If the trade war is prolonged and global protectionism spreads, there will be a greater impact on our exports and overseas businesses. Yet, it is fortunate that according to studies and corporate reaction, the U.S. - China trade war has limited the direct impact on Korea’s exports and the economy, as well as the industries that have entered into business in the U.S. and China.
We need to look at this issue now from a longer-term perspective, and make an effort to pinpoint the short-term impacts. The U.S. - China trade war is not likely to end soon. In this case, it will trigger a change in the global trade order and the value chain.
We can, however, also expect positive effects as the Chinese market opens up further. We should establish a new trade strategy and a U.S. and China strategy, and diversify our export market by focusing on strategic markets such as the New South and the New North.** We will need to be wise in order to take advantage of the new global value chain that is developing and use it as an opportunity to find ways for new growth.
*Editor’s note: The Group of 2, or G-2, is a proposed informal relationship between China and the United States in which both countries would share space in a bipolar order and collaborate to solve global problems.
**Translator’s note: The “New North” and “New South” refer to a policy created by the South Korean government to decrease its country’s dependence on trade with China and the U.S., and to develop better trade relationships with surrounding countries. Countries in the “New North” region include Russia and several Central Asian countries, while India and countries in Southeast Asia make up the “New South.”