Breaking trade dependence on China has been a much-discussed topic among leaders worldwide, especially during the pandemic, highlighting that most countries have a massive reliance on China for medical supplies and other critical components.
One of the most notable cases was that of the United States. During Donald Trump’s administration, it initiated a trade war with the Chinese Communist Party (CCP) in its eagerness to balance the trade balance. The U.S. concluded that the country could not be economically dependent on an ideological rival, which could use the withholding of medical supplies and other critical components as “a weapon.”
The U.S.-China trade war that began before the pandemic opened up questions and critical debates about the CCP’s trade practices. China is now the world’s second-largest economy, but all those countries with which it has trade relations are negatively affected.
How China went from an impoverished nation to a major economy
In 2001, with the support of then U.S. President Bill Clinton, China joined the World Trade Organization (WTO).
The initial idea of the West in letting the CCP join the WTO, whose record of repression and slaughter was already extensive at the time, was to try to replicate what happened to other Eastern countries. Authoritarian regimes such as South Korea and Taiwan assimilated Western values such as democracy, freedom of speech, and religion. They established a rule of law whereby they would play by the same rules as everyone else.
That turned out to be perhaps one of the worst historical mistakes of the West, as the CCP never adopted Western values such as freedom of speech or freedom of religion and still has the worst record of human rights violations.
Once inside the WTO, the CCP opened its doors to foreign investors who, with a vast labor force that was very cheap in comparison, managed to attract investors. As a result, industrialization turned China into a world power conceptually in two decades.
In the words of Apple CEO Tim Cook: “China has moved into very advanced manufacturing, so you find in China the intersection of craftsman kind of skill and sophisticated robotics and … computer science. … That intersection, which is very rare to find anywhere.”
The technical skill of the Chinese workforce is also the result of help from the West. With China’s economic opening, Deng Xiaoping, the CCP leader at the time, began sending Chinese students to the United States to learn the art of business, economics, and industry at top U.S. universities, to bring that knowledge back to China.
The combination of cheap, highly skilled labor and industrial-scale facilities made China a temptation for entrepreneurs always looking to reduce the cost of their production.
Trade unbalance, the start of the trade war
In his campaign to become president, Donald Trump said, “we cannot continue to let China rape our country, and that is what they are doing.” and promised to balance things out.
In fact, from 2010 onwards, in the U.S. trade balance with China, there was always a surplus of more than $300 billion in favor of China. That’s because the Asian giant always exports more than it buys, not only with the United States but with the whole world.
Trump assumed the presidency of the United States and launched an aggressive campaign seeking to balance trade with China.
In July 2018, he imposed tariffs and taxes on 25% of all Chinese imports—more than 34 billion Chinese goods—which escalated in 2019 to 250 billion.
From 2018 to 2019, Chinese imports to the United States went from nearly $540 billion to $450 billion, resulting in a reduction in the trade deficit of more than $75 billion.
Trump’s strategy was simple: get China to buy more goods from the United States.
In response, the CCP imposed tariffs on specific areas of U.S. imports: soybeans, pork, and the auto industry.
Analysts say the Chinese regime’s tariffs were aimed at hurting Trump’s voting base, the rural population that gave him victory since most U.S. soybean and pork production goes to China. In other words, the CCP did not bow to Trump’s pressure.
The war had a truce when Trump and Xi Jinping met in Buenos Aires during the G20, where they both agreed to sign a new trade agreement.
So, was Trump right to start a trade war with the CCP? What are the advantages, and what are the losses?
It is necessary to analyze what the CCP is accused of in terms of its trade practices, what the scenario would be for the U.S. economy by cutting its dependence on China, and the impact for the rest of the world.
What are the CCP’s harmful trade practices
When Trump took office, he opened an investigation into Chinese trade practices. He found that the CCP was indeed pursuing strategies that did not comply with WTO rules and were designed to maintain its economic power at the expense of other participants.
Inaccessible or conditional Chinese markets
While China grew thanks to other countries letting it enter their markets freely, a report by The Economist claims that the Chinese regime prioritizes local companies. China gives them cheap loans or massive subsidies, free land to build on, or tax incentives while at the same time restricting foreign company’s access to their local markets. In some cases, companies have to give up their technology to enter the Chinese market.
In 2019, the Treasury secretary designated China as a currency manipulator after the yuan fell 8% despite China’s economy growing. It accused the CCP of depreciating the Chinese yuan to keep its export prices low while charging more for imports.
Currency manipulation occurs when a government or central bank buys or sells foreign currency in exchange for its own domestic currency to influence its relative value.
By buying the dollar, the price of the Chinese yuan depreciates. So China, which is a net exporter, can sell its products at an artificially lower cost, making it more competitive.
Then as the Chinese economy continues to grow, the Chinese yuan rises in value relative to the dollar.
To illustrate the scenario, let’s say that the price of Chinese soybeans on the international market is one dollar a kilo and costs 10 yuan. But if the yuan’s value becomes stronger, the price goes from 10 yuan to 8 yuan to the dollar.
With this, the value of Chinese soybeans rises to 1.25 dollars on the international market. Then, Chinese soybeans are no longer competitive, and China would lose sales in a normal situation.
Therefore, the CCP, which manages the private and central banks, buys dollars to depreciate the yuan and always keeps prices lower on the international market.
At the same time, this manipulation of its currency makes imports, i.e., when someone wants to sell something to China, more expensive than its local products.
Manipulation of production costs
The Chinese regime is also accused of manipulating production costs to maintain a cheap labor force that other countries cannot compete with.
Until 2012, China had a program called ‘re-education through labor,’ which had an extensive network of forced labor camps populated by prisoners of conscience convicted not necessarily of a crime and used as labor to produce hundreds of thousands of goods for export.
According to the accounts of those who managed to escape from these forced labor camps, under unsanitary and inhumane conditions, the prisoners were forced to manufacture everything from chopsticks to Christmas ornaments, lights, teddy bears, toys, etc.
Prisoners received no monetary compensation, had extremely high daily quotas to meet, and were tortured by guards if they did not or could not comply.
Some Falun Dafa practitioners, who at the time made up almost the entirety of the prisoners in these forced labor camps, gave testimony of how women and men over 70 years old were subjected in these places. Many died because they could not withstand the extreme pressure.
At present, many human rights organizations have made similar accusations about the treatment of Xinjiang’s Uighurs.
The production of millions of Chinese goods in the forced labor camps that defies human decency has destroyed the competition in international markets where the CCP has landed.
Intellectual property theft
Perhaps the most critical aspect of China’s growth is intellectual property theft. How did China come to own brands of cars, cell phones, semiconductors, and other cutting-edge technologies?
According to Bill Evanina, a former U.S. counterintelligence director who served under Trump, the U.S. loses between $300 and $600 billion per year to Chinese espionage. FBI Director Christopher Wray said there had been a 1300% increase in Chinese economic espionage in the last decade and that every 12 hours, the agency has to open an investigation.
In July 2020, U.S. authorities permanently closed the Chinese consulate in Houston, Texas, alleging that the place was a spy hub and that an operation to steal COVID vaccine secrets had originated there.
In Jan. 2020, a Harvard University professor and two Chinese researchers were indicted by the Department of Justice for stealing nanotechnology research for the CCP. Several more cases were where CCP-funded faculty at elite universities transferred the intellectual property to the Chinese People’s Liberation Army.
What has the Biden administration done?
While in practical terms, disengagement with China has not materialized—in 2021, trade with China increased 19%—the Biden administration and Congress, albeit with a more moderate tone, are outlining a path to cut dependence on China.
In February 2021, Biden issued an executive order intended to identify areas where the U.S. supply chain is dependent on China.
In his one-year plan that expires this month, Biden asked various federal agencies to review the following areas and layout a plan to decouple from China:
- Rare minerals
- High-performance batteries (for cars)
- Pharmaceuticals and active pharmaceutical ingredients
- Personal protective equipment
In January of this year, Biden announced a $20 billion investment to build an Intel semiconductor factory in Columbus, Ohio, as part of U.S. efforts to return to chip production dominance. The investment is said to create 3,000 jobs and is the largest in Ohio.
On Feb. 9, the U.S. government warned that if the CCP did not comply with its commitment set out in Phase 1 of the trade agreement it signed with Trump, which required China to increase imports of U.S. goods to $200 billion, it was within the realm of possibility to apply further tariffs. However, it detailed that it would do so in consultation with allies and the business community.
However, this year, the Biden administration removed tariffs on some 549 Chinese import goods, including bicycles, textiles, medical supplies, industrial components, and thermostats.
Although Biden has a much more moderate tone towards China than his predecessor in his speeches, he has reiterated his intention to strengthen the domestic industry.
On the other hand, in June last year, the U.S. Senate passed a bill to strengthen U.S. geopolitical presence by allocating a total budget of $250 billion.
The Innovation and Competition Act establishes specific tools to monitor the activities of academics and their relationships with foreign powers to prevent intellectual property theft. In addition, it allocates $90 billion for research and development of technologies to improve supply chains and includes a $52 billion incentive for more companies to build their factories in the United States.
The bill still needs to be passed in the House of Representatives.
What was the reaction of the Chinese communist regime?
While most countries suffered during the pandemic due to the closure of their economies and other measures to mitigate contagion, China grew in 2020 and 2021. According to work-from-home analysts, there was a lot of demand for technology produced in China.
However, because China’s statistics and data do not have independent scrutiny and are provided by the CCP, it is difficult to say whether China had growth during the pandemic. Especially given the number of videos and images that leaked out of China showing entire towns and cities empty because people were forced to stay at home.
Still, the CCP also came up with a plan to bolster its domestic economy and not rely so heavily on its imports, called Made in China 2025 (MIC25).
The model put forward by the CCP is called “dual circulation,” which some experts in China say is a strategy to make China self-sufficient while making other countries more dependent on the Chinese market.
According to the South China Morning Post, in Xi Jinping’s words, it is a plan to “gradually form a new development model in which domestic circulation plays a dominant role.”
A statement from the Chinese authorities describes the dual circulation model as a means to build a robust domestic market to “comprehensively promote consumption and open up new space for investment.”
The plan’s announcement could well be a strategy by the CCP to dispel fears of investors facing the fall of the real estate market (the case of Evergrande). The attack on large Chinese companies by the CCP, as in the case of Alibaba, has generated doubts and concerns about the future Chinese market.
In its business practices, the CCP has already prioritized its own companies over foreign ones and indicates its clear intention to decrease its imports.
According to a 2021 Harvard Business Review analysis, the Chinese regime has set aside more than $500 billion in various funds to support indigenous research and development (R & D) in technologies and products China currently relies on foreign companies.
Part of the CCP’s MIC25, as mentioned above, is the extraction of intellectual property.
As explained by the U.S.–China Economic and Security Review Commission, “As part of China’s licensing documentation procedures, commercial enterprises are required to provide detailed information about their products and processes to Chinese regime agencies at the local and central levels.”
In other words, to gain access to the Chinese market, companies have to cede their designs, which local companies will then replicate. In turn, these companies will receive subsidies from the state until they can produce the same product and displace the foreign company from the market.
In other instances, to ‘develop’ its technology, the CCP directly uses commercial espionage.
In 2010 American Superconductor (AMSC), a significant supplier of the software used to control wind turbines discovered that its Chinese partner Sinovel paid Dejan Karabasevic, a Serbian engineer employed at AMSC’s development facility in Austria, $1.7 million for the complete AMSC source code.
Consequences for the US of disengaging from China?
A report by the U.S. Chamber of Commerce analyzed a possible scenario if the United States were to cut its dependence on China.
The report presents figures estimated in the billions of dollars of losses in different areas where U.S. companies are currently, partially or wholly, manufacturing their products in China, some of which return to be sold in the United States.
While the report is based on concrete figures of the current trade exchange between the two nations, and that many large American companies such as Intel, Nike, and Apple have China as their best customer. The impact would be significant. The Chamber of Commerce’s approach does not consider a gradual transition with the support of the federal government. The Biden administration has already indicated it is willing to commit to many of these factories returning to the United States and reducing production costs.
To be sure, breaking economic dependence on China will bring losses, at least in the first few decades, but the long-term goal has more benefits with the prospect of creating millions of domestic jobs.
A cold analysis of the data shows that breaking trade dependence on China will be costly for the United States.
However, the CCP has already begun its plan to end its dependence on foreign companies in the most critical technology areas and strengthen its domestic industry and export even more, to continue to grow.
On the other hand, given the high degree of pollution in China, where drinking water is scarce, the CCP, through the Belt and Road Initiative, has ensured that many countries rich in mineral resources will give them access to these resources in exchange for unpayable loans.
In other words, the CCP has already begun its process of disengaging from the United States, so why shouldn’t the United States do the same?
Compelling reasons to decouple
The CCP has enriched itself tremendously:
- First, with the United States’ help to educate the Chinese and enter the WTO and become a large economy.
- Second, by stealing intellectual property through espionage and forcing companies that enter the Chinese market to hand over their technology designs to the state. As a result, China today has its own cars, cell phones, semiconductors, appliances, and computers.
- Third, through its harmful trade practices, which do not comply with the WTO standards that the CCP signed, China competes unfairly with the rest of the markets. In developing countries, thanks to the corruption of local governments that continue to sign trade agreements and declare China as a “market economy,” it gets unrestricted access to sell as much as it wants. As a result, these countries are in an economic crisis because of their complete dependence on China.
In other words, countries in Africa and South America are in constant financial crisis because the local markets are flooded with Chinese products. As a result, their domestic industry is almost non-existent. To solve hyperinflation, instead of stopping depending on China and producing locally, governments increase taxes and continue to borrow, generating a vicious cycle of debt that has no end.
Additionally, the CCP’s economic growth has given it the resources to continue repressing innocent people. Hundreds of thousands of believers have been killed by the CCP’s repressive apparatus thanks to its officials’ monetary incentives.
From these points of view, the United States, the leader of the free world, has a moral duty to the world to decouple from China and stop feeding the red dragon that has been devouring humanity.