Crossing America's GDP redline

China Plus Published: 2018-08-10 21:45:43
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Note: The following is an edited translation of a commentary from the Chinese-language "Commentaries on International Affairs."

This week, the United States announced a list of Chinese goods worth 16 billion dollars that would be subject to an additional 25 percent import tariff. China quickly responded in kind. America started this trade war saying that it would introduce tariffs on 50 billion U.S. dollars’ worth of goods from China. China matched this threat. And on August 23, the first battle in the trade war will be fully underway. 

Tariffs against China are ostensibly to solve what the United States has called China's unfair trade practices. The American move to introduce tariffs appears to be based on domestic political considerations. But the tariff policy also plays into the long-term strategic objective of the United States to suppress and contain its fast-rising competitors. By doing so, it hopes to maintain the hegemony of the U.S. dollar, dominate multilateral institutions, and maximize its economic advantages.

The United States has historically been skillful at containing its competitors. At one point, the gross domestic product (GDP) of the Soviet Union exceeded 60 percent of American GDP. The United States strengthened its efforts at containment of the Soviet Union. At the same time, the Soviet Union also made fatal mistakes that, combined with American economic pressure, led to its eventual disintegration. 

The so-called Japanese miracle also triggered pushback from the United States. Japan's GDP grew to be worth more than 60 percent of the GDP of the United States. In response, America forced Japan to sign the Plaza Agreement, which led to the appreciation of the Japanese yen. Combined with Japan's loose monetary and fiscal policies, large amounts of money flowed into the country's stock market, and into the real estate market. When the bubble burst, Japan entered into a period that has been called its "lost decade". 

[Photo: China Plus/Chen Xiwen]

[Photo: China Plus/Chen Xiwen]

These two significant examples indicate that 60 percent of GDP is a red line for the United States: If any country crosses this red line, the United States will attack, regardless of the challenger's ideology or political system, or whether they are friend or foe. 

The current trade dispute is more analogous to the second example, the Japanese-American trade war. After the Second World War, Japan developed an export-oriented economy. In 1965, Japan posted its first trade surplus with the United States. By 1994, the annual trade surplus had reached 65 billion U.S. dollars, accounting for 43.16 percent of the total American trade deficit. Japan's economy also continued to grow. In 1972, Japan's GDP ranked second in the world. In 1992, it reached 60 percent of American GDP before reaching 71.1 percent in 1995. 

The Japanese textile, steel, home appliance, automobile, telecommunications, and semiconductor industries have in turn been dragged into trade disputes with the United States. American trade sanctions against Japan have evolved in line with Japan's industrial restructuring, and have been most keenly targeted in areas where Japan is a world leader, namely its automotive and semiconductor industries. By 1989, the Office of the U.S. Trade Representative had launched a total of 24 "Section 301 investigations" against Japan, mostly concentrated in these two industries. In order to reach peace deals with the United States, Japan was forced to adopt measures such as paying settlement funds, investing in factories in the United States, restricting its own exports and increasing imports, and reducing excess production capacity.

In the eyes of the United States, all of these measures didn't do enough to reduce Japan's competitiveness. In 1985, under the auspices of the United States, five major economic powers signed the Plaza Agreement, causing the yen to appreciate sharply. By 1988, Japan's surplus with the United States narrowed. But two years later, Japan's surplus expanded again, because the problem, fundamentally, wasn't with Japan. The United States government did not, and still has not, come to terms with the realities of having increasingly internationalized production chains, inefficient domestic industries, and a low national savings rate. With these factors ever present, it was always going to be difficult to reverse its trade imbalance with Japan. 

In 2014, for the first time China's GDP passed the redline of 60 percent of America's GDP. With China's economy growing faster than any of America's previous competitors, and looking likely to surpass it in size in the foreseeable future, it seemed almost inevitable when in August last year the "Section 301" investigations were launched against China. 

But it is at this point that the stories of America's trade wars with Japan and China begin to part ways. China possesses a huge domestic consumer market, whereas Japan's economy relied overwhelmingly on exports, especially to markets in America and Europe. And China's export trade has the benefit of the Belt and Road Initiative: In the first seven months of this year, the volume of trade between China and the other Belt and Road participants amounted to 4.57 trillion yuan, accounting for 27.3 percent of China's total foreign trade. By contrast, trade between China and the United States over the same period was 2.28 trillion yuan. 

Another advantage that China has over Japan of the 1980s and '90s is its stable political environment. Between 1989 and 2000, power in Japan switched between four parties in the Diet, the Cabinet was shuffled nine times, and seven Prime Ministers came to and went from office. Factionalism and inter-party disputes exerted tremendous influence on the government, which threw roadblocks in the way of policy development and implementation.

China also has the world's largest and most diverse industrial ecosystem, enabling it to sit at the center of global industrial and supply chains. This provides China with a major advantage, as it extracts a high price on the United States because of its tariff policy. The tech giant Apple provides a case in point: Almost one-third of Apple's 200 suppliers are based in China. This means that when Apple moves its products along its manufacturing chain from China back to the United States, this American company will be hit with hefty import tariffs. And manufacturers based in the United States are also suffering: The television manufacturer Basic Electronics Inc. has shut its factory in South Carolina and laid off 126 employees because the cost of the parts it imports from China has skyrocketed. 

Both Japan and China have faced the brunt of American containment in the course of their rise. But they will not share the same destiny: China will not fall into a lost decade. The fundamentals of its economy are strong, and it can overcome the challenges brought about by this battle.

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LU Xiankun Professor LU Xiankun is Managing Director of LEDECO Geneva and Associate Partner of IDEAS Centre Geneva. He is Emeritus Professor of China Institute for WTO Studies of the University of International Business and Economics (UIBE) and Wuhan University (WHU) of China and visiting professor or senior research fellow of some other universities and think tanks in China and Europe. He also sits in management of some international business associations and companies, including as Senior Vice President of Shenzhen UEB Technology LTD., a leading e-commerce company of China. Previously, Mr. LU was senior official of Chinese Ministry of Commerce and senior diplomat posted in Europe, including in Geneva as Counsellor and Head of Division of the Permanent Mission of China to the WTO and in Brussels as Commercial Secretary of the Permanent Mission of China to the EU. Benjamin Cavender Benjamin Cavender is a Shanghai based consultant with more than 11 years of experience helping companies understand consumer behavior and develop go to market strategies for China. He is a frequent speaker on economic and consumer trends in China and is often featured on CNBC, Bloomberg, and Channel News Asia. Sara Hsu Sara Hsu is an associate professor from the State University of New York at New Paltz. She is a regular commentator on Chinese economy. Xu Qinduo Xu Qinduo is CRI's former chief correspondent to Washington DC, the United States. He works as the producer, host and commentator for TODAY, a flagship talk show on current affairs. Mr. Xu contributes regularly to English-language newspapers including Shenzhen Daily and Global Times as well as Chinese-language radio and TV services. Lin Shaowen A radio person, Mr. Lin Shaowen is strongly interested in international relations and Chinese politics. As China is quite often misunderstood in the rest of the world, he feels the need to better present the true picture of the country, the policies and meanings. So he talks a lot and is often seen debating. Then friends find a critical Lin Shaowen criticizing and criticized. George N. Tzogopoulos Dr George N. Tzogopoulos is an expert in media and politics/international relations as well as Chinese affairs. He is Senior Research Fellow at the Centre International de Européenne (CIFE) and Visiting Lecturer at the European Institute affiliated with it and is teaching international relations at the Department of Law of the Democritus University of Thrace. George is the author of two books: US Foreign Policy in the European Media: Framing the Rise and Fall of Neoconservatism (IB TAURIS) and The Greek Crisis in the Media: Stereotyping in the International Press (Ashgate) as well as the founder of, an institutional partner of CRI Greek. David Morris David Morris is the Pacific Islands Trade and Investment Commissioner in China, a former Australian diplomat and senior political adviser. Harvey Dzodin After a distinguished career in the US government and American media Dr. Harvey Dzodin is now a Beijing-based freelance columnist for several media outlets. While living in Beijing, he has published over 200 columns with an emphasis on arts, culture and the Belt & Road initiative. He is also a sought-after speaker and advisor in China and abroad. He currently serves as Nonresident Research Fellow of the think tank Center for China and Globalization and Senior Advisor of Tsinghua University National Image Research Center specializing in city branding. Dr. Dzodin was a political appointee of President Jimmy Carter and served as lawyer to a presidential commission. Upon the nomination of the White House and the US State Department he served at the United Nations Office in Vienna, Austria. He was Director and Vice President of the ABC Television in New York for more than two decades.