Crossing America's GDP redline

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]

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.