13 NGUYỄN NGỌC NHƯ NGUYỆT The US China Trade War PDF

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Nguyễn Ngọc Như Nguyệt – FTCStudent ID: 31181020788 Email: [email protected] TRADETHE US – CHINA TRADE WAR:CAUSES AND IMPACTSABSTRACTThe US-China trade war has been going on for more than 2 years but there is still no sign of stopping. There are several causes that drove the US...

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INTERNATIONAL TRADE THE US – CHINA TRADE WAR: CAUSES AND IMPACTS

Nguyễn Ngọc Như Nguyệt – FTC01 Student ID: 31181020788 Email: [email protected]

ABSTRACT The US-China trade war has been going on for more than 2 years but there is still no sign of stopping. There are several causes that drove the US to wage this war, they are (a) President Donald Trump’s protectionist policies that don’t want to lose the US international standing or be depressed about employment issues caused by trade deficit, (b) the US large trade deficit with China, (c) China’s ambition to become the world’s leading technology nation which is perceived as a national security threat to the US in some aspects, (d) China’s serious copyright infringement which gives them the ability to gain unauthorized intrusion to the US intellectual property, confidential business information, trade secrets, and (e) China’s unfair competition practices such as China’s failure to grant foreign enterprises compatible access to its markets, technology transfer requirements and currency devaluing. Due to these reasons, the US has started a war that didn’t only severely affect both sides, but also made many impacts on several other countries. For the world, the US's confrontation with China could disintegrate the global economy into two major economic blocs focusing on the US and China, making multinational enterprises no longer able to optimize their resource allocation. For China, China may no longer be able to take advantage of its best position as a latecomer to increase their potential economic growth rate and significantly affected in terms of welfare, GDP, manufacturing employment and trade. Despite all of that, these losses are not too deep and are considered to be affordable. Meanwhile, although the US gains from the war welfare, GDP and non-manufacturing production, the losses are quite large, manufacturing employment and trade (both export and import) suffered heavy losses. For Vietnam, the trade war can increase Vietnam imports and exports, as well as Foreign Direct Investment (FDI) but also create some challenges, such as the risk of several industries facing with losses in market share or being imposed anti-dumping tariff by the US. Understanding those factors, Vietnam can make early moves by taking specific measures to propose appropriate solutions and eliminate potential challenges.

INTRODUCTION On 22/3/2018, the US President Donald Trump signed Memorandum of Understanding based on Section 301 of the US Trade Act and imposed sanctions against China. This

event has triggered a trade war which is very likely to escalate between 2 giant countries, the US and China. The US Trade Representative (USTR) declared that it would impose a 25% tariff on $50 billion worth of Chinese goods, which includes tariff on $34 billion of Chinese goods coming into effect in 6 July 2018 and a further tariff on $16 billion additional Chinese imports on 23 August 2018. Not wanting to lose the game, China responded US with a tic-for-tac manner, quickly imposed tariff on $50 billion of US imports. In reaction to Chinese retaliation, the US announced its 10% tariff on $200 billion worth of Chinese goods and China soon retaliated by promising to impose tariff on $60 billion worth of US imports on the day the $200 billion tariff action comes into effect. It is obvious that the trade war between the world’s two largest economies US and China hasn’t only severely affected both countries in economic aspect, but also has impacts on many countries not engaging in the war, including Vietnam. My purpose in this report is to summarize and point out major causes that have led to the war, along with potential economics effects that the war may have, from which to propose some suggestions for Vietnamese government and exporters in this context of the ongoing US-China trade war.

MAIN CONTENT Causes that triggered the trade war The US-China trade war stems from several causes which can be divided into 2 parts: deep-rooted causes and particular causes.

Deep-rooted causes There are many doubts about why the US had started a trade war against China. Taking the US side, since the early 2000s, American politicians and economists have been aware of the China’s trade surplus with the US. President Donald Trump has complained about this since his election campaign and promise to “correct” the deficit with China by imposing tariff when he takes office. Eventually, he kept his words, criticized China as an unfair trader, accused China of its wrong-doings which have affected US international standing. By 2030, China's nominal GDP will surpass that of the US. However, in terms of purchasing power parity (PPP), China's GDP now has already

surpassed that of the US. If US is the largest importer and the second largest exporter, China is the largest exporter and the second largest importer. Taking China side, the Communist Party of China has implied that China has been involved in this war because the US perceives China as a threat to their leading position. China also refuted the US claims about them as an unfair trader. They believe that US motives for waging a trade war against them right now is nothing different from the US-Japan trade frictions in the past. Whenever there is a country bounding to reach the “60% level” comparing to the US in terms of economic size, US will perceive it as a threat to their “America First” principle, and will find every excuse to constrain that country’s economic growth.

Particular causes The following issues are considered direct causes that had led to the trade tensions between two countries, especially since China joined the World Trade Organization in 2001. President Donald Trump’s protectionist policies During the election campaign, Donald Trump always raised the slogan "America First". Immediately after taking office, President Donald Trump implemented the protectionist policies. On January 23, 2017, President Donald Trump signed an executive order to withdraw the US from the Trans-Pacific Partnership (TPP) agreement signed by the US and 11 countries in the region. Subsequently, on May 17, 2017, the US President Donald Trump's administration officially sent a notice to Congress about plans to renegotiate the North American Free Trade Agreement (NAFTA) signed with Canada and Mexico. At the same time, US President Donald Trump advocates negotiating and promoting bilateral rather than multilateral trade agreements to promote US advantages and increase US interests in international trade; promoting the trend of increased protectionism and the willingness to increase import taxes on goods that the US has advantages to protect domestic production. Needless to say, President Donald Trump’s protectionist policies have become pessimistic elements that triggered not only the ongoing trade war between US and China, but also the trade tensions with countries considered to be US allies (such as the EU, Japan, South Korea) or US neighbors (such as Canada, Mexico).

The US large trade deficit with China The US large trade deficit with China is considered to be a direct cause of US-China trade war. US trade deficit in December 2019 has increased by nearly 19%. The gap between US export and import increased nearly $60 billion in December 2019. US trade deficit with China is at highest level in history, amounted to $416 billion. Moreover, it ís noticeable that the US trade deficit with China has continuously increased since China joined the WTO (from $100 billion in 2001 to $416 billion in 2019). The US government has repeatedly asked China to reduce its trade surplus with the United States but China responded that in order to reduce the trade deficit, the United States itself needs to increase its export activities.

China's ambition to become the world's leading technology nation China intends to invest about $ 1,400 billion over the 2021-2026 period to build 5G networks, develop artificial intelligence (AI) for applications such as self-driving cars and factory automation, as well as reducing wide area. The goal of the plan, proposed by Chinese President Xi Jinping, is to shift the focus to developing the domestic market, reducing dependence on foreign technology. However, experts say there is a weakness in President Xi Jinping's plan, making the Chinese technology industry increasingly dependent on the United States. It is the silicon semiconductor device. So if China finds its way to produce this device, the future of being the world’s leading technology country is not so far. Consequently, the US has to limit the growth of Huawei, which is also perceived as a national security threat to the US. The US government has demanded that semiconductor companies using its technology apply for a license before cooperating with Huawei, closing a loophole that allowed Chinese corporations to circumvent the ban on using U.S. technology in semiconductor and software industry. China’s serious copyright infringement In August 2017, Trump issued a memorandum directing the Office of the US Trade Representative "to conduct investigations into China's acts, policies and practices concerning technology transfer, intellectual property, and innovation”. In March 2018,

the report on the investigation was finally released. According to the report, Chinese government doesn’t only support, but also conducts unauthorized intrusion into the computer networks of the US enterprises, from which they can gain unauthorized access to intellectual property, confidential business information, trade secrets. Previous presidential administrations often agreed with China's demands for technology transfer in exchange for access to Chinese market, which has been criticized a lot. Trump does not seem to be the one who easily believes in the promises from Beijing, but wants to fix a big problem in the US economy. The trade war with China is how he did it, Boxwell said. China’s unfair competition practices The US Ambassador to World Trade Organization, Dennis Shea, argues that China is pursuing "non-market industrial policies and unfair competition practices" to protect domestic enterprises by restricting or discriminating with foreign enterprises as well as their products and services. The United States reacted strongly to China's failure to grant foreign enterprises compatible access to its markets. According to “the report”, China restricts foreign ownership, equity and investment. They also require US enterprises to become joint venture with Chinese firms and pressure technology transfer. Moreover, China has been devaluing their currency in order to increase their exports to the US, while also weaken the US products competitiveness in Chinese market.

Possible impacts of the trade war The US-China trade war, or at least trade tension, has inevitably escalated and severely affected on both countries as well as the others, including Vietnam.

Impacts on China The US has imposed a 10% tariff on $200 billion worth of Chinese goods, which affected Chinese technology industries, employment and foreign exchange reserves as well as national revenue a lot.

Due to the US tariff hikes against Chinese products, several multinational firms are planning to transfer their business operation out of China to other Southeast Asian countries in order to avoid high cost because of additional tariff. Moreover, the US is also tightened China's acquisition of U.S. high-tech enterprises more with concerns about technology transfer. This will greatly affect China's growth rate in an area where China has always aspired to lead the world. Because of this US action, China may no longer be able to take advantage of its best position as a latecomer to increase their potential economic growth rate, which has decreased due to population aging and depletion of labor surplus in rural areas. According to Economic Impacts of the Possible China–US Trade War simulation result, because of this trade war with the US, China has been significantly affected in terms of welfare, GDP, manufacturing employment and trade. The most affected factor is trade, the second one are production and employment, and finally, relatively weak one is welfare. In short, although the consequences that China has suffered from the trade war with the US are tangible, these losses are not too deep and are considered to be affordable.

Impacts on the US According to Asian Economic Policy Review, the trade war triggered by the US doesn’t only bring losses to China, but also bad effects on the US economy as a whole. On the bright side, what the US gains from the war is welfare, GDP and non-manufacturing production. However, the losses are quite large, manufacturing employment and trade (both export and import) suffered heavy losses. It can be said that the increase of US employment rate is one of the aims that triggered President Donald Trump to wage the war, but the fact shows that the US did not achieve this. Moreover, China is the second largest economy in the world, the core of the global supply chain. With restrictions on doing business with China, US enterprises had to relocate their business operation to other countries. Consequently, the US doesn’t only lose market share in China, but also has to spend more on higher-cost raw materials.

Impacts on other countries As the largest economy in the world, the increase or decrease in US economic activities has a direct effect on the growth of trading partners through increasing or decreasing import demand in these countries. According to World Bank 2016 and 2017, the US growth rate of 1% will make the growth rate in the next year of developed countries and developing countries increase by 0.8% and 0.6% respectively. However, because of the impact of the war, the investment and production activities of American and Chinese enterprises will likely be halted. Consequently, Foreign Direct Investment (FDI) from the US and China will decrease. Moreover, the US's confrontation with China could disintegrate the global economy into two major economic blocs focusing on the United States and China, making multinational enterprises no longer able to optimize their resource allocation. It is important to restructure the supply chain to suitably adapt to this drastic change. According to the Asian Economic Policy Review, the impact of the US-China trade war has a negative impact on trade, investment and global economic growth, even more serious than Britain's exit from the EU.

Impacts on Vietnam The world is currently in a very open state. Since almost all nations have strong connections in the global value chain, each small change in the world economy could create big impacts on every country and Vietnam is not an exception. The US - China trade war can affect Vietnam in two directions, positive and negative. On the bright side, the trade war brings many economic opportunities to Vietnam on many aspects. First, it will increase Vietnam imports and exports. Due to the US tariff imposition on Chinese products which belong to textile, wood, electronics industries, Vietnam has better advantage to make good use of this event and increase exports to the US market as a result. Vietnam's export turnover to the US in the first five months of 2019 reached $22.7 billion, an increase of 29% over the same period last year, of which electronic products increased by 72%, furniture increased by 35%. and suitcases handbags increased by 30%. Moreover, thanks to this trade war, Vietnam has received more Foreign Direct Investment (FDI) opportunities from foreign enterprises who wants to transfer their

business operation out of China. In the first four months of 2019, newly registered FDI (excluding existing projects increasing capital and investment in the form of capital contribution to purchase shares) from China was $1.3 billion. On the other hand, beside opportunities, the trade war also bring to Vietnam some challenges. Although some industries like textile and electronics may have advantage in this war, there are several industries facing with losses in market share due to the increase in imports from China. Imports of electronics and information technology from China to Vietnam in the first five months of 2019 increased by nearly 81%, with a turnover of $5.05 billion and Imports of furniture industry increased by 35.1% in the same period. As sharing a border with China, Vietnam can be affected from the point of origin of goods. What Vietnam now facing with is Chinese goods transshipment via Vietnam to the United States to avoid high tariff. If this happens, it will result in terrible consequences as there might be a high risk of Vietnam being imposed anti-dumping tariff by the US.

Suggestions for Vietnam Needless to say, though this tension is nothing more than a war with no winner, which causes both sides to deeply hurt, it also presents opportunities. So what we should do right now is make good use of the opportunities and try to get rid of the challenges, which is the responsibilities of both the government and enterprises. First, the government should continue to improve administrative procedures, improve the investment environment and accelerate the process of structuring industries, especially key industries, to create competitive advantages and be ready to stand firm in case the trade war will spread globally. Second, the government should soon apply effective trade measures to deal with and control goods quality, carefully study Chinese goods that can enter Vietnam to prevent the country from transferring their goods to Vietnam then exporting to the US market with the label of goods from Vietnam. Beside the government, Vietnamese enterprises need to be aware of the negative effects of the trade war on the market and their enterprises. Enterprises need to accompany the country in the process of dealing with the bad changes that come from the war. First,

enterprises need to enhance the quality of goods, diversified in forms and models, with reasonable prices to increase the competitiveness of domestic manufacturing enterprises and export enterprises. Next, it is necessary to improve the direction of export and import strategies towards sustainability, in which export growth is both in width and depth. Second, Vietnamese enterprises need to continue monitoring the situation, updating the list of tariff imposed goods of the US and China, as well as the exchange rate of the Yuan and USD in order to respond promptly.

CONCLUSION In short, world trade is changing day by day, such as preferring bilateral trade to multilateral trade. Moreover, trade protectionism is on the rise, and the trade war between two world’s largest economies, the US and China, is a typical example. These changes will greatly affect the world economy in general and related countries in particular. Although the economy is increasingly open and getting easier in trading, it is synonymous with interdependence among countries getting involved in the global value chain, and it is one of the reasons for the influence on many other countries in the battle between the US and China. Besides challenges, global economic issue like this also opens up many opportunities. In order to become a strong and developed country, it is extremely important to have knowledge to adapt to changes. Understanding this, Vietnam and its businesses need to take specific measures to propose appropriate solutions and eliminate potential challenges, in order to stand firm in this current unstable world trade.

REFERENCES Main academic papers Chunding Li, Chuantian He & Chuangwei Lin (2018). Economic Impacts of the Possible China–US Trade War. Emerging Markets Finance and Trade , 54:7, 1557-1577. DOI: 10.1080/1540496X.2018.1446131 Chi Hung Kwan (2019). The China–US Trade War: Deep‐Rooted Causes, Shifting Focus and Uncertain Prospects. Asian Economic Policy Review (2020) 15, 55–72. DOI: 10.1111/aepr.12284

Ken Itakura (2019). Evaluating the Impact of the US–China Trade War. Asian Economic Policy Review (2020) 15, 77–93. DOI: 10.1111/aepr.12286 Nisreen Moosa, Vikash Ramiah, Huy Pham & A...