Roots of the U.S.-China Trade Conflict

Every day, the news brings more stories of U.S.-China tensions. What led to the U.S.-China trade conflict? And what would a U.S. pro-worker policy toward China look like?

The most anti-worker president in recent memory slaps big tariffs on products made in China — in the name of protecting the jobs of American workers. Corporate lobbyists criticize the tariffs — but say we must get tough on China’s trade policies. Some Democratic senators warn Trump not to back down in trade negotiations with China.

What can socialists make of all this? To answer this question, let’s examine the background of the trade conflict and the reasons why it broke out recently.

China Rises

Beginning in 1978, the ruling Communist Party in China made a radical turn, called the “reform and opening.” Central planning was gradually replaced by a market economy. The previously closed economy was opened to trade with the capitalist countries. Privately owned companies came to predominate. However, a core of large state-owned enterprises remains, and the government actively regulates the economy. China’s economic system today bears some resemblance to the heavily state-regulated capitalist economies of Western Europe in the post-Second World War decades, although paired with a different political and social system ruled by the Communist Party.

When China started down this road, the U.S. government was enthusiastic and supportive. U.S. big business saw big profit opportunities in a growing China market. The reform and opening led to remarkably rapid economic growth, at about 10% per year for decades. U.S. business lobbied for China’s admission to the World Trade Organization in 2001. Many U.S. companies set up shop in China, which has abundant low-wage (yet relatively healthy and well-educated) labor coming from a huge rural sector. China also has a business-friendly government, docile official trade unions, and a government that makes huge infrastructure investments in transportation and power that underpin the profitability of operating in the China market. 

As “Made in China” labels proliferated in U.S. stores, many U.S. workers lost their jobs. Cheap imports from China, along with those from other low-wage countries, have played a role in driving down the real wages of U.S. workers since 1980. That did not concern the U.S. corporations that were boosting profits by moving production to China, nor did it bother the many sectors of U.S. business that purchased cheap inputs from China. 

About Face

Approximately 10 years ago, the U.S. business and political elite’s view of China began to shift. Although U.S. businesses always had some complaints about constraints on their access to the China market, the complaints now grew louder. U.S. economic relations with China became more strained.

In 2018, President Donald Trump launched the current tariff offensive against China, placing high tariffs on $250 billion of imports from China and enacting severe penalties on leading Chinese high-tech companies. This led to retaliatory tariffs by China, and a trade war began. Recently, Trump threatened to extend tariffs to all Chinese imports, including consumer goods for which China has been a leading supplier such as clothing, computers, and cell phones. The U.S. government is demanding that China do the following:

  1. Stop efforts to obtain technologies from U.S. companies;
  2. End the industrial policy of providing cheap credit to Chinese companies in key industries of the future;
  3. Stop providing support to its state-owned enterprises;
  4. Buy more U.S. products.

The current intense trade conflict has three roots. One is Trump’s right wing nationalist ideology. Trump views trade between countries as a zero-sum relation. That is, one country can benefit from trade only at the expense of other countries. His aim is to use the threat of tariffs and penalties to put pressure on other countries to agree to measures that would benefit the United States at their expense. His main focus is on China, whose economy has become closely interconnected with the U.S. economy through trade in consumer and producer goods, investments, and credit, although he has threatened other countries as well.

The second root of the trade conflict is lodged in the perceived interests of U.S. big business. When China was mainly producing and exporting cheap, low-tech products, such as toys and clothing, U.S. business was pleased. Even though China had entered the global market, the most profitable parts of the global production chains were dominated by American companies. 

However, China’s economy has developed rapidly — that was the motive for the reform-and-opening policy. China has moved from being a poor country reliant on low-tech exports to a middle-income country entering the production of technologically sophisticated goods. In recent years it has became clear that China could reach economic — and technological — parity with the United States within about 20 years. 

No one event marked this passage, but a key development took place in December 2004 when IBM announced the sale of its personal computer business to Lenovo, a Chinese company. At the time U.S. business analysts doubted that China could successfully manage a world-scale high-tech company, but today Lenovo is the leading producer of laptop computers. Other Chinese companies, such as Huawei, are now at the world technological frontier in key products.

For more than 50 years, the United States has been the dominant power in the global capitalist system. That position is based on the leading role of U.S. corporations, as well as U.S. military strength. The rise of another country toward a position of economic and technological equality is seen as a threat by U.S. business and the American policy elite that guards its interests. China’s rapid rise, which initially just contributed to the profits of U.S. business, now is seen as a threat to U.S. economic domination of the global system. Although big business does not like the tariff weapon, which undermines the stability of the global production chains it has constructed, it now favors other approaches to pressure China into giving up the methods it has used to develop rapidly. The aim seems to be to freeze China into a subordinate position in the global economy. This situation resembles the pre-First World War period, when Britain, long the dominant world power, faced late developers such as Germany that were challenging Britain’s economic dominance. That led to the disaster of the First World War.

However, there is a third factor underlying the U.S.-China conflict. The late developers of the early 20th century shared a capitalist economic system with Britain. The conflicts were over colonies and commercial advantage. Although China’s economy has a large capitalist sector, it has some non-capitalist features, centered around its Communist Party-ruled state, which regulates the economy much more intensively than does the U.S. government (or those of Europe). This system-conflict between the neoliberal capitalism of the United States and the state-directed mixed economy of China adds to cries of unfair advantage from U.S. officials and further fuels the trade conflict.

A Pro-Worker Response to China’s Rise

China’s rise has had contradictory effects on working people in the United States and China. Jobs have moved from the United States to China, resulting in downward pressure on U.S. wages. Workers in China haven’t always fared well, either. The booming private sector imposes very long hours and harsh working conditions on workers. In the remaining public enterprises, the long-term job security of the old regime has given way to growing use of short-term and temporary contracts. Previously a relatively egalitarian country, today China’s Gini coefficient, which measures income inequality, is almost as high as that of the United States: 38.6 for China compared to 41.5 for the United States.

However, workers in both countries have derived some material benefits from China’s rise. Because of it, U.S. workers have a new source of high-quality and affordable products, from clothing to cell phones and computers. Despite the absence of real trade unions demanding higher wages, average wages adjusted for inflation in China have risen substantially as the economy has advanced, increasing at the rate of 7.9% per year from 2010 to 2016. By contrast, U.S. wages adjusted for inflation barely rose over that period, at a rate of only 0.6% per year. The hundreds of millions of migrant workers in China no longer need passes to travel outside their place of origin, and only 12.9% of migrants lived in dormitories run by their employers in 2018.

This is how capitalism divides working people. There are never enough good jobs for all under capitalism. Not only are workers in the same country in competition with one another, but workers in different countries are also in competition with each other.  

U.S. socialists have to chart a policy course that resists this feature of capitalism by finding policies that will benefit U.S. workers without harming workers in other countries. A rise in the living standard of working people in previously poor countries should not be a threat to working people in the United States. It may look like a zero-sum game, but some win-win solutions are possible.

U.S. workers do not share the U.S. big-business interest in trying to stop China’s rise. The complaint about China gaining access to U.S. technologies ignores history. A country can develop its economy only by getting access to more advanced technologies. That is how the United States began its industrial development after the American Revolution — with textile-machine technology stolen from Britain to utilize in Rhode Island in 1792! 

Socialists have traditionally favored free access to technologies, while taking account of the need to provide reasonable compensation to the developers. The main method China has used to gain access to better technologies is to make a Western company’s entry into China dependent on agreeing to take on a Chinese partner company that will be taught to use the better technologies. Many leading U.S. companies have agreed to such deals, due to the attraction of producing in China.

However, in recent years that method has become less crucial, as China’s own research and development capability has advanced rapidly. In 2017, China’s R&D investment ranked #2 in the world, and its number of patent applications ranked #1. China’s official policy is now to support strong protection of so-called “intellectual property rights,” a concept that socialists have traditionally looked on with disfavor based on the view that knowledge should be made freely available. The recent Trump administration actions to ban sales from the leading Chinese high-tech company Huawei suggests that it understands that the big challenge faced by U.S. business is not technology theft but effective competition from technologies developed in China.

There are no good grounds for demanding that China give up its industrial policy aimed at promoting key sectors of the economy or its support of state-owned enterprises. Such policies have played a key role in China’s industrialization. Indeed, history shows that such policies typically lead to faster economic advance than the currently fashionable “free-market“ approach followed by the U.S. government. The most rapid national economic advances since the mid-19th century followed some variant of state-guided development, including Germany, Japan, and South Korea. 

How can a previously poor country benefit from economic advance while avoiding the costs both to its own workers and those in countries that are trading partners? A pro-worker program around trade for the United States must include not just measures affecting trade but also policies aimed at the U.S. economy:

  • Trade Stabilization Policy: Current U.S. trade policy allows temporary protection against an import that increases rapidly if it is found to cause “serious injury or threat of serious injury to a domestic industry.” This law could be revised to target serious injury to workers, rather than the companies, and it could be streamlined and enforced more rigorously. This would facilitate adjustment to disruptive changes.
  • True Cost Competition: This would impose counteracting tariffs on imports whose production process is based on standards of wages, working conditions, and/or environment regulations that are significantly below those in the United States. Designing, and implementing, such a measure would not be simple, but such a measure would shift the impact of international trade flows from their current “race to the bottom” character toward imports based on a genuine efficiency advantage in the source location.
  • Generous Job Transition Benefits: The government should provide generous and long-lasting benefits to workers who are displaced by imports, including income maintenance, retraining, and moving allowances. If consumers benefit from imports, the cost to workers should be minimized.
  • Government as Employer of Last Resort: This policy, which almost passed into law after the Second World War, would guarantee a job in the public sector to any worker who needs a job. If paired with a Green New Deal, there would be plenty of important public sector work to be done for many years. Such public-sector jobs should pay a living wage. This would go long way toward insulating working people from the cost of a competitive capitalist economy, in which workers always face the danger of being discarded. 

International trade in the capitalist era, which is based on competition among production sites in different countries, inevitably tends to generate problems for working people – just as competition among different production sites within a country creates problems. However, such policies as those above would respond to China’s rise in a way that offers significant protection for the interests of U.S. working people, without harming workers in China. 

By contrast, the Trump administration policy of using tariffs to stop China’s rise is harmful for U.S. workers, who will suffer from a trade war. The softer approach to stopping China’s rise favored by U.S. big business also requires the revving up of nationalism, which creates political conditions unfavorable for working people to advance their interests. Both approaches to slowing economic advance in China are bound to lead to growing tensions that could again result in armed conflict, in which working people bear the brunt of the costs. In the long run, working people here and elsewhere will continue to face powerful downward pressure on their wages, working conditions, and economic security until the global economic system is transformed to one based on cooperation rather than competition, and production to meet human needs and wants rather than for the profit of small wealthy class.