Written by Niti Parekh
If you ask someone on the street about the China-US trade war, chances are, no one could really tell you what exactly was happening. For Sternies, the trade war is another ambiguous headline being tossed around. I sat down with Joseph Foudy, a Clinical Associate Professor of Economics at Stern, to really understand what was going on.
What is your opinion on the historic trade policies of US and China, and were they always this hostile?
We certainly know that China has benefited enormously from the opening of its economy. The economy has doubled over five times since the 1980s. This is similar to the growth trend recently seen in India and other developing economies. In the US, we benefited from cheaper products that rewarded our consumers and gave us a variety of options. Considering all costs and payoffs, the US has overall benefited from trade with China. Moreover, when we look at the trade deficit in economic terms, we believe that it is driven by how much each country saves, and not by government policy. So, it is absolutely true that China uses tariffs to help domestic countries, and has historically kept its currency weak, all of which have helped exports, but the core issue is that China has a high savings rate, while the US has a low one. They both are imbalanced, but put together, they fit like yin and yang.
The tensions we have always faced is that trade deficits comes with a political cost. Even though the US benefits from trade with China, there are individual companies and groups that are really hurt. The economic consequences of a factory closing in a small town due to trade is devastating, even if it is short-term.
What do you think are the catalysts of current trade tensions?
The current tensions with China have two different sources. For President Trump, he seems to have a laser like focus on the idea of a trade deficit with China. We are hopeful that there may be a solution in the making– to decrease the deficit and other Chinese actions that the government is not happy with. Yet, there are other sources of tension that predate President Trump and actually animate US businesses and people around him.
The second one is the issue of intellectual property. There is strong evidence and unwavering belief among American companies and Washington that the Chinese government exists to take Western intellectual property, and give it to its own firms. I personally believe this is absolutely accurate. This makes Chinese firms are direct competition for American companies, who see the government as undermining their long term position. Similarly, US firms operating in China see themselves on an unlevel playing field. They are often forced to share technology to go into joint ventures, and so they are trading short-term profits for the creation of long term competitors.
Don’t US companies have to pay some cost for gaining access to Chinese markets?
Yes, I think US companies transfer IP to the Chinese companies so that they gain new access and benefit from labor costs. But in the long run, it’s creating competitors. To use a non-US example, Japanese companies had helped China build its first high speed rails. A generation later, the Chinese firms they worked with, displaced the foreign firms. Those companies rightly feel, even though they made profits, that their technology was taken. Overtime, I think we will see improvements, because the biggest victims will be other Chinese firms, who will be scared to innovate if they know other firms can steal their property. I think as issue like this, doesn’t go away with trade negotiations, that’s what’s enervates most companies and officials
How would we quantitatively evidence these claims?
I would look at foreign firms in different industries and see how many of them are profitable. Many firms will fail in China every day because it is a challenging and dynamic market, but to the extent that we cannot find any firm in a range of sectors, that is probably good evidence that the market is tilted against them.
How have the countries’ economic policies changed with respect to these strains?
China has a plan for long term technology and energy dominance. It announced a 2025 plan, and on its release, it essentially told every company in the world in those industries (AI, semi-conductors) that you have no future. Because of national security concerns, I think there is no way that the Chinese government pulls back from it because they are worried that they will be cut off from US technology, China feels like it doesn’t have any choice but to develop their own. On the other hand, the US is vetoing every attempt of the Chinese from buying any tech companies, to make the field unleveled for them.
Why are tariffs not the solution?
Tariffs do not address any of the fundamental issues about market access, rules of business or intellectual property. The goods tariffed may be low-value goods which are not even produced in the US, so essentially we are changing which country we buy them from and the cost to consumers. The focus should be on high-technology spaces, which tariffs do not address.
Where do you see this going?
I am now more optimistic to see a trade deal with China than I have been in the last year. After the deal is enacted, we are in for at least a decade or two of tensions on these issues of technological leadership and intellectual property issues. The biggest debates we’d then see is what the enforcement mechanisms will be. China had signed two agreements before, but there has been no system of verification. It’s very easy to check what goods flow into your country, it’s easy to monitor what tariffs are, it’s hard to monitor if a country is opening up, if the company is respecting intellectual property and how one can prove that.
Which industry do you specifically think will be hit the most?
The key focus is definitely on the tech sector. China wants to be a world leader in artificial intelligence and semi-conductors. That’s where you’ll see huge focus of both governments. The US is already limiting Chinese investments, while China will be looking at which foreign firms they still have access to.