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12.6 Different Logics on Dealing with a Trade War
The U.S. government rarely carries out money-losing business. At the beginning of the Second World War, the U.S. refused to join in the
13The average cost of an umbrella produced in China is only $0.37. Although China’s average wage is 2.2 times higher than that of India, its labor productivity is three to four times higher. Therefore, the average cost of an umbrella produced in China is lower than that in India. See Xu and Li (2009). The End of Poverty, China Machine Press.
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Pacific War. The country then changed its strategy after suffering a big loss when the combined fleets of the Japanese attacked the Amer- ican naval base at Pearl Harbor. In the Persian Gulf War, the Bush administration successfully prevented the invasion of Iraq. However, the U.S. asked other countries to share in the military spending. The Americans are indeed economical?
In trade disputes, wealthy Americans speak louder than other Americans. They want to gain more. They are always the attacker.
In trade conflicts with China, the greatest mistake the U.S. govern- ment has made is underestimating a country’s resistance ability and determination. The U.S. may not have realized that China considers if it can afford to lose when making decisions under pressure.
The Americans have made a similar mistake earlier in history.
In the early 1950s, the Truman government intervened in the civil war in Korea and sent troops to the Yalu River. With its victory, the American government ignored the repeated warnings from the Chinese government. The U.S. government unilaterally believed that the Chinese government would not intervene in the Korean War as China had just ended its own civil war. However, at the time, Chinese leaders Mao Zedong and Zhou Enlai had been considering whether to send troops to North Korea, giving the best estimate of engaging in fighting and stopping on the 38th Parallel and the worst estimate of fighting a huge war and continuing the fight in China if it failed to overcome the American troops in North Korea. They further had a contingency plan of fighting a guerrilla war in the mountains at the cost of late liberation. Although the Chinese leaders continued to call for the overthrow of American imperialism in the external propa- ganda, they actually never expected to win. Neither Mao Zedong nor Peng Dehuai had ever stated anything about American imperialism in North Korea. The reason for the decision to resist U.S. aggression and aid North Korea is that China could afford to lose. The Chinese leaders realized when the Americans could no longer afford to lose;
they could then sit down for negotiations.
In the current international trade relations, the U.S. remains strong and China is weak. In Sino-U.S. trade conflicts, the U.S. is the attacker and China is the defender. When predicting a trade
398 From Trade Surplus to the Dispute over the Exchange Rate
war, note that the Americans only want to win and they cannot afford to lose.
A trade war with China is bound to drag on, and both sides will suffer considerable losses. What is the definition of winning a trade war for the Americans? If China regresses unconditionally for peace, the U.S. may gain larger market shares in China after the war or it may gain no real benefit. If the Chinese people refuse to surrender, the U.S. almost has no hopes to win. In 2011, the Sino- U.S. bilateral import and export amounts were as high as $446.7 billion, up by 15.9% from the previous year,14 which is not a small figure even for an economic giant such as the U.S. Once a trade war breaks out, the U.S. will inevitably lose tens of thousands of jobs.
The unemployed will complain about their status. Moreover, China is attractive to American enterprises as a huge potential market. If a trade war breaks out, American goods will lose their opportunity to enter the Chinese market. Many entrepreneurs will question why they should pay for the trade war when it does not pose a threat to national security. As long as the U.S. suffers losses, these losses will create great domestic disturbance. Maybe the U.S. will not lose in business and in the battlefield because of its strong economic and military power, but it will lose to itself.
If a trade war breaks out between the U.S. and China, neither side will win. The real winners will be Japan, Europe, and other countries that did not participate in the war. In the next 10 and 20 years, the real competitors of the U.S. in terms of economy will be Europe and Japan instead of China. If the U.S. launches a trade war against China, it will merely accelerate the decline of its economic supremacy.
At present, the U.S. is a superpower, Europe and Japan are second- rate economic powers, and China is only a third-rate country. If a trade war occurs between China and the U.S., China will still be a third-rate country, but the U.S. may never be a superpower. As a trade war is good to neither side, why would they allow third parties reap the benefits from it? Maybe both the U.S. and Chinese governments are unclear about this effect.
14Source: The People’s Daily, January 20, 2012.
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