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12.4 Six Commandments of Trade War
The following six commandments is a summary of more than 200 economic sanctions that has occurred since 1914.
(1) Do not impose sanctions on big powers.
(2) Impose sanctions against your friends.
(3) The intensity of sanctions should exceed the limit of the other side.
(4) Form a united front.
(5) Select limited goals.
(6) Win quickly.
1. Do not impose sanctions on big powers
The basic rule in imposing economic sanctions is not to impose sanctions on big powers, especially on those that have the same size as yours or when the attacker lifts a rock only to drop it on its own feet.
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From the perspective of economic scale, economic sanctions can be divided into three categories: big powers (or international orga- nizations) impose sanctions on small countries; big powers (or inter- national organizations) impose sanctions on big powers; and small countries impose sanctions on small countries.7 No small country has succeeded in imposing sanctions on big powers.
The economic scale plays a decisive role in trade war. Undoubt- edly, economic sanctions must cause loss to both attacker and defender. The key to imposing economic sanctions lies in their capa- bility to bear loss. The Art of War by Sunzi states, “If our forces are ten to the enemy’s one, to surround him; if five to one, to attack him.” Economic sanctions are essentially imposed to surround the other side. To succeed in imposing economic sanctions, the attacker should weigh the other side’s economic scale. If the economic scale between the two sides has a large difference, the attacker can possibly succeed more if its economic scale is 10 times larger than that of the other side.
Almost all successful economic sanctions are imposed by big pow- ers on small countries. If the GDP of the attacker is 10 times or even 100 times larger than that of the defender, the probability of success is greater. Forming a united front through international organiza- tions, such as the UN, to let several countries act together is a better option. In doing so, the attacker can have a larger economy than the defender. Moreover, the losses caused by economic sanctions are shared. Therefore, success is easily achieved.
Recently, the U.S. has frequently resorted to economic sanctions.
Most of the targets of the U.S. are small countries, such as Nicaragua, Zimbabwe, Haiti, and Somalia. These small economies cannot stand the extremely highly cost of a trade war. For the U.S., trade war is a mere drop in the ocean. For instance, cost of $100 million may be a
7Throughout history, only three cases have occurred in which small countries imposed sanctions on small countries. In 1963 and 1966, Indonesia imposed sanctions on Malaysia.
In 1994 and 1995, Greece imposed sanctions on Macedonia. In 1994, Greece imposed sanctions on Albania. These so-called economic sanctions were all imposed to express anger and break off relations without any substantive result.
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very heavy blow for small countries, such as Honduras, but the U.S.
merely perceives the amount as inconsequential.
If a trade war occurs between big powers, both sides have to pay very high costs. This war is similar to two ships sailing on the sea. If one ship of 20,000 tons strikes a little sailboat of 50 tons, the latter will be heavily damaged. However, if the former strikes a ship of 10,000 tons, the result is unpredictable. Maybe both ships will sink.
Among 25 cases in which big powers imposed economic sanctions on big powers, only one succeeded, and all the rest failed.
The only successful case is the economic sanction imposed by Britain on the Soviet Union in 1933. The reason for the sanction was that Britain asked the Soviet Union to release two detained British citizens. Perhaps Stalin thought that creating a dispute with Britain over a trivial thing before the world war was not advisable. Thus, the Soviet Union released these two citizens quietly.
Throughout history, China was sanctioned by the U.S. three times and by the former Soviet Union once. All these sanctions failed.
The U.S. and western world imposed nine economic sanctions on Russia (the former Soviet Union). All these sanctions failed.
Before the Second World War, the international community imposed economic sanctions on Germany and Japan. All these sanc- tions failed.
In 1965, the U.S. imposed economic sanctions on the Arab League, in which the latter avenged itself against the former in 1973 and 1974.
Although the Arab League’s economy was smaller than that of the U.S., the former had oil and money. Thus, both countries sanctioned each other without achieving any result. Eventually, these countries had to sit down and negotiate.
Some American citizens advocate a trade war with China, which violates the first rule, that is, not to impose economic sanctions on big powers. According to the PPP, the U.S. GDP was $14.66 trillion and China’s GDP was $10.09 trillion in 2010.8 The size of China’s economy was 68.8% of that of the U.S. In fact, this esti- mate is low. The size of China’s economy may be over 70% of that
8Source: CIA Would Factbook, 2011.
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of the U.S.9 To win in economic sanctions, the economy of the attacker must be 10 times greater than that of the defender. As the economy of China is less than one time of that of the U.S., if these two countries start a trade war, both sides will lose heavily.
2. Impose sanctions against your friends
To succeed in imposing economic sanctions, the following rule must be obeyed: Only impose sanctions against your friends and let your enemies off the hook. The high degree of dependence between friends greatly affects the imposition of economic sanctions. If only a few economic and trade exchanges have occurred between two coun- tries, economic sanctions will have no effect.
Successful cases in economic sanctions in history reveal that the U.S. is more likely to succeed when imposing sanctions on its friends and allies. For instance, the U.S. succeeded in imposing sanctions on Japan, South Korea, Taiwan, and Latin American countries such as Brazil and Salvador, which had close economic ties with the U.S.
These countries have been heavily dependent on the U.S. market for a long time. A break with the U.S. will greatly affect the national economy of these countries.
The best targets for sanction are countries and regions that receive aids from the U.S. The most effective way to impose economic sanc- tions is to terminate the aids, which only harms the defender and almost has no negative impact on the attacker. The U.S. will not suffer much loss in stopping the aids. Therefore, it can make a firm resolve in imposing sanctions. The recipient countries will not receive the money if they are disobedient. The defenders have to yield to U.S.
pressure. Apart from South Korea and Taiwan, even some old indus- trialized countries such as the United Kingdom and France have to be obedient under the threat of economic sanctions as long as they need help from the U.S. In 1956, Egypt nationalized the Suez Canal.
Britain and France then threatened to send out troops to the Middle East. Concerned that Egypt would seek help from the former Soviet Union, the U.S. decided to impose economic sanctions on Britain
9See Chapter 3 of this book and Xu and Christer (2008). What’s the real size of China’s economy,China Economic Journal, 1(1), 97–105.
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and France after failing to dissuade them. At that time, Britain and France were in a state of postwar economic recovery. Thus, these countries were largely dependent on the aid of the Marshall Plan. After weighing the pros and cons, Britain and France had to submit.
During the Cold War, almost no economic exchange existed between the two hostile camps. Therefore, is putting forward eco- nomic sanctions unnecessary? In recent years, the U.S. has imposed economic sanctions on North Korea and Iran several times. However, as these countries have few economic and trade exchanges with the U.S., they do not care about the sanctions. Therefore, the so-called economic sanction is meaningless.
In 1954, the Soviet Union required Australia to repatriate sev- eral fugitives, but its request was ignored. Thus, the Soviet Union announced the economic sanction on Australia by refusing to buy the latter’s lumber. However, as the Soviet Union bought a low volume of lumber from Australia, the sanction caused little loss to Australia.
With few economic and trade exchanges between two countries, the so-called sanction of the Soviet Union was akin to a children’s game.
Some American citizens advocate placing economic sanctions on China. These people do not realize how much economic assistance the U.S. has offered to China. If there was no economic assistance, why would the U.S. dare to do it?
The American market is very important to China. However, the American market is far from fatal reliance. According to the statistics of the U.S. customs, in 2011, China’s exports to the U.S. were $399.335 billion, accounting for 18.1% of the U.S. total imports of $2.207358 trillion, whereas the U.S. exports to China were $103.879 billion, accounting for approximately 7% of its total exports of $1.480646 trillion. According to the statistics of the Chi- nese customs, in 2011, China’s exports to the U.S. were $324.493 billion, accounting for 17.1% of its total exports of $1.898599 tril- lion, whereas China’s imports from the U.S. were $122.154 billion, accounting for 7% of its total imports of $1.743458 trillion. In terms of trade volume, the U.S. trade accounted for 13% of China’s trade
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volume.10 In recent years, China’s foreign trade has been decentral- ized and diversified, thus further reducing its dependency on the U.S.
market.
3. Exceed the limit of the other side with overwhelming force Another basic commandment of economic sanctions is to avoid offending others easily. If you have to, do it thoroughly by taking the enemy by surprise and striking when it is unprepared. You must exert pressure on the enemy once to exceed its limit.
To hit a vital point, economic sanctions must start from projects that have significant impact. In trade wars, some parts are extremely sensitive. That is, these parts react violently once they suffer losses.
Some parts are also insensitive so the impact does not have signifi- cance. The bearing capacity of the trade war depends on the sensitiv- ity degree of the unemployment rate, concentration of the attacked industries, resilience of industries, supervision cost in the trade war, and degree of political stability. The result of the trade war often depends on the bearing ability of the losses of both sides. The side that cannot stand the losses will return to the negotiation table first.
Based on the current situation, although the U.S. has powerful economic forces and advanced science and technology, it exposes too many shortcomings or sensitive parts in the assumed trade war.
Therefore, implementing a precise attack on China is very difficult.
(1) Bearing limit: Undoubtedly, the trade war will increase the unem- ployment rate of both sides. If a trade war occurs between China and the U.S., the side that can bear the pressure of unemployment will succeed. The loss of two sides in the trade war is assumed to be ten to one. In other words, if China loses a million jobs, the U.S. will only lose 100,000 in the trade war. According to a military strategist, the U.S. will completely succeed in the trade war. Let us take a look at what the consequences are for both sides.
Once a trade war occurs, many factories in the southeastern coastal area of China will reduce their production and even close because of the loss of orders. Large state-owned enterprises in China
10Source: The UN Trade Database, UN COMTRADE.
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account for only for a small proportion in exports. The small- and medium-sized enterprises and joint ventures export most of the labor- intensive goods. In these enterprises, the workers have no iron rice bowl. If these migrant workers lose their hard-won jobs in the trade war, they will have to go home. Currently, China’s rural surplus labor force is more than a million. An additional million will incur little change. Upon going back home, these migrant workers will eventually accept their reality economically and mentally. These workers can quickly be integrated into the vast sea of rural surplus labor force.
As China has not fully implemented its social insurance system, the government need not pay unemployment insurance to migrant work- ers. Therefore, these workers will not cause huge fiscal pressure on the Chinese government directly in the short term.
Conversely, if large American companies lose 100,000 jobs in the trade war, the U.S. government must pay unemployment relief funds to these people immediately, which is a huge amount. Moreover, the unions of different industries in the U.S. will not be satisfied with unemployment relief funds. These unions clearly understand that the increasing unemployment rate is caused by the trade war started by the government. Therefore, these unions will demand compensation, thus increasing the financial burden of the U.S. government. From various perspectives, the U.S. bearing capacity of the trade war is not necessarily stronger than that of China.
(2) Concentration of the impact: The jobs lost by China will be dis- persed in a broad area, mainly in small- and medium-sized cities and towns, which are not sensitive parts. However, the loss by the U.S. will focus on several large companies, such as Boeing, GM, and Chrysler. These large enterprises are concentrated in some metropolises. Backed by powerful unions and local senators, these companies will not be affected.
(3) Resilience: The resilience of the industry determines its sensitiv- ity. In 2010, primary and textile products accounted for 40.56% of the exports of mainland China.11 If a trade war breaks out, both
11Source: CEIN database.
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sectors will be seriously hit. As labor-intensive industries, these sec- tors have low demand on capital investment and technique. More- over, these sectors can change production easily. After losing orders from the U.S., both sectors can produce other goods or export the goods to other countries. With the huge domestic market, China can absorb a considerable part of the products. The U.S. mainly exports aircraft, computer, and other high-tech products to China. Factories producing aircraft cannot possibly produce toys. Therefore, China’s domestic market scale is essentially fixed. If the U.S. cannot export products to China, it has to reduce its production.
(4) Supervision cost: In the trade war, the supervision information of China and U.S. is asymmetrical. The supervision cost of the U.S.
is far higher compared with that of China. China exports a diversity of products to the U.S., such as home appliance, tool, clothes, shoes, and tools. Among these products, several are produced by enterprises in Hong Kong and Taiwan, wholly foreign owned enterprises, and adventure-joint enterprises. The enterprises producing small prod- ucts can switch to another line of products easily. Thus, identifying and supervising the origin become difficult. A major stockholder of an enterprise producing umbrella is assumed to be a Taiwanese busi- nessman. If the U.S. imposes a tariff of 100% on an umbrella made in China, this company transports these to Kaohsiung port, label these as made in Taiwan, and then ships these to the U.S. Therefore, how can the U.S. identify the origin of the umbrella? Noticeably, the litigation cannot be easily handled. However, identifying the origin of Boeing aircraft is easy.
(5) Pressure mechanism. The U.S. has two parties: Democratic and Republican. If the Democratic Party is in trouble, it objectively helps the Republican Party. “You have already finished your performance.
It’s my turn now.” Since the financial crisis, the unemployment rate has been high in the U.S. because of the economic recession. In March 2012, the U.S. unemployment rate reached 8.6%. As a result, the whole country was beset with discontent. If the U.S. launches a trade war on China, the Democratic Party will lose 100,000 jobs. Therefore, President Obama will find living in the White House difficult. If a
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trade war occurs, will the Chinese government change if China loses a million or two jobs?
In 1996, the U.S. threatened to impose economic sanctions on China. The sanction list of the U.S. trade representative office included electrical appliances, shoes, toys, and other products exported from China to the U.S. These products were worth approx- imately $2.8 billion. The U.S. played its card on hand, hoping to overwhelm China in the momentum. China returned every blow and put forward seven retaliatory measures. The commodities included game machine, cigarette, alcohol, cosmetics, and so on. The worst retaliatory measure was stopping the acceptance of applications of U.S. companies aiming to set up companies in China. China’s retalia- tory measures did not include the main goods exported from the U.S.
to China, such as aircraft, computer, and different kinds of machiner- ies. In other words, China had many cards to play. If China survived the first shock wave, the U.S. would have had no important means to increase pressure. However, China could play its cards one by one to increase pressure gradually. The executives in aircraft and car com- panies would run around to secure their own interests. These officials would ask the White House why they should pay a heavy price for this trade war. As a result, two sides would compromise at the last moment and avoiding a trade war.
Some American senators create so much commotion. However, if a trade war actually breaks out, the bearing capacity of the U.S. will be stronger than that of China. After all, not starting a trade war is a better alternative.
4. Form a united front for economic sanctions
To impose sanctions on a powerful country, forming a broad united front is necessary.
Imposing economic sanctions is akin to surrounding a city. In imposing these sanctions, the city is allowed to pack solidly. The effect of these sanctions is manifested in the exhaustion of ammu- nition and food supplies. Consequently, the defenders have to yield.
Not surrounding the city can also be an option.
In 1948, the former Soviet Union imposed economic sanctions on Yugoslavia. During that time, the import and export volumes
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between Yugoslavia and Soviet Union accounted for approximately 50% of the total trade. At the beginning of economic sanctions, Yugoslavia encountered many difficulties. According to Yugoslavia, in 1948 and 1954, the country suffered a heavy loss of $400 mil- lion because of the economic sanctions imposed by the Soviet Union.
However, the Soviet Union’s economic sanctions forced Yugoslavia to transfer its trade to the Western countries. In 1954, the trade between Yugoslavia and Western countries accounted for 80% of its foreign trade volume. President Tito also received many trade credits and aids from Western countries. According to the statistics from some Western economists, during this period, Yugoslavia suffered losses in the trade with the Soviet Union but gained in the trade with West- ern countries. In fact, Yugoslavia had a net income of $187 million.
Instead of achieving the goal, the Soviet Union tremendously helped President Tito.
The U.S. imposed sanctions on Cuba in 1960. Arguably, these sanctions were supposed to succeed easily. However, they unexpect- edly turned out to be only tit for tat. The Soviet Union became involved and offered Cuba what it wanted. The economic sanction of the U.S. then failed.
For years, Arab countries have united in taking sanctions against Israel. However, the U.S. provided Israel with much support to dis- solve the pressure of economic sanctions. The economic sanctions imposed on Israel by Arab countries world remain in name only until today.
Clear thinking is necessary in determining the possibility of cut- ting off the defender’s foreign aid, ending the substitution, and dis- cerning the ability to form a united front and the reliability of a united front before launching economic sanctions. If the sanction lasts for a long time with little progress, the united front may collapse, making economic sanctions difficult to continue. Seeking the United Nation’s approval of a bill and letting all countries in the world par- ticipate in the sanctions are better options. Clearly, as a permanent member of the UN Security Committee, China can exercise a veto with only one vote. Therefore, obtaining an approval from the United Nations regarding the resolution of imposing economic sanctions on China is impossible.