Don Tow's Website

In the last year or so, and especially in the last few weeks, we have heard news coverage almost on a daily basis about the trade war between the U.S. and China. Because of the large difference between the amount of U.S. imports from China as compared to the amount of U.S. exports to China, we have repeatedly heard how unfair that is, and therefore the U.S. government must impose tariffs on a large amount of Chinese products.

In this article, we offer a broader perspective on the issue between the U.S. and China.  The conclusion we come to is that the motivation behind the recent U.S. government policy toward China is because the U.S. government does not want to have its position as the world’s leading economic and political power challenged and therefore wants to thwart China’s rise before China can become an even more serious competitor.

If one reads the front page articles of newspapers like the New York Times in the last few months, one will find one or more times per week an article that is extremely critical of the Chinese government and life in China, e.g., stealing of American jobs, stealing of American trade secrets, espionage against the U.S government, creating instabilities in the South China Sea and threatening Asian neighbors, exploiting other countries through debt traps, great unrest in the Chinese populace and mistreatment of Chinese ethnic minorities. We now discuss each of these issues.

Stealing American Jobs:  Yes, China exports a much larger amount to the U.S. than it imports from the U.S.  But what is the major reason for this difference?  The major reason is due mainly to the large difference in average wage in the two countries.  In 2018, the ratio of the average wage in the U.S. over the average wage in China is about four (about $900/week in U.S. versus about $220/week in China), and 10 years earlier this ratio was probably double that because wages have been rising in China much faster than in the U.S. in the last three decades.

As China developed the capabilities in its factories and the skills in its people, it is a natural migration that more and more factory and other jobs will migrate from the U.S. to China.  Initially the jobs required little technical capabilities and skills, and then gradually require more technical capabilities and skills.  We have seen this occurring in places like Japan and Hong Kong in the 1950s-1980s, and then occurring in places like South Korea and China starting in the 1990s, and now occurring more and more in places like Vietnam and the Philippines.   In the future, this will occur more and more in places like Latin America and Africa.  Twenty or so years from now, with rising wages, China will face similar kinds of issues faced by the U.S. in the last few decades.  This is just the result of market forces at play.  It is not that China has been stealing American jobs.

Because of its higher standard of living, U.S. must move up the industrial production chain working on activities that require more and more sophisticated technical capabilities and skills.  In order to achieve that, U.S. must produce more technical and professional college graduates.     Unfortunately the graduate students in our technical departments in our colleges and universities are more and more populated by foreign students. [1,2]  We will come back to this issue near the end of this article.

Does imposing tariffs on Chinese imports help the American economy?  First, the cost from the tariffs will be passed on to the import companies and eventually passed on to the customers, which means that the American people will ultimately pay for the increased cost from the tariffs.

In response to the increased tariffs, besides imposing a tariff on American exports, China will buy less certain products from the U.S., such as soybeans and fertilizers.  In order not to hurt American farmers, U.S. government then subsidizes these farmers, to the tune of $16 billions as was announced recently, in addition to the $12 billion subsidy to farmers in 2018 [3].  This just adds to our national debt which is already astronomically high.

Furthermore, China, which controls most of the world’s rare earth elements (after taking into consideration manufacturing), can limit its sale to the U.S. of these valuable ingredients which are crucial to producing various high tech products, such as computer hard drives and screens, magnets, hybrid cars, metals in aircraft engines, missile guidance and control systems, satellite communications.  This will adversely affect U.S.’s ability to make and sell high tech industrial products, as well as utilizing them in important military applications.

Yes, imposing tariffs on Chinese imports will have adverse impacts on China, but it also has adverse impacts on the U.S.  It is not good for either country, and it is not clear in the long run which country will suffer the most.

Sometimes one also hears that China’s state-owned or partially state-owned companies provide them an unfair advantage over U.S. companies.   However, one should keep in mind that almost all the large companies in the U.S. receive all kinds of special financial subsidies from local governments, state governments, and the federal government via various tax incentives.

A recent example is Amazon, whose profits nearly doubled from $5.6 billion in 2017 to $11.2 billion in 2018, but once again Amazon paid $0 in federal tax.  As a matter of fact, it received for tax year 2018 a federal income tax rebate of $129 million. [4]  In 2018 when various cities submitted bids to Amazon for its East Coast headquarter, many of the bids included billions of dollars of tax incentives from the corresponding city and state governments.

Stealing American Trade Secrets:  One of the arguments one often hears from U.S. government officials is that China is stealing a lot of trade secrets from the U.S.  The U.S. Chamber of Commerce’s Global Innovation Policy Center (GIPC) has been investigating how well various countries protect the intellectual property of foreign companies.  In their February 2019 report [5] “U.S. Chamber International IP Index:  7th Edition,” they found that China actually scored fairly well, especially among developing nations.  China’s score was just below Mexico and Malaysia, but above countries like Turkey, Russia, Brazil, Saudi Arabia, India, Philippines, South Africa, Thailand, Indonesia, Egypt.

Furthermore, Renjun Bian of the University of California at Berkeley’s School of Law has recently investigated a publicly accessible database called China Judgements Online (CJO) of all judgments made in Chinese courts since January 1, 2014.  Her conclusion [6] is that (1) foreign patent holders were as likely to litigate as domestic patent holders, and received noticeably better results – higher win rate, injunction rate, and average damages, and (2) plaintiffs won in 80.16% of all patent infringement cases.  These findings contradict long-standing beliefs held by westerners about patent enforcement in China.

One should also look at the trend.  As China grows in terms of technical capabilities, skills, and originality, China also wants to protect her intellectual properties (IPs). Earlier in her history, perhaps even as late as 10-15 years ago, China, like other developing countries, might not have as much interest in protecting IPs.  Now, when China is among the world’s leaders in filing patents, China now has as much vested interest in protecting IPs as other advanced countries.  The discussion in the two previous paragraphs provide supportive evidence.

Another commonly heard complaint is that in order for foreign companies to come to China to do business, they are required to form joint ventures (JVs), and therefore, it is more likely that more of their IPs will be shared with their Chinese JV partners.  One should keep in mind that the foreign company has a choice:  Doing business in China via JVs or not doing business in China at all.  Many companies have decided to choose the first option, and most have continued to do that.  The reason is that these companies have concluded that it makes sense to them from a business financial perspective.  If it did not make financial sense to them, they would have stopped doing that.

Espionage Against the U.S. Government:  Again if you listen to U.S. government officials’ statements and the American mass media articles, you will conclude that China is engaging in espionage significantly more than the U.S. and other countries.  But what is the reality? The U.S. has been spying on all world leaders, including the top leaders of her most important allies, including Germany, France, and Great Britain.  The most obvious example is as revealed by Edward Snowden that the U.S.’s National Security Agency has been monitoring the cell phone of German Chancellor Angela Merkel.

Furthermore, according to the Washington Post [7] “the National Security Agency (NSA) and the FBI have been tapping directly into the central servers of nine leading U.S. Internet companies, extracting audio and video chats, photographs, e-mails, documents, and connection logs that enable analysts to track foreign targets.”  The nine companies are Microsoft, Yahoo, Google, Facebook, PalTalk, AOL, Skype, YouTube, Apple.

Smart assistant devices like Amazon’s Echo and Google’s Home Hub record all conversations because they need to know when you are talking to them.  However, these devices don’t delete their recordings even after it is clear that the conversations just recorded are not addressed to them.  This means that the U.S. government can work with Amazon and Google, or force Amazon and Google to work with them, to obtain all kinds of private information for the government.

Intelligence gathering to a certain extent could be explained as part of knowing your enemy or your potential enemy, but when you couple that intelligence gathering together with initiating, encouraging, supporting, and outright instigating of regime change in a legitimate government goes beyond the line of legitimate espionage.   Here is just a small partial list of legitimate governments that the U.S. has instigated regime change since 1950s:  Egypt in 1952, Iran in 1953, Democratic Republic of Congo in 1960, Dominican Republic in 1961 and 1965-66, Brazil in 1961-64, South Vietnam in 1963, Indonesia in 1965-67 and 1997-98,  Greece in 1967, Chile in 1973, Afghanistan in 1979-1989, Poland in 1980-89, Nicaragua in 1982-89, Yogoslavia in 2000, Iraq in 2003, Syria post 2005, Libya in 2011. [8]  It is frightening to learn how frequently the U.S. government has used its economic and military power to encourage, support, initiate, and instigate a regime change because the regime in power doesn’t see eye-to-eye with the policy of the U.S.

The U.S. government has accused Huawei of working with the Chinese government to provide espionage of U.S. companies and the U.S. government.  Yet, it has never offered any evidence for such accusation,  but it has forbidden Hwawei equipment from being used in U.S. business as well as its military.  It has threatened other countries with retaliatory measures if they use Huawei equipment.  Even with such threats, countries like Great Britain are still proceeding with using Huawei equipment. [9] 

Perhaps the real reason to oppose Huawei is that the U.S. government recognizes the importance of Huawei to helping China to be able to compete with the U.S. in the leading technological areas, and therefore, it wants to thwart Huawei.

Not only that the U.S. government sees security threat from the Chinese government, it has also implied there is security threat from all Chinese Americans.  In February 2018, in response to Senator Marco Rubio’s request to comment on “the counterintelligence risk posed to U.S. national security from Chinese students,” FBI Director Christopher Wray said that he “views the China threat as not just a whole-of-government threat but a whole-of-society threat.”

This suggests that all Chinese Americans (even those who were born and lived all their lives in the U.S.), not just foreign students from China,  are potential security threats, thus recreating the extremism of the McCarthyism of the 1950s and the Chinese Exclusion Act of the 1880s.  This ignores completely the fact that Chinese Americans also want the U.S. to be strong and prosperous, keeping in mind that they and especially their children and grand children are living and will continue to live in the U.S.  When the U.S. government adopts unfair and dangerous policy, especially completely irrational policy whose intent is to destroy China before it can become an economical and military equal to the U.S., then Chinese Americans will and should become critics of such U.S. policy. [10]

Creating Instabilities in the South China Sea and Threatening Asian Neighbors: The U.S. government has also accused China of violating international laws as specified under the United Nations Convention on the Law of the Sea (UNCLOS) and that China is bullying her smaller neighbors and is posing a military threat to the world.

China is also often accused of stealing some of these islands in the South China Sea from countries near these islands.  First, by international laws, a country that is closest to an island is not necessarily the owner of the island.  Its ownership is established by other criteria, such as which country first discovered or used the island, i.e., historical rights are key to determining territorial sovereignty, which is a critical point in UNCLOS and is often ignored by China critics such as the U.S..   Historically, there are clear cut evidence that these islands are legally Chinese territories.

As to the question of whether China is abusing international laws, UNCLOS provides three procedures for settlement of disputes:

1. The International Tribunal for the Law of the Sea (ITLOS), an independent judicial body established by UNCLOS in Hamburg, Germany
2. The International Court of Justice (ICJ),  the principal judicial organ of the UN established in The Hague, Netherlands
3. An Arbitral Tribunal (AT) and its administrative support entity Permanent Court of Arbitration (PCA).

What came out of UNCLOS on this issue was a decision by the Arbitral Tribunal.  However, because this dispute involves territorial sovereignty/historical rights, which as stated in UNCLOS is outside of the jurisdiction of the Arbitral Tribunal, China from the very beginning has the right to declare in writing that it would not participate and not abide by the decision of this Arbitral Tribunal.

Since these islands belong to China, China has every right to develop the islands, including adding land fills and building air strips.  In light of the U.S.’s 7th fleet and military alliances and military bases all around China, China needs to strengthen her defenses.  China has never taken any action to block the freedom of navigation in the South China Sea; that is just a make-up charge by the U.S. to justify her own imperialistic policy.

Exploiting Other Countries Through Debt Traps:  John R. Bolton, the U.S. National Security Advisor has stated that China is making “strategic use of debt to hold states in Africa captive to Beijing’s wishes and demands.”  Let’s hear the view of one of the world’s premier experts on this subject, Dr. Deborah Bräutigam, the Bernard L. Schwartz Professor of Political Economy and Director of the China Africa Research Initiative (CARI) at Johns Hopkins University’s School of Advanced International Studies, with extensive experience working in the United Nations, the World Bank, the African Development Bank, and the US Agency for International Development, and has advised more than a dozen governments on China-Africa relations. 

Dr. Brautigam wrote “Yes, debt is on the rise in the developing world, and Chinese overseas lending is, for the first time, a part of the story.  But a number of us academics who have studied China’s practices in detail have found scant evidence of a pattern indicating that Chinese banks, acting at the government’s behest, are deliberately over-lending or funding loss-making projects to secure strategic advantages for China.” [12]

In the CARI blog [12],  her team wrote “Once again, the Trump administration described Chinese lending as predatory: ‘the strategic use of debt to hold states in Africa captive to Beijing’s wishes and demands.’ No evidence was provided for this characterization of Chinese lending.”  The blog also states “As with the administration’s overblown estimates of Chinese lending in Djibouti, we urge reporters to do their own reporting on China-Africa debt issues, and not to simply report the administration’s ‘facts’ at face value.”

Yes, for various reasons there have been failed Belt and Road Initiative (BRI) projects.  But during the last five years, the number of BRI projects are in the hundreds which is overwhelmingly larger than the number of failed projects that have come to public attention. And some of the countries that put projects on hold in 2017 have already come back to the negotiating table. 

It is important to note that the BRI projects are designed to address some of the most critical infrastructure needs of these developing countries, and successfully addressing these needs will significantly help the future economic success of these countries.   These are difficult projects.  On the one hand,  there are always risks associated with such projects.  On the other hand, they address the critical problems facing these countries.

Great Unrest in the Chinese Populace and Mistreatment of Chinese Ethnic Minorities:  If you listen to U.S. leaders and the Western mass media’s reporting on China, you would think that there is great dissatisfaction of the Chinese people for their lives and for the Chinese government,  In reality, the overwhelming majority of the Chinese people recognize and acknowledge that the Chinese government in less than 70 years have lifted more than 800 million Chinese people from poverty, have led China to become the world’s second largest economy, and have changed the country from being controlled by many foreign powers while living under many unequal treaties.

The Chinese people also realize that their country has many shortcomings and there are many ways that the country and their lives can be improved.  However, they want to make these changes on their own.  They don’t want to have these changes forced on them under the instigation of foreign powers who do not have the best interests of the Chinese people.

Foreign powers have a long history of taking control of other countries and exploiting them for their own benefits.  The method used in the 19th and 20th centuries was to colonize the other country.  The method used now is more subtle, via suggesting, encouraging, supporting, and outright instigating regime change.  The objective is still more and less the same, to make a change, by force if necessary, in the direction of another country to align with the interest of the foreign power.