A Trade War That is Unwarranted

• Published date: 01 September 2018
• Date: 01 September 2018
• DOI: http://doi.org/10.1111/cwe.12255
• Author: Yongding Yu

©2018 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 38–61, Vol. 26, No. 5, 2018

38

*Yongding Yu, Senior Fellow, Institute of World Economics and Politics, Chinese Academy of Social

Sciences, China. Email: yuyongding@126.com.

A Trade War That is Unwarranted

Yongding Yu*

Abstract

The Trump Administration has presented three major reasons to justify the initiation of

a China−US trade war: China’s large trade surplus against the US, China’s failure to

comply with World Trade Organization (WTO) commitments and China’s unreasonable

acquisition of US technology and theft of intellectual property rights. The fundamental

cause of the US trade deficit is its persistent saving deficiency. China has complied

with WTO commitments, although there remains significant room for improvement.

The case against China for the so-called unfair acquisition of foreign technologies and

cyber-enabled intellectual property rights theft is weak at best, although China needs

to redouble its effort in protecting intellectual property rights. President Trump’s trade

war will not drive China to abandon its resolve to catch up to the advanced economies.

China is ready to ght a war of attrition. Unfortunately, both sides – as well as the rest

of the world – will incur heavy losses in the process.

Key words: China, Section 301 investigation, trade war, US

JEL codes: F1, F6, O1, O5

I. Introduction

On 8 March 2018, US President Donald Trump’s Administration fired the opening

shot of the trade war between the US and China by declaring tariff increases on steel

and alumnium products from China and some other countries. After three rounds of

negotiation, hope was raised that a war could be averted. However, on 16 June 2018,

President Trump announced that the US would proceed with the plan announced on

4 April 2018 to impose additional tariffs of 25 percent on products worth US$50bn

imported from China, to take effect on 1 July 2018. China immediately retaliated

with the imposition of an additional 25 percent tariff on products worth US$50bn

imported from the US, which would also take effect on 1 July 2018. Friction over trade

threatened to become a full-blown trade war. While trade friction has long been an

issue in the Sino−US relationship, few expected such an escalation, not least because

©2018 Institute of World Economics and Politics, Chinese Academy of Social Sciences

A Trade War That is Unwarranted 39

economists widely view trade wars as damaging to all parties. The US states three main

complaints against China: (i) China’s trade surplus against the US, (ii) China’s failure

to implement its World Trade Organization (WTO) commitments, and (iii) China’s

unreasonable acquisition of US technology. This paper carefully examines these three

complaints and nds little reason or evidence to support the US case.

The paper is structured as follows. Section II analyses the causes and implications

of the US trade deficit against China. Section III refutes the claim that China failed to

implement its WTO commitments. Section IV provides a comprehensive review of the

Section 301 investigation report1 on China’s trade action, policies and practices. Section V

discusses the legality of US action against China based on Section 301. Section VI provides

concluding remarks.

II. China–US Trade Imbalances

Indeed, China has run a large current account surplus against the US. However, the US

has run trade decit, uninterrupted, since 1980. The US Government has successively

blamed Germany, Japan and East Asian countries for the deficit. China only became

the largest single source of the US global decit after 2003. Thus, one should rst ask

why the US has run a trade deficit against the rest of the world so consistently and

persistently. There are two schools of thought about the causes of US trade decit.

One school attributes the deficit to US secular decline in international

competitiveness, which started in the late 1970s (e.g. Griswold, 1998). Another argues

that the fundamental cause of the US trade decit is its saving deciency (Bernanke,

2005). As pointed out by Hufbauer and Lu (2016):

[T]he United States is bound to run an overall trade decit with the rest of the world

when combined US savings of the household, business, and government sectors are

negative, as they have been for some years. To nance the trade decit, the United States

is obliged to borrow or attract investment from the rest of the world, making a global US

trade decit inevitable.

1Section 301 refers to US Trade Act of 1974 Section 301. Full text is available from: https://www.gpo.gov/

fdsys/search/pagedetails.action?collectionCode=USCODE&searchPath=Title+19%2FChapter+12%2FSUBC

HAPTER+III&granuleId=USCODE-2011-title19-chap12-subchapIII-sec2411&packageId=USCODE-2011-ti

tle19&oldPath=Title+19%2FChapter+12%2FSUBCHAPTER+III&fromPageDetails=true&collapse=false&y

cord=1626.4000244140625. The investigation report entitled Findings of the Investigation into China’s Acts,

Policies and Practices Related to Technology Transfer, Intellectual Property, and Innovation under Section

301 of the Trade Act of 1974 (Section 301 investigation report) is available from: https://ustr.gov/about-us/

policy-ofces/press-ofce/press-releases/2018/march/section-301-report-chinas-acts.