China-US Trade War Heats Up: 3 Reasons It Won’t Cool Down Anytime Soon

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Yves here. This is a useful article as far as it goes, but it may not go far enough for the taste of some readers.

The first is that it may miss the real source of the outtrade between the US and China, which is that China appears not to accept a fundamental consequence of greater economic integration with other countries, which is a weakening of national sovereignity. This is a fundamental point made by Dani Rodrik’s trade trileamma.

The US supported China joining the WTO in 2003 largely for geopolitical reasons, that trading more with the rest of the world would bring Chinese interests more in alignment with those of the West. It didn’t hurt that multinationals were salivating at the prospect of getting access to China’s ginormous population, even if it might take a while for incomes to rise enough for consumer to be able to afford all that much.

However, what we have also seen is a massive shift of investment from advanced economies to China, along with the moderate to high skilled manufacturing jobs that they provided. We noted in a 2005 Conference Board Review article how US businesses, starting in 2003, had become net savers, which was unnatural by historical standards. That change was accompanied by labor share of GDP growth also being unprecedentedly low for a post World War II expansion.

But too many people, particularly executives at large (and therefore politically influential) companies were making out from the China boom for beefs about risks and downsides to be given much of a hearing. And even when China was clearly engaging in abusive behavior, the US failed to do anything about it. For instance, the US was ready to file a case against China and Indonesia for its subsidies to coated paper producer violated WTO rules. This case would have had a new wrinkle by focusing on subsidies to plant construction and startup, which are important drivers of total costs in this highly capital-intensive industry. But the US failed to proceed, nor did it win any concessions from either country.

China has thus for a very long time been able to have its cake and eat it: run a mercantilist trade policy, yet not hew anywhere near as much as its trade partners to trade rules, laws, and contracts. We’ve allowed China to be exceptional. Given China’s hypersensitivity to being pushed around, it’s not going to take well to the premise that it has to behave like everyone else.

Another issue is that the author gives the usual warnings about trade wars being bad things. As UserFriendly described trade economist Paul Krugman’s column earlier this week, “Krugman takes a small detour from being wrong about everything to point out that trade wars aren’t the end of the world before returning to style.”

By Greg Wright, Assistant Professor of Economics, University of California, Merced. Originally published at The Conversation

The truce in the U.S.-China trade war is in tatters.

China said on May 13 that it will impose new tariffs on a range of American goods in retaliation for President Donald Trump’s decision to raise duties on US$200 billion in Chinese imports.

Although trade talks may continue, for now the trade war that Trump began in January 2018 is back on, which will mean more economic pain for companies and consumers in both the U.S. and China.

As an economist who focuses on international trade, I believe there are three reasons the conflict could continue for a long time.

1. Mastering the Fundamentals

All evidence suggests that negotiators have made little headway resolving the fundamental disagreements between China and the U.S.

The most pressing issues involve deep structural features of the Chinese economy that China has little incentive – or in some cases, ability – to change. In short, the U.S. believes that the Chinese government has been both too involved and not involved enough in how its economy functions.

The most important and long-standing issue is that the Chinese economy owes part of its rapid development in recent decades to heavy subsidization of targeted companies and industries. The U.S. wants China to be much more transparent about this support and to reduce subsidies overall.

At the same time, the Chinese government has not been doing enough when it comes to protecting foreign intellectual property in China. Copyright enforcement is still weak, and U.S. companies are forced to transfer technologies to Chinese counterparts as a condition of doing business in the country. This is estimated to cost American businesses hundreds of billions of dollars a year.

But China is unlikely to end industrial subsidies or increase enforcement of intellectual property laws in any meaningful way in the short run. In part this is because the Chinese economy is growing more slowly than at any other time in the last two decades, and any significant change in policy would be risky.

China might be persuaded to transition away from this economic model in the long run if the proper incentives are put in place. But it remains to be seen whether the Trump administration has the patience to compromise on its short-run objectives in order to create a long-run path toward a more level playing field.

2. Carrots and Sticks

The U.S. negotiating position has been heavy on “stick” and light on “carrot.”

Even before the trade war, Chinese companies faced significant tariffswhen exporting to the U.S. – some dating back to before China joined the World Trade Organization in 2001. Critically, they are unlikely to be removed regardless of the outcome of negotiations.

Many of these tariffs are known as “antidumping duties” and are imposed when a product is sold in the U.S. at a price legally determined to be too low. Overall, these tariffs are nearly twice as high as the tariffs that the Trump administration has so far imposed during the current trade war.

Ultimately, China does not want to appear to be folding to U.S. pressure when it already faces significant, and likely non-negotiable, tariffs.

So unless the U.S. decides to offer China some kind of carrot, such as reducing these underlying duties, trade talks will undoubtedly continue to stall – or will achieve little.

Washing machine tariffs showed clearly the consumer costs of protectionism. Reuters/Rick Wilking

3. More Pain May Mean Less Gain
The costs of the trade war up to now have been high, but could get much worse. And that could lower the odds of ending it.

So far consumers may not have noticed the tariffs since they are spread across thousands of products and, in some cases, have been absorbed by U.S. companies for competitive reasons. Nevertheless they have cost each American around $11 per month, according to a recent study by economists from the Federal Reserve Bank of New York, Columbia University and Princeton University – which is not insignificant.

In fact, the Trump administration inadvertently provided an ideal test case for the calculation of these costs when it imposed a tariff on imported washing machines in January. As it turns out, approximately 1,800 jobs were created in the U.S. as a result of this policy, which was exactly its intended effect. However, the rise in the price of washing machines and, incidentally, dryers, cost consumers over $1.5 billion. This means each job cost $815,000, which is an expensive and inefficient way to boost U.S. employment.

And while consumers may not have noticed the previous tariffs, they most likely will feel the impact of the ones Trump raised on May 10. Trump has also said he plans to slap a tariff on every other Chinese export in the coming months if a deal isn’t reached. This would likely curb U.S. economic growth by half a percentage point in 2020 and cost 300,000 jobs, according to Oxford Economics.

With the accumulation of tariffs, and the passing of time, the need for greater concessions from China to justify these costs becomes more pressing – and becomes less likely to be met. This is a key reason that economists nearly unanimously agree that trade wars are not “easy to win,” as Trump claims.

More often than not everyone loses.

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  1. jeremyharrison

    It would seem that the US will never been in China’s position to play “the Long Game” in any negotiation or trade war. Unlike China, the US faces a Presidential election every 4 years, hence no President can bluff that they can withstand long-term pain, while China can (to some degree).

    I suspect Trump knows this.

    So what’s his game? My suspicion – he want 2 things out of this:

    1 – Temporarily keep interest rates low, to minimize the chance of a Fed-induced recession in 2020, or perhaps even a cyclical recession. The current trade war is keeping long term interest rates down.

    2 – Gain a major talking point for 2020. “I stood up to China, I fought for manufacturing jobs while the last 4 Presidents before me shipped them away.” Good for Rust Belt votes.

    It seems like this could be achieved by keeping the trade war going (but not escalating) for 6 months or so, and then cutting a deal which has zero teeth against China (basically reverts to the status quo pre-trade-war), but saves face for Trump (The Chinese know full well the value of saving face – and can easily give it to Trump in exchange for essentially nothing – maybe some superficial agreements with no enforcement).

    1. cnchal

      Two seconds after China accedes to US demands that financial and insurance markets be opened up to Wall Streets frauds, the trade war is over.

      What Trump wants is for the peasants to believe the illusion that he cares for them just long enough to get elected again.

      > . . . Copyright enforcement is still weak, and U.S. companies are forced to transfer technologies to Chinese counterparts as a condition of doing business in the country.

      No US company is “forced” to transfer technologies. It is done willingly. It’s typical for eclownomists to miss this and parrot the party line. When a US company moves production to China, how would the products then be made without “transferring technology”. Typically that technology consists of the tooling and processing needed to make the end product. For there to be no “transfer of technology” a US company would set up a factory with some work benches and tell the Chinese employees to make their stuff, with no tools or instructions on how to do it.

      Has no eclownomist ever worked in a factory? It seems so.

      1. East Boston

        “No US company is “forced” to transfer technologies”. That’s equivalent to no US company is forced to do business in China. However if a tech company wants to do business in China today they are required to release their source code to their Chinese partners and the Chinese government.
        See Section C.

        I’m not aware of any other country that requires this for all software products.

      2. Susan the other`

        China can’t lose control of its sovereignty by allowing Western finance to financialize it; securitize it; bundle it; sell it and just sit back with their cigars and live off 15% returns – only to reinvest in China for more fun and profit in financialization. I hope China draws the line against this encroachment. It is a massive market and has potential to grow explosively. That would be a tragedy not just for China but for the entire world as China was forced to push its manufacturing to grow fast enough to service all the usury. The best thing that can happen now to China, and the West, is a jobs guarantee program. This is the perfect opportunity to wind down pointless environmental devastation and replace it with green jobs that protect what’s left of the environment. If any country can figure out how to escape the insane growth demands of global neoliberalism and replace it with government spending to create environmental/green jobs it’s China. They have a command economy and it is still in their power.

      3. lordkoos

        “This is estimated to cost American businesses hundreds of billions of dollars a year.”

        I wondered about this, as it must still be profitable for US companies to be in China in spite of these type of losses. If having their intellectual property stolen is so harmful to the bottom line, why don’t they move the jobs back to the USA ?

      4. Josephus P. Franks

        Well put. I don’t see how anyone can have antipathy toward China’s economic policies – they’re doing the best they can to do what the US, France, Germany, Japan, etc., did to catch up with the leading countries of their day. I’d be delighted if the trade war prompts the Chinese leadership to take the socialist exit from the capitalist road to development, however.

    2. Tony Wright

      I have seen suggestions in financial newsletters to the effect that Trump is escalating this dispute to cause a short term correction in the stock market, which would force the US Fed to cut interest rates. Then stage manage a face saving, but meaningless deal as suggested above by jeremyharrison, which, along with the reduced borrowing rates, would give the stock market a boost for long enough to get re-elected in 2020.
      Mind you, I have also read newsletter opinions to the effect that Trump does not have a clue what he is doing, and this is all going to be the next big black swan, or grey rhino.
      Given the conduct of the North Korea negotiations, I think the face saving deal scenario is more likely – same pattern.

  2. J7915

    Don’t they teach the folly of lusting after the hundred million oil lamps of China, in business schools anymore??

  3. Sound of the Suburbs

    Unfortunately, the architects of the Washington Consensus were using neoclassical economics.

    They didn’t stand a chance.

    How were they supposed to know the US’s high cost of living would against it in an open globalised world?

    Disposable income = wages – (taxes + the cost of living)

    Neoclassical economics rendered the second term in the brackets with taxes invisible.

    An open globalised world would work against the West due to its high cost of living causing massive off-shoring.

    The rise of China and decline of the US was baked in.

    The 1% would get better returns from investing their capital in the rapidly growing Asian economies than the mature economies of the West.

    Multi-national corporations could make higher profits in Asia due to the low cost of living that they had to cover in wages.

    (Employees get their money from wages, so the employer pays through wages.)

    The West never did work out what was going on, but now the more developed Eastern economies are seeing the same thing and are looking into it.

    Richard Koo explains:

    Higher returns on capital are affecting their economies as they off-shore to places where they can pay lower wages for higher profits.

    China is now quite expensive as they have let their cost of living rise and the developed Eastern economies are off-shoring to places like Vietnam, Bangladesh and the Philippines causing wage stagnation.

    Richard Koo found American firms were looking to expand in Mexico, not the US, as they can pay lower wages and make more profit there due to its low cost of living.

    To maximise profit you really want to off-shore as much as possible from the West.

    This doesn’t affect the top end as the cost of living isn’t so important and most of the people you want are in the West.

    You can’t off-shore jobs that have to done locally, e.g. health, education, low paid service sector jobs.

    To keep unemployment figures down they have divided up old full time jobs into new part time jobs. It multiplies up the jobs in the economy artificially.

    94% of the jobs created by Obama were part time.

    1. Ignacio

      Yep. The important point is that the economic integration was increasingly driven in all terms and conditions by multinationals more than the WTO/States. States were mere agents on behalf of these. This fact broke the truism that “commerce is good for all” that economists tend to defend. We can call it one-sided globalization.

  4. Stadist

    On the topic of Trump Economics, which is roughly related to the this trade war:

    Aren’t these Trump Economic manouvers like textbook MMT?

    From wikipedia on MMT:
    “MMT advocates argue that the government should use fiscal policy to achieve full employment, creating new money to fund government purchases. The primary risk once the economy reaches full employment is inflation, which can be addressed by raising taxes and issuing bonds, to remove excess money from the system.[3] MMT is controversial, with active debate[4] about its policy effectiveness and risks.”

    Trump runs big deficits, this is true. But Trump tariffs are essentially taxes when the industry and consumers have no alternative places to outsource the products from in short term.

    Of course personally I would advocate the deficit spending be used on infrastructure and other durable long term investments but the target of spending is controversial topic always.

    Excuse me now if I came to state the obvious here, I haven’t been following all the discussions or links very heavily recently, I wouldn’t be surprised if this was common understanding in here already.

  5. Ignacio

    Dryers are not expensive enough… Those may be somehow necessary in Seattle but in San Diego?

    – Consume a lot of energy
    – Shorten the life cycle of clothes

    1. mauisurfer

      good point
      i hang my clothes on an INDOOR clothesline, they dry just fine without sun or electricity

  6. The Rev Kev

    Assuming that China does not agree to restructure their economy to Trump’s liking nor to cripple their research & development program because their products are getting far too successful on the international market, then likely Trump will slap a tariff on everything that comes out of China and into the US. I can see a US effort to have all other countries to also impose the same tariffs on China so that the US won’t be left out in the cold on their own but I doubt that these countries will indulge in sympathetic seppaku with their own economies. I am wondering what happens next.
    China would probably put a tariff on all US imports but they might have more options. They might just stop importing all US oil into the country for example, and start sourcing it from Iran in defiance of Trump’s demands that they do not do so. They may not sell off their treasury holdings in large lots but certainly they would not be buying any more. Also, the problem with international trade is that you may not be aware of the source of a component in something that you buy until it is too late. It may be that some components from China cannot be easily replaced as production lines might have to be set up from scratch which most companies would be wary about doing so in the current unstable climate. It may come down to a waiting game with the Chinese aware that Trump has an election facing him in only 537 days and an electorate to answer to.
    Long term the damage is going to be enormous. I have read that the Chinese build-up of their military can be partly traced back to when the CIA bombed the Chinese Belgrade Embassy back in 1999 and the Chinese had nothing to respond back with. With this blatant attack on core Chinese interest there is not a doubt in my mind that the Chinese will endure what pain they have to and then go for long term solutions but I can only guess what they might be or how we might see them play out over the next coupla decades. It won’t be pretty.

    1. MyLessThanPrimeBeef

      Trump and the 2020 election.

      Is it possible that Trump uses it this way – vote for me, so I can complete the job?

      Maybe even a third term, if he can get voters to believe this is a crisis and he can be that leader, like FDR in WW2.

    2. False Solace

      > They may not sell off their treasury holdings in large lots but certainly they would not be buying any more.

      They have a large trade surplus with the US. If they don’t park their dollars in T bonds they’re stuck earning no interest. gg as the young folks say.

      1. The Rev Kev

        Or they could use those dollars by investing in infrastructure such as the Belt and Road program. Best thing about that is that it could not be confiscated by the Treasury like has happened with other countries holdings.

        1. Yves Smith Post author

          They can only use the dollars with parties that will take dollars. Otherwise, China has to sell the dollars to convert the currency, which would drive the currency they were buying up. For small economies, this would likely not be welcome.

  7. PlutoniumKun

    Its just tangentally related to the post, but I think the best explanation I’ve found for the US’s huge trade deficit (when standard trade theory says it should be in surplus) is provided by Michael Pettis in this long, but very clearly written post.

    One take-out – which MMT economists would no doubt agree with in principle, is that the best way the US could fix the deficit is by fiscal expansion (specifically, fiscal expansion aimed at reducing inequality), which is completely contrary to what most mainstream economists argue.

    1. Adam1

      Thanks for posting the link. I love Pettis’s detail and his ability to explain. I’ll have to order his book in September.

    2. John B

      Thank you for that link. One of the highest combined clarity and complexity scores I have seen in any work on economics.

      Interestingly, Pettis suggests (I think) that capital controls would be a better way than tariffs to reduce the distortions that Chinese and German investment subsidies cause to US, UK, and other economies. The US has virtually no capital controls. However, the president can block foreign investment for national security reasons. This has rarely been done, but the Trump administration seems to be doing it more. Should it do so for economic reasons, regardless of whether there actually exist any security justifications? Would that reduce the trade deficit more effectively than tariffs, and if so, would that be a good thing?

      1. Ignacio

        I think he doesn’t suggest it but it is implicit in his arguments. Capital controls oh! oh! impossible in the neolib “order”. In this framework It is possible to argue that net capital flows to the US drive military overspending.

    3. Brian L.

      From Pettis:
      “If the country wants to escape this condition, the United States must reduce its trade deficit with the world, but not by addressing the trade deficit directly through import tariffs or quotas. Instead, the United States must address foreign capital inflows directly, perhaps by taxing them.”

      What are the chances of that?

      1. John k

        Confusing to me…
        So if a foreigner wants to buy a house in LA he first buys (bids up) dollars, say with yuan, and then buys the house? And we tax the import of dollars that funds the transaction? So our residents send dollars out of the country when they buy foreign stuff, but we tax the dollars when they come back?
        And same if they buy some of our stuff, say a us made Tesla, so we are taxing exports?

  8. Tom

    I have a feeling that globalisation will roll back not because of reasons like national sovereignty but that’s its too damn complex for us to work with. Any thoughts?

    1. fajensen

      I think it will be rolled back too but rather because of inequality.

      That the 99% have nothing in common with the 1% is a given, but the 1% will not let a single dollar be wasted on any needs of the 99%.

      So the 99% will boost any political issues that will stop the 1% from having that dollar since they are not getting anything anymore.

      This is an unstable situation, as demonstrated many times by Latin America.

  9. Marlin

    Actually paying around 800k$ as an initial subsidy for an industrial job isn’t as bad as it sounds. Industrial jobs ofter are created around clusters, but if you don’t have a cluster you need to create a kernel.
    Apart from that, part of the 800k$ is actually paid to the US government.

    1. a different chris

      I’m an engineer, not an economist. So if I ever wrote a sentence like this it would not leave my desktop:

      Using the level of shipments to construct an aggregate, we calculate that these tariffs
      resulted in increased costs to consumers of just over 1.5 billion USD on an annual basis. By
      comparison, the total amount of tariff revenue collected was relatively small, aggregating
      to about 82 million USD annually

      So somehow 82 million replicated itself(?) by a factor of 18? For every buck the gummint collected in tariffs somebody somehow someway jacked the price by 17 bucks? How? How does that make any sense at all?

      And if it is true, it isn’t the tariff that’s the problem. It’s the System, one that Al Capone would just have to marvel at.

      1. Ignacio

        Economists… I clicked de link to the study to check those calculations, but then thought twice. I have better things to do.

  10. Godfree Roberts

    The perceptive Erica Wong explained China’s stance thus:

    Trump has now raised the tariff on $200 billion of Chinese exports/yr. from 10% to 25%. That’s $30 billion of new tariffs that would be collected if the export volumes remained constant.

    China’s economy is expected to grow this year by 6–6.5%, to $804- $871 billion.

    Without understanding the price elasticity of demand of various products it’s not possible to know the exact effect of this tariff, but let’s take an almost worst case scenario where exports of these goods drop by 50%.

    In order to calculate the effect on GDP, where GDP = C + I + G + (Ex – Im) one has to exclude the imports required to produce the exports.

    So what’s the impact on China’s GDP? Worst case is $50-$70 billion.

    Realistically the tariffs will have a $20-$25 billion impact on China’s GDP.

    But since tariffs were applied the Yuan’s decline has offset 90% of the tariffs.”

    If China walks away she wins. If she accepts a deal she wins. Affordably.

  11. hemeantwell

    I’d appreciate it if someone here would recommend a critical analysis of China’s use of industrial subsidies. The book linked by the author, with a pic of a Chinese flag steamrolling the flags of the EU and the US, doesn’t look promising.

    It seems that if one compares China’s current policies to the historical course of US support for domestic industry easy use of terms like “transparency” becomes difficult. For example, it’s widely understood that US tech has benefited greatly from DoD research. Is that not a subsidy? Transparency implies a here and now standpoint that is historically blindered, which of course yields huge advantages to established economies.

    1. Frank Little

      Seconded. I’ve always been puzzled by this aspect of the reporting on the China-US negotiations. How are the subsidies that the Chinese provide to key industries all that different from the way that US defense spending subsidizes US arms manufacturers? After all, the US is the largest arms dealer in the world and it’s clearly a key part of the US geopolitical strategy to use those exports to solidify political and military alliances.

    2. Stadist

      The whole case of industrial subsidies is just ideological dogma within the assumed ‘Free Trade’, meanwhile import customs are fine, at least when USA or EU do them.
      It’s also silly to say China isn’t allowed to help it’s own companies and industries, why aren’t they allowed to do that? I don’t care about what some arbitrary international agreements say, especially the local and global superpowers ignore international agreements all the time as they wish for their own benefit.

      In big picture it makes perfect sense that highly developed industrialised nations promote free trade, this way competing industries can’t really form in less developed countries because many industries include very high establishment costs and the establishment also takes long time. This also neatly explains why many african countries have hard time developing, they are actively prevented from doing so.

      Main problem is USA with its free market dogmas and hate for active government actually can’t compete with the State Capitalism that China operates on. Like the saying goes, the capitalist will sell the rope used to hang him. That’s about exactly what has been happening with USA and China. Now USA is being like a little kid saying “you aren’t allowed to do that, it’s not fair”. If we compare which one is bigger bully in our world China has a lot of catchig up to do. It isn’t even fair comparion when USA is actually gearing up for war against Iran. Meanwhile USA makes so much noise about South China Sea atolls. Incredibly hypocritical.

      Of course China has been a bully also, especially in South China Sea, but lets be clear now, USA has no place whatsoever to critizise China about bullying other countries.

  12. Summer

    “Given China’s hypersensitivity to being pushed around, it’s not going to take well to the premise that it has to behave like everyone else.”

    I don’t know how dealings between China and the rest of the world will proceed, but “behave like everyone else”…like the other children…whew! No wonder they will stand their ground like there is no tomorrow.

        1. Yves Smith Post author

          The intellectual property theft extends to companies that don’t do business in China, such as luxury goods manufacturers having Chinese counterfeits sold on eBay, and Game of Thrones having vastly more bootleg downloads (like on an order of over 10X) their paid views on HBO. Oh, and site scrapers. I get ripped off around the world, including in China. You are saying this is my fault, when I don’t get paid on ads presented to Chinese viewers and don’t harbor any illusions that anyone in China contributes in our fundraiser (they don’t, BTW).

  13. ptb

    Trying to make sense of the US China situation, the economics is hopelessly intermixed with the geopolitical rivalry. There is enough good faith effort to seek a win-win solution in the former, but that kind of thinking is seemingly discouraged in the latter.

    The balance-of-power thinkers are scared sh**less of where trends extrapolate – scared most of all what would happen if a China extrapolated to the year 2050 behaved exactly as the US has behaved in the past 50 years. Except you have to talk around a bunch of off-limits subjects to even try to have a conversation about this. Even so, it is apparent that the window of time in which China’s faster growth trend can be nipped in the bud is closing. Perhaps is fully closed already. The consequence of this, i.e. that a multilateral system is not just a good idea, but will soon be the only idea, is at best difficult to talk about. At worst, a monster cognitive dissonance for probably 3 generations of US policy makers and media. Some of them will fight it for years even after the reality of it is settled.

    The saving grace, hopefully, is that the economic/business source of policy is fundamentally stronger than the nationalist balance-of-power source of policy.

    Nostradamus says: Once a few iconic US businesses start losing business in their fastest growing market, the holders of the purse strings will take back what is theirs, and after that I don’t think the trade war will last more than 6 months. The Trump administration will fold, strike a compromise deal that is 90% status quo and 10% substance. The subject will be dropped, in favor of the next scandal for the public, and probably something new for the guardians of national power to be concerned about as well.

    In the intervening time, there would have to be some prominently visible damage (i.e. stock prices) to motivate a resolution. Otherwise it will just go on and on, never ending sh*t talk.

  14. Chris Smith

    I’m tired of hearing about “forced” technology transfers. If you don’t want to transfer technology, don’t do business with a company that insists on the transfer as a term of doing business.

    1. The Rev Kev

      Same here about “forced” technology transfers. If they do not want to play by Chinese rules, there is no law that says that they have to go to China. Nobody is putting a gun to those companies heads and forcing them to move there. When you play with another kid’s bat and ball, you play by his rules.

      1. Jerry B

        I few years ago the author Beth Macy wrote a book called Factory Man which chronicled the Bassett Furniture company and their efforts to deal with globalization. In short, once “globalization” increased starting in the 1980’s it was pretty much a feeding frenzy. Nothing was “forced”. It was all about trying to compete with cheaper products from other countries AND chasing cheaper labor in order to increase profits. US companies sold their souls (technology transfer, etc.) in search of countries with cheaper costs, especially labor costs. The race to the bottom in pursuit of more profits.

        From the article:

        In the 1980s, American furniture makers began to find themselves in a bind; to compete with cheaper products made abroad, they had to begin manufacturing abroad too. The result, of course, was that foreign (mostly Chinese) companies sent representatives here to learn the business and solicit contracts — and, just as the Bassetts had done long ago, promptly undercut their American tutors by offering knockoffs at substantially cheaper prices. Americans had become perilously shortsighted: “If the price is right, you will do anything,” a Taiwanese businessman told John Bassett. “We have never seen people before who are this greedy — or this naïve.”

        1. Jeff N

          My dad sold furniture (including Bassett) for many years. The difference in quality between my still-extant childhood/1970s Bassett dresser (high) and my current Vaughn-Bassett (low) is depressing

          1. Jerry B

            Thanks for the personal reflection Jeff! Yeah it is depressing. If you read Factory Man, it talks about the lengths the furniture makers would go to make a cheap product in order to chase profit and compete with other countries cheap products. Fiberboard/Particleboard, contact paper, paint, etc. Anything but actual wood. Furniture making went from being a craft with high quality workmanship to just another commodity with planned obsolescence.

            Also, for decades Virginia was home to Bassett Furniture and other furniture makers. When the globalization trend took off in the 1980’s many people who made Bassett furniture lost their jobs. Generations of families worked in the furniture industry in Virginia and elsewhere until the advent of globalization. And it was not as if their skill set easily transferred to other jobs/careers.

      2. Marlin

        But if Chinese rules are incompatible with WTO rules, it shouldn’t have joined the WTO and it should not have the rights the WTO affords as protection against protectionism of other countries.

      3. Summer

        China can count on two things:
        1) The USAs over-expansion into everybody else’s business
        2) The US corporations hatred of their workers.

        1. fajensen

          … and the USA’s 5% p/a growth in military expenditure.

          Compound interests means that the US military will become the entire US economy in only a few decades and The Iron Law of Institutions means that the military (and country) will fail some time before that, like the USSR did.

          Just imagine Donald Trump on top of a tank spraying the dissidents occupying the Whitehouse with thousands of 30 mm chain-gun rounds – Boris Yeltsin Style?

          Anyway, that distraction should be good for another +500 really on the DOW!

    2. Marlin

      Companies are not countries. For the company, it might be profitable to share the technology and get market access to China. But for country in which the company grew and developed the technology it still can be a big loss.

      1. John k

        Yes. So we need our pols to either justify our policies or change them. It doesn’t profit them to do either, so we should chuck them out.

  15. RBHoughton

    The intellectual property complaint seems weak imo. Western companies are not forced to go to China to manufacture their widgets. They might go anywhere they please. Those that do take advantage of the natural skillfulness of Chinese workers and the small wages that satisfy them. That means bigger profits as they maintain the old pricing they were getting when manufacturing in the west on their new supply from China. The complaint is allowing their Chinese-made products to be available in the Chinese economy without their patent surcharge. That’s the deal they signed up for. I suppose the Commerce Department will argue any case if enough companies ask for it but this one looks like unmitigated greed and must detract from their arguments unless they are all like that.

    The matter of subsidisation also confuses me. Recently Noam Chomsky was recalling how fifty years ago American academies hosted the great electronic companies – Boeing, Raytheon and the rest. Government subsidised university research and gave it to those companies to exploit. More recently Chomsky noted the electronics firms have been replaced by pharmaceutical firms. Presumably the same dynamic is occurring – government funded research is being handed to private companies to exploit. How does that differ from what China does?

    Frankly it looks a bit dodgy to me. If someone on this blog said the west just does not want an enemy getting rich and evolving its own opinions I would be hard pressed to disagree. There must be an aspect of these talks that has totally escaped me.

    1. Yves Smith Post author

      Intellectual property is a ton more than technology transfer. It is also pirating of movies and music, using software without having a software license, and counterfeiting goods. This is happening to companies that have not set up business in China but are damaged in their home market, witness counterfeit Prada/Hermes/you name it being sold on eBay in the US and Europe.

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