A Lose­Lose Move

EDITOR’S NOTE U.S. Trade Representative Robert Lighthizer on August 18 formally launched a Section 301 investigation into alleged intellectual property practices by China under a rarely used 1974 trade law, triggering concerns that Washington may unilaterally impose restrictions that would eventually hurt both countries. Dagong Credit Research Institute Co., a subsidiary of Dagong Global Credit Rating Group, China’s largest credit rating agency, released on August 24 a report on the negative effects of trade frictions caused by the U.S. move. An edited version follows

The Section 301 investigation will inevita- bly cause trade friction between China and the United States, which can lead to several negative consequences such as dam- age to the United States’ wealth-creation and debt-paying ability.

In the fi rst place, trade friction will harm the output of U.S. high value-added products and result in shrinkage of its foreign trade. It may even accelerate the frequency of inter- est rate rises of the U.S. dollar, hindering U.S. exports and then its economic growth.

Surely, U.S. trade restrictions can block China’s exports. However, the international division of labor and fragmentation of pro- duction have already become a new and inevitable trend. In this arrangement, China is currently at the low end of global supply chains, while most of the added value is still obtained by the United States and other de- veloped countries. As a result, trade barriers would only do more harm to the interests of upstream suppliers and downstream distributors, damaging the production and export of high value-added products from the United States.

Trade confl ict will also hamper U.S. eco- nomic and trade exchanges with China, its largest trading partner. In the meantime, as China has been speeding up efforts in en- gaging in economic cooperation with other BRICS countries and promoting the Regional Comprehensive Economic Partnership and the Belt and Road Initiative, its markets will open wider to relevant economies. Therefore, deteriorating trade relations between China and the U.S. will diminish U.S. exports to China and China’s direct investment in the United States.

In the meantime, U.S. monetary policy has to make changes along with the trade friction, curbing its exports further. The per unit labor costs of China’s manufacturing industry are a lot lower than those of the United States. Even if the U.S. restricts cer- tain imports from China, its own labor force might lack the willingness to produce those products, unless Washington provides tax in- centives and subsidies. Limiting inexpensive products from China would lead to rises in local consumer prices, jacking up U.S. infl a- tion. Under these circumstances, the Federal Reserve will unavoidably raise interest rates of the U.S. currency, which is not good news for U.S. exports.

In the past three decades, the United States has developed the habit of deficit spending. There are deficits in both gov- ernment budgets and foreign trade. The functioning of the country depends largely on foreign debt. The constant pressure from not making ends meet has sucked the country into a debt trap. Although it has transferred some risks to creditor nations by taking advantage of the dollar’s status as an international reserve currency, its weak repayment ability is not getting any better. Trade friction will pose a threat to the U.S. ability to create wealth and pay back debt. A large amount of debt is a stumbling block for economic development. In 2016, the total debt of the U.S. accounted for 252.8 percent of its GDP. The federal government debt is high and keeps going up. There’s not much maneuver- ing room in this respect. The pattern of using debt to drive up growth is unsustainable. What’s more, a weaker ability to create wealth caused by trade frictions will make it hard to roll over debt, which means it’s getting harder to repay debt with new loans.