Lately, The department of agriculture had confirmed China’s purchase of meat and beans as promised on the earlier trade talk. Trump’s administration, exultant in its victory, may not realize there is a diminish effect on tariff pressure on China’s macro-economy. China is readjusting its economic structure to built more on innovation rather than investment-dependent growth, and more domestic need driven than count on international trade . Chinese has much lower standard of living (majority has low wage anyway), they can afford to be unemployed and get by low-level government living subsidies for some time. Also China’s reduced production will lead to lower needs/reliance for energy imports which is one of the main expenditure on China economy. This lower energy transaction trend eventually caused lower need for U.S. dollar, which further lead to decreased appetite in international market to purchase U.S. bond. U.S. has skyrocket debt and huge budget deficit, heavily rely on recycle of its bond on long term basis. But long term, there is going to be a day no body is willing to come to the rescue. So there is limited benefits United States can get from trade war to help solve its fundamental issue. Especially if U.S. consumer can not reduced their need for purchase, the increased tariff is eventually fall on U.S. consumers, and backfire on President Trump.
Although Trump had ordered American international corporation to immediately start looking for alternative manufacturing base to China, including bringing companies HOME and make products in the USA. There is limited effects for this policy:
- The policy does able to let American companies to move to other areas, but moving is very costly and takes time to resettle – All pose very heavy costs to U.S companies, increase challenges to their international competitiveness (at least increase cost to their products).
- Moving back to U.S is even harder since labor cost are much expensive back home, and after more than twenty years offshore, there is shortage in skill workers, absent of compatible condition back home, making high probability of failure for companies moving home.
- U.S. infrastructure is very outdated, not able to fulfill the need of large manufacturing facilities.
- U.S. in under investment for education of the labor force and its education system;
The major issue between U.S-China trade unbalance still is caused by imbalance of investment and consuming of these two regions. Chinese is over-invested, and Americans over-consumed. For the long term problem solving, both U.S. and China, the two economic locomotives of the world, need to increase their interest rate to promote saving and reduced stock market over-heat. The trade negotiation teams of the two countries need to get to an agreement for a schedule to appreciate Yuan overtime between the USD-Yuan exchange rate. There can be realistic difficulty for Chinese central bank to do so considering its own debt load. Maybe a mechanism can some how created so that China can issue bonds to U.S investors backed by its gold storage, and the proceeds from the bond should be limited to be used in areas that has immediately good return prospects and cash flow. The whole accounting system and debt grading evaluation books should be transparent to the investors. Meanwhile, Trump’s administration need to put in substantial effort to prepare for U.S. manufacturings’ base to gradually moving back. In short, an appreciated Chinese Yuan is the way to reduce trade imbalance.