The global economy slowed down considerably in 2018 and to a large degree it was due to US tariffs on Chinese goods. The sentiment deteriorated in financial markets, especially towards the end of the year and it was translated to a fast decline in stock markets and crude Oil prices during the last three months of 2018. But the sentiment improved this year as the Chinese government introduced fiscal measure which seemed to be helping the economy and China and the US were heading towards a trade deal. But China backtracked on some important issues and Trump increased tariffs from 10% to 25%. China is still keeping its position and it has retaliated back at the US with tariffs on $60 billion US goods, but China is in a losing game here and it is even on the wrong side. Here’s why:
1. Intervention in the Yuan
The People’s Bank of China (PBOC) is owned by the Chinese government and the PBOC not only intervenes in the exchange rate, but it has pegged it to the USD. The peg is roughly between $6 and $7 and the PBOC has also intervened to keep this peg. The CNY manipulation as Donald Trump addressed to it, used to be a major issue until a year ago as the exchange rate approached the 7 level. Although right now this is not the hottest issue.
2. Intervention in the Economy
China has some of the biggest companies in the world, both in terms of revenue and the number of people they serve and employ. But these companies are also state owned, since China still remains a communist country, despite the open market to foreign companies. Some of these companies also operate globally. But they are also heavily subsidized from time to time from the Chinese government.
The subsidies make the products for these products cheaper, thus more competing in foreign markets. Donald Trump wants to initiate a new anti-dumping and countervailing duty probe which would tackle parts of this problem but wouldn’t eliminate it without the Chinese government participating in it, but China is a communist country, so this goes against it’s philosophy. As Chinese companies receive state fund, their products become more competitive than foreign companies and China is a huge market, which is getting bigger pretty fast.
3. Intellectual Property IP Theft
Intellectual property theft from China cost the US from around $250 billion to $600 billion annually. Intellectual property is usually stolen by cyber attacks from Chinese companies. That’s a big issue but I have heard personally that the Chinese military employs around 10,000 personnel to attack and steal trade secrets such as know-how and technology. I assume a lot of US military technology and other secrets are being targeted and stolen as well and this might actually be the big issue where the trade negotiations failed. China has been stealing IP since the 70s, hence the cheap knock-off toys during the Chinese toy boom in the “70s, “80s and “90 if the older people remember. But things have gone to another level in 2000s and 2010s as stakes grow and the IP being stolen becoming more advanced. The Huawei situation with the US banning the company and asking for the arrest of its CFO is because the us accuses Huawei for stealing 5G technology from the US.
3. Forced Technology Transfer
In fact, Huawei’s situation also exposes China’s government. Huawei is about to lead the 5G move if 5G becomes a thing, because we have heard from many sources that its wave field might be dangerous or harmful to humans. Anyway, all clues point to Huawei being part in forced technology transfer or theft. Foreign companies have been forced to share technology with Chinese partners since the 1980s as a required of American and other foreign companies as a condition to doing business on Chinese soil. This can’t go on forever. When China was not this huge monster that it now is, the US was tolerating it, but now things have gotten too serious with technology transfer and theft, so the US and Donald Trump is totally in their right to ask china to stop such practices.