Will United States plan to take on China be effective?

Mon May 20 2024
Mark Cooper (3159 articles)
Will United States plan to take on China be effective?

The new tariffs President Biden announced last week have minimal economic impact. Symbolically, they carry significant weight.

The United States has a very limited demand for electric vehicles, steel, and semiconductors, which happen to be the products affected by the tariffs imposed on China. However, by choosing to increase tariffs instead of removing them, which were initially imposed in 2018 by former President Donald Trump, it indicates that the separation of the Chinese and U.S. economies is moving towards a state that cannot be reversed.

Furthermore, the tariffs serve as a crucial component of a comprehensive economic strategy aimed at enhancing competitiveness against China.

This strategy is a well-balanced approach. One approach involves providing subsidies to develop a sustainable technology manufacturing industry, spanning from clean energy to semiconductors. Another concern is the imposition of tariffs on Chinese imports, which could undermine the progress made in these endeavors. Another factor to consider is the limitations placed on accessing funds, technology, and knowledge that could potentially enhance China’s competitiveness. The achievement of a fourth leg, a unified economic front with allies, is still pending.

When it comes to economic strategy, the U.S. has limited experience. China strategically charts its course towards economic dominance through its meticulously crafted five-year plans. Japan’s postwar economic rise was guided by its influential Ministry of International Trade and Industry.

The U.S. strategy lacks a formal designation or a specific location. This can be attributed to the long-standing caution towards industrial policy and the division of economic power among various branches of government. This includes different administrations and even factions within the same administration.

Truly, the strategy of the United States developed gradually. Since 2016, officials and alumni from the Obama administration, including Jake Sullivan, who is now Biden’s national security adviser, have raised doubts about the bipartisan consensus that supports free trade and engagement with China.

In 2017, Trump assumed office with a team focused on challenging the established norms in both the economy and national security. In that year, they officially ended their engagement and labeled China as a strategic competitor.

Trump’s initial execution, however, lacked proper planning and organization. He prioritized imposing his initial significant tariffs on allies rather than China, with the intention of safeguarding the steel and aluminum industries rather than focusing on technology. He supported a $10 billion Foxconn Technology liquid-crystal display factory in Wisconsin that never came to fruition. In a surprising move, he lifted the ban on the sale of sensitive technology to Chinese telecom supplier ZTE.

In 2019, Joe Biden, who had a keen understanding of economic matters, expressed his intention to rectify the “irresponsible tariff war” initiated by the previous administration. He proposed a course of action that would bring about a restoration of the previous state of affairs.

It did not occur. Internally, there was a division among Biden’s top advisers. Treasury Secretary Janet Yellen advocated for reduced tariffs and increased interaction with China. Trade Ambassador Katherine Tai expressed support for tariffs. Others prioritized climate cooperation and affordable clean-energy equipment. As tensions with China increased, such as due to a spy balloon incident, the obstacles to re-engagement also multiplied.

The strategy that has ultimately emerged is primarily credited to Sullivan, as stated by current and former administration officials. He views trade, domestic economic policy, and security as interconnected. According to sources, he enjoys a high level of trust from Biden.

However, the strategy also has a bipartisan heritage, as it builds upon initiatives that were initiated during the Trump administration. Last week’s tariffs were a direct result of a thorough investigation conducted by the Trump administration, which had previously imposed tariffs on China.

In 2020, prompted by officials from the Trump administration, Taiwan Semiconductor Manufacturing Co., the leading manufacturer of cutting-edge semiconductors, revealed its plans to construct a chip fabrication plant, or fab, in Arizona. At that time, a bill to subsidize such plants was introduced in the Senate with bipartisan support.

Driven by the efforts of Biden officials, that bill was ultimately passed into law in 2022. In recent months, the Commerce Department has been able to announce approximately $29 billion in subsidies to the world’s top chip makers.

They have included TSMC, who recently announced plans to expand their operations in Arizona by building three fabs instead of just one by 2030. If TSMC follows through, it is possible that its customers like Apple and Nvidia could eventually shift their chip design and manufacturing operations to the U.S. rather than Asia.

Biden’s extensive limitations on the sale of advanced chips and chip-making equipment to China mirror the restrictions previously implemented by Trump officials against Huawei Technologies.

Biden officials prefer not to link these restrictions, which are primarily focused on security threats, to their wider economic strategy. However, there is clearly a connection.

These restrictions provide a strong motivation for tech companies to direct their investments towards the U.S. or its allies rather than China. For instance, the White House is currently involved in an ongoing investigation regarding the security risks associated with “connected cars,” which involve the sharing of driver data with the manufacturer. There is a possibility that this could lead to a potential restriction on Chinese EVs in the U.S. market, regardless of whether they are manufactured in the U.S. or Mexico.

It appears that the United States has finally developed a plan for economic competition. The outcome is uncertain at this point.

It’s getting quite late, isn’t it? China’s influence in important markets has continued to expand since 2017. The world is preparing for a potential wave of inexpensive manufactured exports that could pose challenges for local producers.

As an economist would note, the share of global production for “legacy” chips, which are commonly used in cars, appliances, and other basic applications, has experienced significant growth. Specifically, this share has increased from 17% in 2015 to 31% in 2023. According to research firm Rhodium Group, it is projected to reach 39% by 2027.

In a recent announcement, Biden revealed that tariffs on these chips would increase from 25% to 50%. The intention behind this move is to potentially shift production away from China. However, those chips usually make their way into the U.S. as part of other products, unaffected by tariffs.

According to Jimmy Goodrich, senior adviser for strategic technology analysis to the Rand Corporation, China’s capacity expansion remains unaffected by tariffs due to its focus on self-sufficiency rather than profit.

The economic strategy has also been influenced by political factors. Similar to his predecessor, Biden has a strong focus on steel and recognizes its significance to swing states in the rust belt. Despite the abundance of domestic and allied alternatives to China, he decided to increase tariffs on the metal. He refrained from increasing tariffs on drones, which play an increasingly crucial role in national security, and upon which the U.S. heavily relies on China.

Ultimately, despite extensive discussions, the United States and its allies have encountered difficulties in establishing a cohesive strategy to effectively compete with China. Although the Biden administration decided to temporarily halt the tariffs imposed by Trump on European Union steel and aluminum, their attempt to completely eliminate these tariffs was unsuccessful. One of the reasons for this failure was the EU’s refusal to collaborate with the U.S. in addressing the issue of Chinese steel. In an effort to keep up with the U.S. and China in the electric vehicle market, the EU is actively preparing its own set of subsidies and tariffs.

If Trump were to be reelected and follow through on his promise to impose tariffs on all imports, including those from allies, it could exacerbate existing divisions. China is now experiencing a significant economic pushback from the West, which is a notable development. However, it should be noted that the West is not presenting a unified front in this regard, which may provide some comfort to China.

Mark Cooper

Mark Cooper

Mark Cooper is Political / Stock Market Correspondent. He has been covering Global Stock Markets for more than 6 years.