FP6008 Capella Trade War Between USA and China Articles Discussion

Dear All,

here are two articles related to the trade war between USA and China. They are written by two different professors at Harvard. After reading them, please let us know three major points in each article you agree or disagree along with your reasoning. Also, give us your prediction on the future of this war.

thank you!

Article 1:

The Real Cost of Trump’s Tariffs

May 23, 2019 JEFFREY FRANKEL

Whereas winners tend to outnumber losers when trade is liberalized, raising tariffs normally has the opposite result. US President Donald Trump appears to have engineered a spectacular example of this: his trade war with China has hurt almost every segment of the US economy, and created very few winners.

WASHINGTON, DC – Earlier this month, US President Donald Trump suddenly revealed that a trade agreement between the United States and China was not imminent after all. On the contrary, on May 10, the Trump administration raised its previous 10% tariff on $200 billion worth of Chinese goods to 25%, and threatened to apply the same rate to the remaining $300 billion or so of US imports from China by late June. China then retaliated with reciprocal tariffs on $60 billion worth of US exports, effective June 1. Surprised stock markets fell in response, with the S&P 500 down 4% over the first week of the renewed trade war.

US trade policy is now a hot mess of conflicting goals. Given the current impasse in talks with China, and Trump’s general unpredictability, the inconsistencies of US trade policy – and their costs – are unlikely to go away soon.

For starters, US officials and some prominent economists defend the high US tariffs as a regrettable but temporary expedient, and a necessary means to a strategic end. On this view, the tariffs are a weapon that will enable Trump, the consummate dealmaker, to force concessions from China and America’s other trading partners.

Yet Trump looks and talks like someone who would be perfectly satisfied if the tariffs became permanent. He continues to insist that China is paying the cost of the tariffs, sending money to the US Treasury. Moreover, he seems unfazed by the possible long-term effects of a protracted trade war: decoupling of the Chinese and American economies, and a loss of gains from trade, including a dismantling of the supply chains on which so much industry in both countries depends.

At the same time, the Trump administration is demanding that China make it easier for American companies to set up operations in the country – in particular, by ensuring that US firms aren’t required to hand over technology or other intellectual property to local partners. But this seems inconsistent with Trump’s goal of increasing US net exports to China, which would presumably involve American firms producing at home rather than in China.4

The incoherence of Trump’s trade policies is even more worrying on closer inspection. If higher tariffs remain indefinitely – as now appears possible – the US and the global economy will be worse off.

Trump’s gleeful belief that China is helping to fund the US government via the tariffs is outlandish. A tariff is a tax, and it is US consumers and firms, not China, who are paying it. True, Chinese exporters might in theory have had to lower their prices if US tariffs had led to a sufficiently large drop in demand for their products. But two new studies by eminent economists using 2018 data find that Chinese exporters have not lowered their prices and that, as a result, the full extent of the price increase has been passed through to US households.

According to one estimate, if Trump goes ahead with his threat to extend the 25% tariff to all imports from China, the cost for a typical US household will be $300-$800 per year; another puts the additional costs as high as $2,200 per year. Moreover, this does not count the cost to US firms, workers, and farmers from lost exports – the result of Chinese retaliation and other effects, including appreciation of the dollar against the renminbi.

An extended tariff war would also result in a loss of gains from US-China trade. Economists have long said that the public can’t be expected to understand the principle of gains from trade without having been taught British economist David Ricardo’s principle of comparative advantage. This idea – which states that trade between two countries can be mutually beneficial even when one country can produce everything more cheaply than the other – was famously described by US economist Paul Samuelson as being both universally true and yet not obvious.

But in fact, one does not need a full grasp of the principle of comparative advantage to understand the basic idea of mutual gains from trade. If both the buyer and the seller voluntarily agree to the exchange, then they both gain. This assumes that they are each good judges of what they want – or at least better than the government is. This assumption is usually correct, with some exceptions (such as users’ opioid purchases).

To say that both countries gain overall from trade is not to claim that every citizen of each country benefits. Changes in trade or tariffs give rise to both winners and losers within each country. But whereas winners tend to outnumber losers when trade is liberalized, raising tariffs normally has the opposite result.

Trump appears to have engineered a spectacular example of this: his trade war with China has hurt almost every segment of the US economy, and created very few winners. The losers include not only consumers, but also firms and the workers they employ, from farmers losing their export markets to manufacturers forced to pay higher input costs. Even the US auto industry, which did not ask for Trump’s “protection,” is worse off overall because it has to pay more for imported steel and auto parts.

As a result, Trump has come close to accomplishing something seemingly impossible: tariffs that benefit almost no one. Protectionism is usually explained as the result of special interests wielding disproportionate power. Trump’s tariffs against Chinese goods don’t fit this theory. And a theory that does explain them may not exist.

Author: Jeffrey Frankel, Professor of Capital Formation and Growth at Harvard University, previously served as a member of President Bill Clinton’s Council of Economic Advisers. He is a research associate at the US National Bureau of Economic Research, where he is a member of the Business Cycle Dating Committee, the official US arbiter of recession and recovery.

source: https://www.project-syndicate.org/commentary/america-china-trump-tariffs-economic-cost-by-jeffrey-frankel-2019-05

Article 2:

There Is No Sino-American Trade War

Author: Martin Feldstein

| Jan. 29, 2019

CAMBRIDGE – The current conflict between the United States and China is not a trade war. Although the US has a large trade deficit with China, that is not the reason why it is imposing high tariffs on imports from China and threatening to increase them further after the end of the current 90-day truce on March 1. The purpose of those tariffs is to induce China to end its policy of stealing US technology.

The Chinese government refers to the conflict as a trade war because it hopes that buying large quantities of American products will lead the US to end its tariffs. The Chinese negotiators have recently offered to buy enough US products to reduce the trade deficit to zero by 2024. Tellingly, the US negotiators have rejected that as a way to end the dispute.

The US wants China to stop requiring American firms that seek to do business in China to have a Chinese partner and to share their technology with that partner. That policy is explicitly forbidden by World Trade Organization rules, which China has been obliged to respect since they joined the WTO in 2001. The Chinese deny that they are violating that rule, arguing that US firms are not being forced to share technology: they do so voluntarily in order to have access to the Chinese market and to Chinese production opportunities. But American firms regard China’s behavior as a form of extortion.

The US also wants China to stop using cyber espionage to steal technology and other industrial secrets from American companies. Chinese President Xi Jinping agreed to end such digital theft of US industrial technology after he met with President Barack Obama in 2015. Unfortunately, the agreement reached at the time was very narrow, referring only to theft by both governments. Although the agreement did lead to a temporary reduction in cyber theft of industrial technology, cyber-attacks on US companies, possibly carried out by Chinese state-owned industries and other sophisticated organizations, have increased again in recent years.

The Chinese use the stolen technology to compete with US firms in China and in other parts of the world. The US Trade Representative recently estimated that this technology theft is costing the US economy $225-600 billion per year. And the FBI has asserted that the China’s cyber theft of American technology is the “most severe” threat to US national security.

Likewise, a lengthy 142-page report on the US-China conflict by the US Chamber of Commerce and the American Chamber of Commerce in China emphasized the problem of technology theft. The report made no reference at all to the trade balance.

That, no doubt, is because the authors understand the basic economic fact that the overall US global trade imbalance is the result of economic conditions in the US – the excess of investment over savings. If the Chinese bought enough US goods to eliminate the bilateral imbalance, the US imbalance would merely shift to other countries, without reducing the overall imbalance.

The US tariffs are clearly hurting the Chinese economy. The Chinese stock market is down substantially, and the Chinese economy is growing more slowly. Annual real (inflation-adjusted) GDP growth in the fourth quarter of 2018 was down to just 4%. The Chinese authorities are making statements signaling their eagerness to conclude an agreement with the US in order to stop the economic slowdown and reverse the decline in the Chinese stock market. The White House also makes positive statements about the negotiation, because doing so appears to boost the US stock market. But the reality is that there is no progress yet in dealing with the fundamental problem of technology theft.

The US government has no desire to stop China’s economic growth or the growth of its high-tech industries. But stealing technology is wrong. It has gone on for too long and should not be allowed to continue.

The US is determined to stop it. If nothing is resolved by March 1, the US will raise the tariff on $200 billion of Chinese exports from 10% to 25%. That will hurt the Chinese economy further and cause the Chinese authorities to take the US demands more seriously – and to negotiate accordingly.

The Author: Martin Feldstein

Member of the Board, Belfer Center for Science and International Affairs

George F. Baker Professor of Economics at Harvard University

source: https://www.belfercenter.org/publication/there-no-sino-american-trade-war

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