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42 China is quickly making up ground, but this could run into political push back. Figure 3.5 shows the disparity. However, this can hardly be exploited since the government can do little to require the withdrawing of foreign assets short of creating massive disincentives which make it costly to hold foreign investments – such a move would be a debilitating tax on multinational corporations – or the US government could pass legislation requiring the withdraw of large portions of the Chinese economy. Neither would be a very efficient use of economic power since the absolute costs would almost certainly exceed the relative gains. When the absolute loses outweigh the relative gains as heavily as they do in this case there is no other choice but to conclude that the bilateral relationship is indicative of an interdependent union.
In this sub-section, it becomes clear that neither China nor the United States can gainfully utilize finance as a tool for economic coercion. Since this research focuses on cases of attempted economic coercion as a means to test theoretical potential versus practical application of
economic coercion, it is unnecessary to pick a case study for financial power. However, it provides a perfect example of the level of economic interdependence that the United States and China enjoy and what is at risk in the event of an economic or political fall-out.
3.3 Trade
Any conversation regarding the United States-Chinese economic relationship invariably leads to the trade deficit the United States has experienced at the hands of the Chinese economy.
The United States has run a deficit every year since 1985. China has also enjoyed this trade surplus at ever increasing amounts totaling a net gain of over 250 billion dollars last year. Figure 3.6 shows the incredible hole the United States has dug for itself. There is little question that this has been the avenue through which China has achieved such high economic growth and therefore
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43 found new international influence and their gains in hard power. Furthermore, this feeds off of and is fed by their vast currency holdings; however, is it on its own a vulnerability or a tool for economic coercion?
It seems obvious that trade would be an area of favor for China; however, the topic is much more contentious than it would appear. There is much more research on China’s use of its massive currency and debt holdings as a tool of economic coercion than there is on the potential use of trade sanctions against the United States. This is because in a global economy
characterized by interconnectedness bilateral trade wars benefit the importer not always the exporter. This goes double for a country that can garner the support of the international
community or is a highly desired market for goods, as the United States has shown itself to be.
Figure 3.6 US-China Balance of Trade. United States Census Bureau 2016.
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44 As Kirshner explains, “the creation of a dependent trade relationship often involves the fostering of bilateralism as opposed to multilateralism. This means that increases in multilateral relations could actually undermine trade power under some circumstances” (Kirshner, 1995, p. 24).
While it can certainly be said that the United States has proven itself to be dependent on cheap Chinese imports, in typical co-dependent fashion, the Chinese economy is likewise
dependent on US consumers high demand for their goods. When confronted with this reality that both countries benefit significantly from their bilateral trade agreements many jump to the
conclusion that there is no gain, nor definitive winner, to be had from a trade war breaking out between the two countries. This does not follow the economic realities between the two countries, instead it is a relationship that while co-dependent is rife with conflict and possibly volatility.
Roach argues that there have been two mirror but opposite stories of globalization at play in the bilateral relationship. He posits that
Americans have been squeezed as workers but have benefited as consumers. The opposite is true for the Chinese: They have benefited as workers but are squeezed as consumers. The mirror images of codependency couldn’t be sharper. Second-round impacts however, could be very different. Neither globalization nor codependency is static. As China and the United States face up to the rebalancing agendas, their roles in a globalized world will change. (Roach, 2014, p. 107)
Changing roles in the greater geopolitical landscape can be a volatile time, and there is little reason to claim that a power transition between the United States and China would be much different (Friedberg, 2011). Therefore, the question becomes: in the event of that economic
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45 tensions boiling over who is relatively more dependent on whom and who is in the better
position to exploit the vulnerabilities? The United States has three aspects that work to their benefit: First, the sheer size of their economy; Second, their market is the most sought after for cheap products; Third, they benefit from their position as the central player and architect of a world trade system that goes back to World War II.
Figures on trade statistics need to take into consideration the GDP of their respective countries to give a better understanding of what’s at stake for the two countries. Reliance on foreign goods is a two-way street, and the successful use of economic coercion must take into account the United States home economy and the goods from the outside that it requires to maintain current economic output. Figure 3.7 further illustrates the trade relationship and the shared dependence.
Figure 3.6 US-China trade as percent of GDP. United States Census Bureau 2016.
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46
The United States is still the largest economy in the world, and as such the trade deficit with China – while large – represents up only a relatively small fraction of their overall GDP.
China’s economy, while still large, stands to lose slightly more as a percentage GDP growth.
According to Kirshner, “States that are large enough to have a high degree of absolute trade but a low trade/GNP ratio are the best situated in the arena of trade power, because they are at once powerful and yet insulated”(Kirshner, 1995, p. 22). This is certainly indicative of the United States position, whereas, China’s economy is still massive, their high population combined with their export-trade driven economic growth make for vulnerabilities to the use of trade as a tool of economic coercion. Having said that their reliance is clearly dropping, as figure 3.6 shows especially after 2006.
The United States also enjoys the advantage of being a highly sought after market for trade in goods. Since the United States has grown as an economy to specialize in services rather than manufacturing it has grown accustomed to acquiring most goods by importation. China is the most recent beneficiary of that convention. However, there is an inherent asymmetry at play.
The United States requires the goods that China provides to continue their consumption led growth pattern, but they do not require that China is the provider; contrariwise, China would have a difficult time filling the hole left in the United States restricted Chinese imports.
Furthermore, while China produces and trades goods to the United States they are predominantly cheap unskilled-labor intensive products that can be produced elsewhere. While this would most likely lead to higher prices, the United States would be able to continue near their current rate of economic growth. Instead, the goods that the United States provides to China are more finite in their origins, for example United States agricultural products would have the potential to more
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47 than hurt GDP growth they could significantly increase prices of staples such as chicken,
soybeans, corn, and pork (Bradsher, 2016).
Lastly, The United States still benefits largely from their central position as architect of the post-World War economic system. The United States list of benefits it enjoys from the system it helped create include having a heavy hand in the writing of the rule required for ascension into the WTO and its trade litigation mechanisms. Being central to the drafting of the system and allocating resources to its proper utilization mean that the United States have a
“disparity in the power resources” (Besson & Mehdi, 2004). As well as being the world’s primary reserve currency, they are also the largest shareholder of the World Bank and have the most votes in the IMF. According to Malawer, “The U.S. has been the most active in the WTO’s dispute resolution system. The focus of the U.S. has increasingly been on china, and Chinese litigation has been primarily focused on the U.S. Further, the pace of WTO litigation among all countries has picked up” (Malawer, 2014). However, the United States wins far more than they lose when they bring the cases as the complainant.
These three advantages lead to the conclusion that the United States holds relative leverage in the utilization of trade as a tool of economic coercion. However, trade is not as free as monetary power in its usage, trade is a very public form of economic coercion and therefore will come with higher risk of domestic feedback as well as potential condemnation or loss of face with the international community. Although the United States has been allowed greater freedom in their use of trade sanctions they are not above ridicule and each new constraint on the liberalization of trade has consequences for the world economy (Leonard, 2016).
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48 Furthermore, trade is highly susceptive to the paradoxical relationship in which agent countries will be more likely to take coercive action against their non-ally counterparts, but much less likely to win any substantial concessions. Also, because of the expectation of further and potentially escalating conflicts economic coercive action will probably only be for limited objectives and using constraint. For these reasons it is prudent to pick a case study to test the validity of the United States leverage in trade. If valid the case study can also shed light on what would be the necessary condition for economic concessions to be achieved. In light of this, the case study to be explored will focus on the “Public Law 112-99” signed in 2012, which both allowed for the placement of countervailing duties on Chinese goods such as solar panels, steel products, and tires (Miles, 2014) which the United States claims gain an unfair advantage from their producers situation as a State Owned Enterprise. Since these are products that have been subject to trade disputes as well as have been adjudicated in the past, it is a good study of the sanctions paradox and the perpetuation of trade conflicts. Therefore, will provide the
opportunity to assess when concessions are made and for what reasons overcoming the sanctions paradox, as well as, providing an opportunity for predictions to be made.
From the facts and figures in this subsection it becomes apparent that the United States has theoretical economic coercive potential in trade. However, given the large level of
interdependence characteristic of the Chinese-United States economic relationship, and the inherent difficulties in utilizing trade as an effective tool to coerce foreign powers this research proposes two hypothesizes that can be used to test the United States true economic coercive capabilities versus their theoretical potential outlined above:
Hypothesis one: The United States cannot use trade as an effective means to influence economic decisions in China.
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49 Hypothesis two: The United States can use trade barriers to signal displeasure with Chinese policies showing China’s policy as contrary to the global norms.
These hypothesizes aim to reflect why the United States would initiate attempts to use trade as a tool of economic coercion while acknowledging the difficulties in doing so. In order to uphold or deny these hypothesizes this subsection proposes following the passing of Public Law 112-99 and the subsequent WTO dispute resolution procedures.