Jack Ma: Trade war will hurt US

Chinese Billionaire Jack Ma, owner of Alibaba, has warned against trade wars in the past. In a recent op-ed, Ma argued that the US-China trade relationship is highly beneficial to both parties. Ma questioned whether the US will lose the opportunity to exploit the Chinese market due to its trade rhetoric.

Background

The United States and China have a robust framework of trade. The US-China trade relationship supports around 2.6 million Jobs in the United States. In 2015, China purchased $165 billion in goods and services from the United States. In 2016, China was the third largest market for US exports. China is also the US’s biggest overseas creditor after Japan. In 2017, China’s trade surplus with the United States widened to $347 billion.

Current US President Donald Trump has been vocally critic of China. He blames the country for the loss of jobs within the US. He has also often criticised their “very unfair and one-sided” trade relationship. President Trump said that US companies are forced to transfer intellectual properties if they want to do business in China, and that a trade investigation has been started regarding this issue. According to the New York Times, America loses almost $600 billion a year to intellectual-property theft, and China is a main suspect.

In recent months, experts have sounded the alarm about an impending trade war between US and China.  These fears solidified in March, when US President Donald Trump announced global import tariffs of 25% on steel and 10% on aluminium, and China promised retaliation.  Since then, US has notified Beijing of $60 billion in annual tariffs. Trump has proposed tariffs on 1,300 industrial and medical products (worth $50 million), speculated to target Beijing’s “Made in China 2025” policy. He has also reportedly asked the trade department to investigate additional tariffs worth $100 billion. Washington has complained to the WTO about protection of intellectual property.  

In retaliation to the steel tariffs, China has increased tariffs by up to 25% on 128 US products, including pork and wine. It also announced potential tariffs on 106 US goods, including soybeans, chemical, agricultural and transport goods. China is the largest export market for American soybeans, worth $14 billion annually and accounting for 65 % of US soybean exports.

Jack Ma

Jack Ma is the CEO of Alibaba and the richest man in Asia. His net worth is above $46.9 billion, and he is considered by many to be a political force to be reckoned with. His business, Alibaba Group Holding Limited is a Chinese e-commerce, retail and technology conglomerate founded in 1999 with Leng Lei.  Alibaba owns and operates an array of businesses around the world in numerous sectors. As of November 2017, Alibaba's market cap stood at US$486.27 billion. It is one of the top 10 most valuable companies in the world.

Ma has warned against trade wars before. In January, speaking at the World Economic Forum in Davos, Ma warned global leaders not to “use trade as a weapon”. “The world needs trade. If the trade stops, the wars start," he said.

Analysis

In an opinion piece published this week, Jack Ma warned that a trade war between the US and China would kill “jobs, opportunities, and hope.” His key argument was that the war would not benefit the US economy.

Ma expressed his belief that the trade deficit, Washington’s foremost complaint, hasn’t affected the American economy. He pointed out that unemployment was at 4.1%, a 17 year low, adding that “dollars earned from trade surpluses in China have been recycled to finance American borrowing, keeping US interest rates low.”

Ma stated that the US- China trade relationship has allowed both US and Chinese governments to achieve their respective goals. US has become “became a pre-eminent technology leader.” Meanwhile, China has been able to maintain the social contract between the communist party and the people, improving standards of living and increasing per capita GDP. Ma cited Apple as a “beneficiary of this symbiotic relationship.” Apple products are designed in California, components are manufactured in South Korea, and then assembled by Chinese workers; most of the profit returns to the US

Ma pointed out the changing nature of the Chinese economy, which he believes is turning from an exporter to a consumer. “Chinese citizens now have the wealth and income to pursue discretionary spending,” Ma stated, noting that China will soon import up to $8 trillion in goods. “Is America going to forfeit this opportunity?”

Ma argued that US protectionism would not improve American competitiveness. “Any country seeking to increase exports would do better to focus on developing good products and channels to access foreign markets rather than putting up trade barriers,” he stated.  Ma emphasised that a trade war would hurt small American businesses and farmers the most.  Others have made similar arguments. On March 19^th, the US Chamber of Commerce released a joint statement with other US trade associations urging Trump not to impose “sweeping tariffs”. “As we’re starting to see, tariffs could lead to a destructive trade war with serious consequences for US economic growth and job creation. The livelihood of America’s consumers, businesses, farmers, and ranchers are at risk if the administration proceeds with this plan,” the statement read.

Counterpoint

Responses to Ma’s article have largely pointed out that the Chinese economy is highly closed-off and protectionist itself. “Let's not pretend China is a bastion of laissez-faire capitalism,” Tim Culpan said, writing for Bloomberg. Culpan pointed out that China retained its numerous import tariffs, a number of which are higher than American tariffs, even after joining the WTO. Additionally, Culpan points out the non-tariff barriers to trade prevalent in the Chinese economy. China has numerous restrictions on foreign ownership in multiple industries and the Chinese economy is no stranger to protectionism.

Linda Yueh, a Fellow in Economics at Oxford, and Visiting Senior Fellow at LSE IDEAS has stated that a trade war could be averted by mutual decisions to open up markets, “particularly China’s.” Writing for the Guardian, she added that “opening up China would improve the US trade position,” adding that increasing US exports could be more beneficial than cutting imports. She noted that more competition may also improve Chinese growth prospects.

Assessment

Our assessment is that Washington’s current protectionist stance could limit its own ambitions. As stated previously, a trade war would harm not only US and China, but the entire global economy. If this rhetoric continues, it may affect the world GDP by 1-3 percentage points in the next few years, and could wear down multilateral and bilateral trade regulations that have governed global markets since the 1990s.

We believe that tit-for-tat protectionism is not a solution to the countries’ current economic problems. However, US concerns such as intellectual property rights and non-trade barriers are highly valid. Although Xi Jinping had recently promised to ease business restrictions in some industries, the Chinese economy remains protectionist. Presidents Jinping and Trump may be forced to reach a compromise that is amenable to both nations, to avoid disastrous consequences. Will they be able to amicably set aside their differences?