Breaking the Dragon

During his campaign in 2016, President Donald Trump accused the People’s Republic of China of being a trade cheat, alleging that they were guilty of such unfair practices as state-sponsored intellectual property theft, currency manipulation, forced technology transfer, and restricting US access to its market, while the US granted China nearly unlimited access to US markets. The United State Trade Representative estimates that China steals roughly $225 -$600 billion in intellectual property from the US each year.

These charges were the basis for the US-China trade war. President Trump began levying tariffs on Chinese imports to drive up their prices, which would have several positive effects for Americans: first, it would make American products more price competitive, increasing American purchases of American products. An increase in the purchase of American goods would increase American manufacturing, creating jobs. Next, tariffs would increase government revenue, as the tariffs would be paid to the US government, as opposed to the Chinese government.

The President’s Trade Policy Agenda states that the US will make decisions which benefit the US, including creating and saving jobs. This is what he meant when he said “America First” and what he promised during his first campaign, and this mantra has driven his policies since. He removed the US from the Transpacific Partnership (TPP) because he felt the terms were advantageous for the trading partners, not the US. This does not mean, as some would have you believe, that the US reduced its trade with those partners. The US continues to engage with the TPP members and the world, through bilateral trade agreements, which the US has always favored over multilateral. NAFTA was one of the few multinational trade agreements the US has entered and Trump has considered scrapping that one for the same reasons.

Some people misinterpret the US-China tariffs, saying they hurt Americans because America risks losing its $120 billion of exports to China. A loss in US exports has already negatively impacted the US agricultural sector, particularly soybeans and corn, as well as US exports of farm machinery. And while this is true, the maximum dollar amount – assuming all US exports to China ceased – is only $120 billion, whereas US tariffs already stand at $200-300 billion. Furthermore, restricting China’s access to the US and placing tariffs will force US companies out of China, decreasing Chinese IP theft and forced technology transfer. Which, according to the US Trade Representative, is costing the US $250-$600 billion per year.

Decisions of a US president are not, however, made strictly according to economics models. He should also consider the strategic implications of taking or not taking a particular decision. From a strategic standpoint, the tariffs will force US and foreign companies to leave China, which will decrease China’s exports and China’s revenues. It will cause some US companies to return to the US, which will create jobs and help to develop US industrial capacity. By curbing China’s IP theft and reducing imports of Chinese technology, Trump’s China policy should help to rejuvenate American innovation. Should Americans decide to continue to purchase Chinese products, in spite of the tariffs, this will increase government revenue.

Trump’s Human Rights Sanctions on China

While Hunter Biden cooperated with the Communist Party of China, did business with blacklisted entities, and helped fund military and weapons programs in the country which poses the greatest threat to the US and the free world, the Trump administration has been stepping up pressure on China though human rights sanctions.

After Beijing passed the National Security Law (NSL) in Hong Kong, Secretary of State Mike Pompeo conducted an investigation, at President Trump’s direction, and determined that the law effectively ended the special rights and freedoms of the Separately Administered Region (SAR) and that Hong Kong should now be treated as China. This has massive implications for the communist government. First, it prevents Beijing from purchasing dual-use or military technology through Hong Kong. It also subjects Hong Kong exports to the same tariffs as Chinese exports.

Those individuals and entities found guilty of ending Hong Kong’s freedoms will be subject to US sanctions, including having their US assets frozen. Banks in Hong Kong, including foreign banks – even of US ally nations – will be subject to sanctions if they conduct business with sanctioned individuals. They will no longer be able to get loans from US banks nor participate in foreign-currency offers within the US. Additionally, the executives of banks subject to sanctions would be banned from receiving visas to enter the US. Some foreign banks in Hong Kong have already begun auditing their clients to see if they are potentially subject to US sanctions. The trade war is working.

The communist government of China fuels its expansion with US dollars. Now, they may no longer be able to obtain dollars through Hong Kong and have been forced to increased their holdings of US dollar debt. A combination of the National Security Law and US sanctions could trigger an exodus of foreign banks, ending Hong Kong’s role as a global financial sector and dramatically reducing Beijing’s access to foreign investment and US dollars. Hong Kong accounted for roughly 70% of China’s international funding. Hong Kong’s foreign direct investment (FDI) has already dropped by 48%. The Hong Kong dollar is currently pegged to the US dollar, making it easily convertible, but the negative financial impact of the Trump sanctions may cause the Hong Kong dollar to have to unpeg, becoming just another weak currency with limited international circulation.

President Trump has also signed the Uyghur Human Rights Act Into Law. This law would bring similar sanctions against entities who perpetrated or supported human rights abuses against the Uighur ethnic minority in China’s Xinjiang Uighur Autonomous Region. The US has already sanctioned a number of Chinese companies under this law. All told, the Trump tariffs and sanctions could cost China trillions of US dollars, particularly if it drives foreign banks out of Hong Kong. Additionally, there are another 60 bills in Congress to sanction China.

Restricting Chinese Investment

Donald Trump is restricting the Chinese government’s access to US capital markets. The total value of the Chinese company stocks traded in the US is approximately $1 trillion with around $8 billion being traded each day. According to the US-China Economic and Security Review Commission, at least 11 Chinese companies listed on major US exchanges were 30% or more state-owned. Other US-listed companies are not state-owned, but the Chinese government or a government owned entity holds significant, controlling interest.

Protecting Investors through Audit Oversight (PCAOB) which oversees the audits of US-listed firms reports that it is blocked from reviewing the audits of 200 China or Hong Kong based firms. The House Financial Services Committee reported that under previous administrations, “Chinese companies have disregarded US reporting standards, misleading our investors.” The Holding Foreign Companies Accountable Act would subject Chinese firms to the same transparency rules as all other US-listed firms or face delisting. The act has passed the Republican-controlled Senate and is expected to be signed into law by President Trump, if the Democrat-controlled House passes it.

Trump’s tariffs, sanctions and delisting are depriving Beijing of money they need to buy weapons and to fund the Belt and Road Initiative (BRI). Currently, China can count on 60 votes in the UN for any violations of human rights or international laws they break around the world, as the BRI countries will support them. But as Trump is tearing down the Chinese economy, one brick at a time, China will no longer be able to write checks to its “friends.” Slowly, many countries are shifting back to a US-led alliance. Even European nations are considering placing sanctions on China and restricting economic engagement with China. China is breaking economically and the last thing they want is four more years of Trump. If Joe Biden ends the tariffs and renegotiates a more pleasant relationship with China, China’s global expansion will continue, unfettered. If Trump’s policies remain in effect for another year, we will be many steps closer to breaking the dragon.