New Shots Fired In US-China Trade War

Contrary to popular belief, the US does still have a manufacturing base. While manufacturing has declined from 27% in 1950 to its current level of 11.7% today, it remains a central pillar in US economic strength. For decades, the US manufacturing base has eroded due to several factors, from tax incentives for offshoring to the relaxation of import barriers. One of the remarkable moves taken by the Obama administration has been a series of steps to resolve this issue, in particular against the worlds second largest economy, China.

By comparison, China is a very import-unfriendly environment. From heavy tariffs to trade quotas, it is very difficult to bring goods into China. In addition, China locks its currency, known as the Yuan, against the US Dollar in a way that artificially lowers the cost of goods being exported from China while raising the cost of goods being imported to China.

Today China announced that it would be adjusting the Yuan to Dollar ratio, lowering the exchange rate by an additional 1.1%. This means goods that they export to the US now will be 1.1% cheaper while goods being imported into China will now be 1.1% more expensive. Even before the adjustment, currency exchange experts find that the Yuan is severely undervalued, by between 15 to 40%.

This is after earlier this month China imposed strict new tariffs on imported goods such as US manufactured automobiles which could range up to 80% of value. With the value already increased by up to 80% due to the Yuan value manipulation, this prices even the most affordable US automobile above the point at which any but the most élite within China can grasp. This combined with demand is why one Jeep Grand Cherokee recently sold for US $189,750.

Then there are severe trade quotas which restrict the amount of any particular good being imported or exported. Combine these factors together, the loss of manufacturing jobs to China is an inevitable result. Simply put, a good manufactured in the US cannot be sold easily in the world’s second largest economy, while a good built-in China can be sold to both the Chinese and US markets without issue.

Until these factors are addressed, we will continue to lose strength in manufacturing, and as Alexander Hamilton felt, an America which does not produce will fall into slavery of foreign powers.

However, Adam Smith says it best in “Wealth of Nations” when he says:

A nation of customers is fit only for a nation of shopkeepers