K. ARAVIND
This is article based on the response to last week’s article in this column on the Cold War and the Trade War. The Cold War three decades ago and the trade war we face today are very different.
Even as the United States and China fight over sanctions and trade wars for certain companies the economies of the two countries are interconnected. China holds the largest number of US-issued bonds. During the Cold War, such relations between the two countries were unimaginable. The trade war is not like the Cold War.
Companies in the U.S., Europe, Japan, Korea and the European Union are the beneficiaries of government- sponsored capitalism in China. The main reason why companies in the US and other countries rely on China is because they can produce at low cost, regardless of the many criteria they have to meet in their home country, such as labor law, wages, environmental protection, and pollution control. They get this benefit by setting up production units in China or importing production materials from there. Companies that set up manufacturing units can also gain a significant presence in the Chinese market. For example, Apple did not have a large market in China until the 2008 recession. But now China is the second largest market of iPhones after the US.
Companies have set up manufacturing units in China to reduce the cost of enforcing mandatory regulations due to the strict regulatory system in their own country where liberal democracy exists. But COVID-19 has led these companies to feel that there is something beyond financial gain. It is in the light of this recognition that US companies such as Apple are closing production units in China and Japan is providing financial assistance to those who bring manufacturing units back to the country. The strange admonition that if TikTok has to survive in the US it has to be sold to any US company and leave will only happen during the time of COVID.
Although US President Donald Trump started the trade war on the basis of some of his bizarre views, it is likely to remain even stronger if the Democrats come to power in the next election. The Democrats will be able to embrace some of the political variants that came after COVID in the trade war. If Joe Biden wins against Trump, the trade war is likely to intensify.
Warren Buffett, Bill Gates and Zuckerberg, the pro – Democrats’ corporate leaders, are demanding higher taxes. Although Trump’s corporate tax cuts have benefited his companies financially, corporate leaders have argued that the super-rich should be taxed more. Therefore, they will continue to support the Democrats in their emotional war with China, rather than for economic gain.
At the same time, the trade war is unlikely to turn into a Cold War that will soon sever ties between the Chinese and US economies. In the age of globalisation, it is not easy to sever trade ties completely. There are limits to sanctions and prohibitions. It would be a major setback for China’s economy if China, the “manufacturing hub”, began to reject the economic benefits of reducing production costs to companies in other parts of the world for non-economic reasons. “China is no longer the world’s factory,” a senior Apple official said, closing some of its units there. In the case of China, at least to some extent, “globalisation” will have an impact on the country’s economy.
