International Trade
The Trump Administration has been restructuring the world’s political economy in a fundamental way. It is looking at rebalancing supply and demand, with the U.S. increasing structural supply and China and other trading partners raising structural demand. The Administration is seeking to establish a zero-tariff international trading system within a sovereign and reliable supply chain as an end goal. It is using tariffs as leverage to force other countries to beat a path towards real free trade, with access to the U.S. consumer market as a privilege instead of something taken for granted. Since most countries have tariffs on U.S. products and services, some of them excruciatingly high, the realignment will be politically fraught for them.
As an open economy, the impact of any trading rearrangement will have material impact on Australia, for different sectors of the economy. Those claiming that the U.S. trade agenda has no theoretical underpinning are still viewing the world from the old post-World War 2 paradigm. The senses that they wish the U.S. government would return to can be considered nonsenses in today’s context.
Trade Theory
The foundation for free trade is the comparative advantage principle. Assuming there are 2 countries, A and B, each producing the same 2 goods, chair and bicycle, both countries can gain from trade even if one country can produce both goods more efficiently than the other. The default benefit of trading comes from the relative efficiency between the countries in producing the goods. If the opportunity cost of producing one good is different between the countries, they will both gain from trading.
Eg, country A can produce 4 chairs and 20 bicycles per year given its domestic resources endowment. To produce 1 extra chair, it would have to give up 5 bikes (domestic goods trade-off ratio of 20/4).
Country B can do 3 chairs and 6 bikes (domestic trade-off ratio of 6/3).
If the two countries engage in trade, and A gives B 3 bikes in exchange for 1 chair from B, A will end up with 5 chairs and 17 bikes.
B will end up with 2 chairs and 9 bikes.
Without trade, for A to gain an extra chair, it would have to give up 5 bikes so would end up with 5 chairs and only 15 bikes.
Without trade, B would have to give up 1.5 chairs to get an extra 3 bikes, so would end up with only 1.5 chairs and 9 bikes.
By trading, A gains 2 extra bikes and B gains 0.5 chair for their desired goods mix. Both minimise the potential loss in gaining what they want more of.
This example applies to multiple countries with multiple goods and services. Trade tariffs do cause a net loss to both seller and buyer countries. They add to the price the buyer has to pay and/or cut the margin to the seller and therefore reduce the quantity of goods traded.
The tariff component of a price tends to be shared between the domestic buyer and foreign seller depending on how responsive each is to the price rise or margin cut – the price elasticity of demand and of supply of the target goods. The effect will cause a fall in demand and/or supply quantity regardless of who bears the tariff. This creates a deadweight loss to both seller and buyer economies because without the higher price or lower margin, there would be more buyers and sellers willing to trade. The tariff is received by the domestic government but on a smaller trade volume.
Most commentators criticised the U.S. government on this basis. And this is where they ended and Trump began.
Value System
Comparative advantage works only for same-value system participants at any point in time. As soon as we bring in the dynamic elements of trade, things become less benign. Remember the global supply chain disruptions and national security exposure during the Covid-19 lockdowns? From the U.S.’s viewpoint, if a participant like China cheats and steals IP and engages in anti-competitive conduct, then the trading system is not free and the theoretical net welfare gain for the U.S. does not exist. For the U.S., China’s conduct in international trade is one of the rare topics that command bipartisan agreement in Washington. Over 40 years, since the U.S. invited China to participate in the West’s trading system, it has given China Most Favoured Nation status under the General Agreement on Tariffs and Trade, sponsored China to join the World Trade Organisation in 2001, provided China with opportunities for millions of students and research personnel to come to the U.S. to learn and transfer skills and capital to fast-track China’s development. But in DC’s view, China has abused U.S. goodwill by:
blocking U.S. and generally Western access to the China market (Western social media and banking being examples).
allowing foreign companies to establish presence in China only if they registered their IP with the Chinese government, which enabled state owned enterprises or crony companies to copy or reverse-engineer the foreign products.
applying significant tariffs and other trade barriers such as quotas and travel restrictions on foreign businesses.
making regulatory compliance almost impossible for foreign competitors of Chinese companies to operate freely and fairly in China while Chinese companies were accorded favoured treatment in financial reporting when listing on U.S. stock exchanges.
pegging the currency to the U.S. dollar instead of allowing it to float to reflect the relative strength of trade between the 2 countries (if the yuan is artificially kept low, it makes China-produced goods artificially cheaper than otherwise, causing supply / demand imbalances and leading to excessive trade surpluses for China and deficits for the U.S.).
intensifying aggressive behaviour by engaging in military intimidation and threats towards neighbouring countries.
threatening to monopolise world markets via Made in China 2025 for critical materiel after cornering them through state subsidies and anti-competitive conduct.
installing malware and other spying devices inside China-made electronic products sold to the U.S. / world markets.
flagrantly engage in national security impactful conduct such as spy balloons over the U.S., setting up biolabs in the country and smuggling pathogens into the U.S. with capacity to disrupt the country's food supplies.
using the foreign reserves built on the back of U.S. / Western trade generosity to amass a military aimed directly at rivalling the U.S., along the way expressing clear intent to push the U.S. out of the Indo-Pacific region.
expanding a global infrastructure network based on debt trap diplomacy in which China bribed foreign governments to take on China debt for large scale projects that they would have little prospect of paying back, leading to forfeiture of control of such assets.
rushing head-long into a superpower adversarial contest, claiming annexation of global commons like the SEAS, challenging the U.S. for trespassing in international waters despite being found by the international court in The Hague of illegally occupying territory within the Philippines’ exclusive economic zone.
Conducting transnational aggression campaigns against civilians in other countries with complete disregard for diplomatic relations or civil protocols.
While international conventions are disputed by various parties, it’s China’s winner-takes-all geopolitical dimension that puts it squarely in the crosshair of the U.S. government. There would not have been a Baidu if the CCP hadn’t indirectly blocked entry of Google in 2010. Fear of sharing propaganda power with foreigners dovetailed with state protection of local digital communication, which in turn protected local digital banking and workings of the capital market. It was China’s prerogative to block its market to build its propaganda machine, but it cannot complain when other countries do the same to Chinese companies. China maintains a comprehensive internet censorship system, commonly known as the “Great Firewall,” which blocks access to most major Western social media platforms, including Facebook, Twitter (now X), Instagram, YouTube, and TikTok’s international version. These platforms are not permitted to operate within China without complying with stringent local data localisation, content moderation, and surveillance requirements that would effectively require them to censor content in line with Chinese government directives. As a result, Western companies have largely chosen not to enter the market or have been effectively barred, preventing them from operating freely or on equal regulatory footing with domestic platforms like WeChat (Tencent), Weibo, or Douyin (TikTok’s Chinese version). Local platforms must adhere to China’s cybersecurity laws, including real-time content removal for sensitive topics, but they benefit from government support and unrestricted access within the country. This disparity ensures that foreign social media cannot compete directly, as users rely on VPNs (which are also increasingly restricted) for access, limiting their scale and functionality.
While foreign banks are not outright blocked from operating in China, they face significant regulatory barriers that prevent them from functioning with the same freedom or under identical conditions as domestic banks. Under the 2006 Regulations on the Administration of Foreign-Funded Banks (updated in subsequent reforms), foreign banks must obtain licenses from the China Banking and Insurance Regulatory Commission (CBIRC), meet high capital requirements (RMB100 million minimum), and often operate as branches or joint ventures rather than fully independent entities. Key restrictions include:
Business Scope Limitations: Foreign branches are prohibited from certain activities, such as retail banking for local currency (RMB) services in many areas and face geographic and client restrictions (limited to corporate clients initially).
Data and Compliance Hurdles: Strict rules on data localisation prevent the transfer of Chinese-sourced information abroad without approval, and foreign banks must comply with draconian anti-money laundering and cybersecurity standards that exceed those for locals in practice.
Ownership Caps: Foreign ownership in banks is limited to 20% for a single investor and 25% aggregate, far stricter than for domestic institutions, making full control rare.
Reforms since 2019 (eg, easing branch approvals and RMB business access) have allowed some parity in pilot zones like Shanghai but foreign banks still hold only 1-2% of total assets, compared to state-dominated local giants like ICBC. This creates an uneven playing field, where domestic banks enjoy implicit government backing, lower compliance burdens, and broader market access, effectively curtailing foreign banks’ ability to operate on equal terms.
China’s economy is an “attack” economy, it doesn’t trade, it exports. It absorbs industrial inputs (rather than imports products and services for its citizens), what needs to be sucked in to use as commodities, learn and build and then once ready Beijing will throw the spike strips to puncture foreign businesses to get them to quit China “voluntarily”. It might take 2 years or 20 years – you can make money initially and that’s the honey trap period – but the day will come when tech transfer or tech theft is done and you are shown the door. Looking at China’s economy’s bottom half, a competitive market, and forgetting the upper monolithic half, is what has buried many a foreign business lured to the “billion+” consumer market.
The asymmetric nature of China’s relationship with the world ensures that there cannot be free trade with it. This is not an economic decision but an ideological one. The mega-cult that sits atop the centripetal structure doesn’t deal with outsiders well. People live a double life, the normal private and the abnormal public. Public life is so distorted by indoctrination that people just accept the government’s demands, whatever they are, and try to ignore them as best they can while conducting their private lives. When it comes to international trade, the best approach is as “attack-full” as the CCP accords you. It will respect you for it. There is therefore nothing wrong with the West giving Beijing a list of things it will do and things it won’t do and park the principles of classical free trade aside. Those principles are for same-value counterparties. Trump’s handling of China related issues is correct. If Western social media cannot operate in China under benign and fair regulations, there is no reason for the West to accord Chinese companies any “fair” treatment. Demand for Tik Tok to be sold to a Western buyer is rather generous, as it will continue to operate normally in the U.S. under uniform U.S. law, hence its sale value is fair value, not under duress like Western businesses that have been squeezed out of China.
TikTok is owned by ByteDance, a Beijing-based Chinese technology company founded in 2012 by Zhang Yiming and others. ByteDance’s ownership structure includes its founders, Chinese investors, global investors (such as U.S.-based Sequoia Capital and General Atlantic), and employees, with institutional investors holding about 60% of the stake. Tencent, another Chinese tech giant (best known for WeChat), is a minority investor in ByteDance but does not hold a majority stake or exert control over TikTok’s operations. Tik Tok’s U.S. operations will transfer to a new joint venture with majority American ownership (around 80%), led by investors including Oracle, Silver Lake, and the Abu Dhabi-based MGX investment fund (with significant U.S. ties through partnerships). Oracle will handle data security, cloud services, and oversight of the algorithm. Other potential participants mentioned in reports include Rupert Murdoch’s media interests. The new U.S. entity is valued at approximately USD14 billion – below TikTok’s overall estimated worth of USD30-40 billion that includes operations in other countries that are not part of the sale – global Tik Tok will remain under ByteDance, the latter will be retaining a minority stake of less than 20% in Tik Tok U.S. to comply with U.S. law. The core recommendation algorithm will be licensed to the new company, retrained solely on U.S. user data, and controlled independently by the U.S. entity (with Oracle auditing it), severing operational ties to ByteDance. U.S. users won’t need to download a new app, and the platform will continue operating seamlessly. It’s a neat deal.
It is rather incomprehensible that Western governments and business communities haven’t done this before and instead accepted China’s ultra-mercantilist dealings for two-three decades on a one-way relationship. China’s tech companies should not be allowed to access any of the West’s markets, through any indirect or covert associated entities unless they can prove that they are not subject to China’s national security law. Western citizens’ data that is kept by the CCP represents gross negligence on the part of Western government. Expanding the fix to the distorted trading regime that the West has been operating under, a wholesale revamp of the WTO’s management and monitoring functions is well overdue. Unless and until the WTO is reformed, high tariffs on breaching counterparties should apply or sectoral decoupling might be the only choice. This will provide incentives for WTO members to work hard towards reforming international trade as it should be.
The other elephant in the room that should be front and centre in WTO reform is cyber-warfare and intellectual property theft. This Warm War engagement has been around for so long and it’s numbed people to the seriousness of the offence. It’s been reported periodically to the U.S. Congress without any effective response from lawmakers or the Executive. In the IP Commission Report – The Theft to American Intellectual Property: Reassessment of the Challenge and United States Policy, and its Update Report of 2023, the Commission writes,
“…IP theft pervades international trade in goods and services due to lack of legal enforcement and national industrial policies that encourage IP theft by public, quasi-private, and private entities. While some indicators show that the problem may have improved marginally, the theft of IP remains a grave threat to the United States. Since 2013, at the release of the IP Commission Report, U.S. policy mechanisms have been markedly enhanced but gone largely unused. We estimate that the annual cost to the U.S. economy continues to exceed $225 billion in counterfeit goods, pirated software, and theft of trade secrets and could be as high as $600 billion. It is important to note that both the low- and high-end figures do not incorporate the full cost of patent infringement – an area sorely in need of greater research. We have found no evidence that casts doubt on the estimate provided by the Office of the Director of National Intelligence in November 2015 that economic espionage through hacking costs $400 billion per year. At this rate, the United States has suffered over $1.2 trillion in economic damage since the publication of the original IP Commission Report more than three years ago…”
It continues,
“…Apart from the economic costs of IP theft are the political costs. Allowing persistent state-backed IP theft to continue represents the erosion of the norms between countries that buttress the international order. The United States has chosen to uphold these norms for generations and continues to uphold them when they are threatened in other domains. It should not give up on leading toward a code of conduct in the cyber domain or on addressing the issue of IP theft. Such leadership requires that the United States enforce its own laws.
The commissioners were discouraged by the Obama administration’s inaction on IP theft and cyber-espionage. Congress has implemented several of the recommendations from our 2013 report, namely Section 1637 of the 2015 NDAA and the Defence Trade Secrets Act of 2016. Although the president took steps to bring his emergency economic powers to bear on cyber-enabled IP theft, the Obama administration failed to bring any cases against the perpetrators of cybercrime or IP theft.
The U.S. government has the capability and resources to address this problem. President Donald Trump should make IP theft a core issue in the early months of his administration. It is perhaps the single best way to correct the problems in the Sino-U.S. relationship that he highlighted during his campaign. To that end, several of this Commission’s recommendations (outlined in the appendix) remain ripe for implementation, and we hope that the new Congress and administration will examine them early in 2017. If the makeup of this Commission is any suggestion, there exists broad bipartisan support for addressing IP theft and safeguarding the competitive advantages of U.S. firms, entrepreneurs, and workers…”
In theory, periodic trade deficits are not an issue, since they are the other side of the same Balance of Payments coin. Offsetting the trade balance is the capital balance. A country running a trade deficit must run a capital balance surplus. Exporters to the U.S. receive USD payments and these count as capital export by the U.S. Only high credit rated countries can run trade deficits continuously like the U.S. has done. Exporters to the U.S. can put USD income into U.S. assets, listed companies, properties or U.S. Treasury papers, or they can bring USD home to invest in further production capacity for more exports. As long as buyers and sellers (importers and exporters) are consenting adults in the free market, there should be no problems. But over time, trade deficits become unsustainable due to the offsetting capital flows acting as claims on the deficit-country’s sovereignty. Such claims by same-value friendly nations may be acceptable to a large degree. If by an adversary, it will not be for reasons of national security. USD and other foreign currency income, placed in passive assets or held in cash, and not yet used for specific economic activities, accumulate as foreign reserves for the exporting countries. China holds the largest foreign reserves in the world, at over USD3 trillion, of which one-third was until recently held in U.S. Treasury Bills and Bonds. It has been offloading a portion of these holdings due to the trade and tech war.
A large part of these reserves has been used to help modernise the People’s Liberation Army (PLA), transforming a once-outdated force into a modern military, remodelled on the U.S.’ armed force’s structure. Another part is used to heavily subsidise what the CCP considers strategic industries. China always underbid competitors for infrastructure projects anywhere in the world. Besides subsidies, bidders understand that they will have opportunities to claim contract variations anytime once a project has started. It’s standard practice in large scale engineering projects. Unless a client is willing to waste years on legal disputes, they tend to pay. These practices sooner or later drive competing trading partners’ industrial suppliers out of the global market. This mercenary approach is due to the central command structure of China’s economy, which still emphasises production at all costs at the expense of consumption. And Chinese companies tend to succeed with underbids by including under-counter money for their clients, something Western companies don’t dare to do.
There is no reason for China’s production growth to continue to dominate its own economy despite evidence of demand collapse. This obsession with supply side growth to maintain domestic employment is having the perverse effect of cutting back on workers’ earnings since excess supplies could no longer find new markets offshore. Heavy price discounting has been hurting China’s automakers. Thus, there should be low tolerance for trade deficits when it comes to trade with China. Arguing about free trade with regards the U.S.-China contest, along the vein of the old Bretton Woods system and institutions, completely misses the point. That world is gone, not because it is undesirable but because it’s been too corrupted.
China’s excess production capacity looking for a home will keep putting pressure on the CCP government to pump subsidies into its export sector including EV. Western markets will be pressed to put up even higher barriers against Chinese goods. The E.U.’s declaration of anti-dumping tariffs against Chinese EVs will need to be jacked up again due to price cuts in China. While waiting for foreign markets to decide on tariffs, Beijing has continued to order EVs to help sustain employment, which has led to dumping of brand-new EVs in car graveyards around the country or at sea during transit to blocked-off export markets.
