At the beginning of June the President of the United States Donald trump opened the second front in global trade wars. Washington announced the imposition of tariffs of 5% on all imports from Mexico, and threatened to raise their speed up to 25% from October of this year. After a week of eccentric American President suspended the introduction of restrictive measures, after the frightened, the Mexican government has promised to reduce the flow of migrants to the United States.

Although the conflict ended quickly and without bloodshed, the precipitate, as they say, remained. It became clear that trump got a taste and will introduce trade restrictions for the sake of achieving certain political goals. Commonly import tariffs introduced in response to economic imbalances in trade or other commercial controversies. Trump also said that raised tariffs in response to illegal migration from neighboring countries.

The statements of the President of the United States was extremely hard and even offensive. He accused Mexico of invading America “drug dealers, drug cartels, human traffickers and illegal migrants.” While trump doesn’t seem to understand that a significant share of responsibility for the immigration crisis lies with the United States. Even more responsible they are for drug trafficking.

Any economic justification in the “cavalry attack” on Mexico, trump is much less than in the case of China. First, the trade deficit with Mexico is largely caused by the actions of the United States. In 25 years of existence of the free trade zone in the North American region (NAFTA), the automotive industry migrated to the bordering US States of Mexico, where the workers automakers receive significantly lower wages than in the United States and Canada. Approximately 26%, 24% and 10% of North American production for GM, Fiat and Ford respectively was concentrated in 2018 in Mexico. However, the outsourcing market solution international automakers, not more. In addition, the surplus in services partly kompensiruet the deficit in trade in oil and oil products — from 2015, Mexico became a net importer of these product categories.

Secondly, Mexico, unlike China, does not conduct industrial policy based on supporting national Champions through directed lending from state-controlled banks and other state subsidies. Mexico is not trying (and unable) to replace American products on the market, as does China. And do not committed to import substitution. In this sense, it is absolutely safe for the United States, unlike China, which is 10-15 years under favorable conditions will actually be able to make technological competition, America.

Finally, the main claims trump to Mexico — illegal immigration and drug trafficking is rather ambiguous. Take, for example, drug trafficking. Its economy is. The whimsical and Coca bushes grow mainly in three South American countries — Colombia, Bolivia and Peru. To manufacture a kilogram of cocaine requires approximately 350 kg of dried Coca leaf, in Colombia they cost $385 (the price provided by the book Tom Wainwrite Narconomics). A kilo of cocaine in the Colombian’s worth $800. When cocaine is in the territory of the transit country (often this is just Mexico), the price rises to $2200. And after crossing the border of the United States soars to $14.5 thousand At the wholesale level dealer in the United States is already $19.5 thousand Finally, street dealers in U.S. cities to sell cocaine at an average of $78 thousand per kilogram. As you can see, the biggest jump in value occurs on the territory of the United States. It’s a fantastically profitable business for American organized crime, so it would be logical to focus on fighting the demand in the States themselves. In any case, it is far more effective than to deal with a very elastic supply in the producing countries and transit countries. But trump prefers to look for enemies outside.

A serious enemy

And yet the achievement of any agreement with Mexico shows that Washington does not consider this country as an existential threat. You can not say about China. The stakes here are much higher.

After China joined the WTO in 2001, the United States opened for him its huge consumer market, just as market opened earlier for Japanese, South Korean and Taiwanese products. Trade growth has been unprecedented — in 2001, the volume of Chinese imports in the U.S. was $102 billion in 2018 rose to $520 billion While the deficit of U.S. trade with China grew from $83 billion in 2001 to $419 billion in 2018.

China was given the role of world factory, he satisfied the demand of the developed world (mostly the U.S. and Europe) on final consumption goods and raise their economy due to mass outsourcing of global corporations. At the same time export-oriented Chinese enterprises integrated in global value chains. Mainly it was the Assembly or processing of imported intermediate components (at the initial stage is almost the same than doing cross-border venture in Mexico).

Easy Assembly industrial production in modern economies is mostly at the bottom of the so-called “smile of value added” (smiling curve). The creation of high added value mainly comes at the start and end points of the product life cycle — development and design, on the one hand, and marketing, logistics and after-sales service on the other. In some cases, the creation of high added value can be in the process of industrial production high-tech and/or niche products. But this is the exception rather than the rule, in an example, the German automotive industry and aircraft manufacturing duopoly of Boeing and Airbus. In the vast majority of cases, simple industrial Assembly does not bring much added value and is not too promising for the economy — it requires advanced technology, know-how.

Up to a certain moment, Washington is satisfied with the role of China as a world factory with a limited share in the global value chains. In addition, the United States believed that the growth in China’s middle class dominance of the Communist party will weaken and the country will begin democratization.

In any case, the Americans were counting on the economic, and most importantly, the political handling of Junior partner and that China is gradually political changes occur, as well as earlier in South Korea and Taiwan.

But now it is clear that the younger partner to be more not going. China openly declares that in the relatively near future hopes to become a full-fledged superpower. In 40 years of reform China has made great progress not only in the Assembly of goods to markets senior partners, but in copying technology and now produces and successfully exports are often goods of medium-high technology. That is, gradually improve their positions in the smiling curve through the implementation of several technical and scientific development programs, e.g. 863 and 973 Programs, and now well-known “Made in China 2025”.

China is important to Apple not only as a Assembly plant, but also as a huge market продукцииAFP / East News

Over the past decade has grown significantly, China’s share in exports of goods such as LCD and LED panels, locomotives, tankers, solar panels, air conditioners, diesel generators, etc. In recent years, the traditional “Assembly” of Chinese exports with high share of foreign components is falling.

At the same time increasing imports of high-tech components, it can be stopped as soon as Chinese firms copy the technology. For example, the number of Chinese suppliers for Apple has grown from seven in 2012 to 19 (or 28 if you count Hong Kong). Chinese suppliers supplant the West as the mastering technology.

Hermann Simon, a specialist in successful companies, dominant in an obscure non-professional markets (the so-called hidden champions; Simon — author of the book Hidden Champions of the 21st Century: The Success Strategies of Unknown World Market Leaders), notes that Chinese companies have become strong competitors for the niche manufacturers, high value-added in Germany, especially in the field of home appliances and metallurgy.

As economic strengthening of China, using a huge scale and market increasingly demanded foreign companies transfer technology (usually through the creation of a JV) or outright copied it. Foreigners had to look the other way — too attractive has become Chinese market over the past 10-20 years.

And one can hardly blame China itself, because almost any industrialized country when it is implicitly or explicitly doing exactly the same — protectionism, subsidies for “national Champions”, the assignment of patents, etc. well-Known economist and, by the way, the son of the Minister of industry at the time of rapid economic growth, South Korea’s Ha-Joon Chang book Kicking Away the Ladder: Development Strategy in Historical Perspective describe the strategy applied to the UK and the USA of XVIII–XIX centuries. According to him, these countries actively resorted to protectionist practices and copying someone else’s intellectual property during the period of rapid economic growth. Even then, being quite of developed countries, they began to actively enforce the principles of free trade and protection of intellectual property in relation to other, poorer countries, deliberately depriving them thereby of the chance for economic development (hence the name of the book is literally “kicking the ladder from under his feet”).

The US response to the challenge from China

Anyway, the United States realized the risk of losing technological superiority within the next 10-15 years and are unlikely to stand on ceremony with China. Washington needs not just to eliminate the imbalance in trade with China. Trump, maybe, and extravagant, as demonstrated by the sharp turn in attitude towards Mexico, but “in his madness there is a system,” as said by Polonius Prince hamlet.

The “system” that all amendments to the eccentricity trump simple — not to allow China to become the industrial leader of the world. And in General a superpower in a broader sense. This requires the rupture of the chains that has made many American firms dependent on Chinese industry. Last, and by means of trade barriers. American companies at high rates will be forced to withdraw from China to other countries.

The second line of attack — the “national Champions” of China. Here the United States in many respects are ahead of the curve, because while Beijing has managed to grow a few of these companies. Huawei is almost the only high-tech company in China, having global ambitions, coupled with innovative technology (a communication standard 5G). The course for isolating apparent, with Huawei has limited the cooperation of the American Google and Facebook. And it is clear that the process of stigmatization will not end. According to U.S. Politico, Washington is considering the possibility of limiting the export to China of products and components associated with high technology (for example, in the field of artificial intelligence, robotics, 3D printing). In addition, there may be a ban on the employment of foreign citizens in a technology company (it will help to prevent the loss of know-how). Also, the administration is considering at least five more Chinese companies to impose restrictions similar to sanctions against Huawei.

Beijing can counter this a little. Among the “fashionable” options — sale of U.S. assets held on the balance sheet of the people’s Bank of China. However, in a practical sense it is of little use, except for some temporary increase the yields on US government bonds. The volume of American securities in China is not large enough to destabilize the market, anyway, with the current state of the American economy.

Another, weaker, but more realistic answer — the introduction of China’s export restrictions on strategically important market for the world commodities controlled by Beijing. It is primarily about rare earth metals. In fact, China is monopolist in this market (85% of world production). Rare earth metals are strategically important raw materials for electronics (batteries, magnets, smart phones, catalytic converters, etc.) and other high-tech industries, including military-industrial complex (equipment for GPS, night vision, precise aiming etc.).

Beijing has used export restrictions on rare earth metals as a political tool in 2010, when for a short time reduced their shipments to Japan in response to the clash of the Chinese with the Japanese vessel in disputed waters in the South China sea.

The restriction of Chinese exports of rare earth metals in the United States can break the process chain in many industries. Probably, the Americans are already preparing for such an option, as recently the only major non-Chinese producer of rare earth metals, the Australian company Lynas (up to 10% of the world market) announced the construction of a concentrator in the USA.

However, while this flanking manoeuvre, the Chinese side reserves and if they resort to it, it is likely that after the G20 summit in Okinawa, which will be held in late June. American companies should find alternative suppliers, but it will take considerable time and will cause temporary breaks in many production chains. But, most likely, the US will survive this blow without much loss, and another trump card in the hands of Beijing, it seems, no. And a compromise like the same Mexico, China can hardly hope that the war, though a trade, but there is a “life and death”. While the US successfully knock the ladder from under the feet of the competitor, but, apparently, the conflict will be long and will teach a lot of surprises to both parties, as well as around the world.

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