Before we even begin the article, let’s start with a disclaimer: I used to live in the United States, but I don’t anymore. If had the choice or the opportunity to vote during the recent elections, I would have voted for Hillary Clinton without batting an eyelid. That doesn’t mean that I oppose everything that President-elect Donald Trump says or turn a blind eye even when I think he is correct. Absolutely not.
Trump’s tweets about China this month and the Chinese response to those messages has, indeed, created a huge furore, with the left wing and the right wing opposing and supporting Trump as usual. It is natural for people to be worried when the two most powerful countries on the planet are seemingly on a collision course.
Though it all started with Trump taking that phone call from the president of both countries’ ‘no go zone’, Taiwan, what really caught my eye was the Tweet from Trump two days after he spoke to the president of Taiwan.
The last part of the tweet about Chinese expansionist policies is definitely not our cup of tea, so we will keep our focus on the first two parts – currency devaluation and taxation.
The Question of Currency Valuation
Most developed countries follow a floating exchange rate policy where the currency’s valuation is decided by the market forces and the government only intervenes to reduce volatility in the market.
“The Department of the Treasury and the Federal Reserve, which are the U.S. monetary authorities, occasionally intervene in the foreign exchange (FX) market to counter disorderly market conditions. Since the breakdown of the Bretton Woods system in 1971, the United States has used FX intervention both to slow rapid exchange rate moves and to signal the U.S. monetary authorities’ view that the exchange rate did not reflect fundamental economic conditions. U.S. FX intervention became much less frequent in the late 1990s. The United States intervened in the FX market on eight different days in 1995, but only twice from August 1995 through December 2006.” – NewYorkFed
The Chinese follow a different system. The yuan was pegged at 8.28 to the dollar between 1995 and 2005, during a period when China’s GDP grew from $734 billion to $2.286 trillion, while the trade imbalance between the two countries widened from $33.789 billion to a mind boggling $202.278 billion.
After 2005 China moved away from a fixed rate policy, allowing its currency to move in a given band decided by its central bank, a little more relaxed than before but essentially the same old wine in a different bottle. It’s kind of a hybrid system between fixed and floating, but tilted more towards the fixed rate system because the central bank gets to decide which band the currency can float in.
It’s extremely difficult to accurately find out how much devaluation the yuan has gone through, but it’s not at all hard to find out where the motivation for undervaluation comes from.
If you are a Chinese apparel manufacturer looking to compete aggressively in the U.S. market, how much would you want your average T-Shirt to cost? 15 dollars or 10 dollars? By keeping your national currency valuation low, you can edge out the competition. Can a European manufacturing company compete with you on an even scale when the euro keeps moving up and down while the yuan stays at the same place or even goes low because the central bank thinks it should?
China is a export-oriented economy, with exports accounting for 22.375% of the country’s GDP in 2015 and the bulwark of their nation’s progress.
The valuation of the yuan has, indeed, given the country a lot of room to accelerate its exports – but at the expense of other countries and their currencies. But to call the country a currency manipulator would be far-fetched, because they did all of this in full view of everyone, though no one was really in a position to put enough pressure on them to level the playing field. The one country that could have changed the status quo was the United States, but it only watched the trade imbalance ballon every year.
Trump hit the nail on the head when he said that China didn’t ask the United States’ opinion on fixing its exchange rate, but the freedom they had all these years was offered by none other than the country that he is going to start leading very soon.
The United States was the largest consumer of Chinese goods for many years and, as its biggest market, the country never fully exploited its own buying power as it chose to remain a sellers’ market.
The Heavier Issue of Taxation
Now, let’s move on to the second part of his statement – about taxation. The statement “the US doesn’t tax them” is a bit generic, because we don’t really know what tax he is talking about? There is always the import duty, which all importers need to pay.
So, if you are importing a car from China, you are going to be hit with 2.5% of duty, and when you turn around and sell that car, you need to pay the local tax, which varies from state to state.
“If you are purchasing a Ford Focus with a cash selling price of $18,000 and a dealer documentation fee of $250, while living in Fulton county, (which has a 7% sales tax rate,) the total Ohio car tax is $1,277.50” – Carsdirect
Now let’s reverse that situation and see what happens if you export a car to China. Imported goods in China are subject to Value Added Tax, Customs Duty and Consumption Tax. According to Chinaimportexport.org, the Customs Duty rate of motor vehicles is 25%, VAT is 17% and Consumption Tax is calculated according to gas displacement of motor vehicles. Clearly, by the time you get your hands on a US-made car in China, the price would have ballooned by more than 1.4 times.
Now for a real-world scenario with the Tesla Model X.
“The Tesla Model X 90D costs 961,000 Yuan, the P90D has a price point of 1.15 million Yuan, while the Signature Red jumps to a staggering 1.47 million Yuan.
In plain American currency, that means Chinese customers have to shell out the equivalent of $147,000, $176,000 and $225,000, respectively, for the aforementioned Model X Tesla cars. To put it in perspective, Tesla charges $95,500 for the 90D and $115,500 for the P90D in its home market, so that’s quite a difference.” – TechTimes
Things haven’t changed much in the past few years. Back in January 2014, IBTimes reported:
”Tesla is selling the Model S with the 85 kWh battery in China for $81,070, the same price the vehicle costs in the U.S. excluding the $7,500 federal tax credit. On top of the base price, Tesla is charging a $3,600 delivery fee. The final price tag, including the duties and VAT charge in China puts the price at 734,000 yuan (about $121,000).”
Import duties and other taxes push the final price tag of a car built in the United States up by nearly 1.5 times by the time a customer in China gets behind the wheel. As we saw, the picture is hugely different when moving a car from China to the United States.
So Trump has a point about the tax part, that there is a huge imbalance when it comes to the same type of goods when it is imported in China compared to when it is imported in the United States. The “U.S. does tax them” part of Trump’s tweet is wrong. But, as is usually the case with Trump, he always finds a way to get the benefit of the doubt.
Much as it goes against the very grain of my thinking, I must admit that Donald Trump got it right on these two issues – even if the smaller details escape his vice-like intellectual grip on the facts of the case. But hey, what are economic advisers for if not to dot his i’s and cross his t’s?
Thanks for reading our work! Please bookmark 1redDrop.com to keep tabs on the hottest, most happening tech and business news from around the world. On Apple News, please favorite the 1redDrop channel to get us in your news feed.