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THE CRUX OF THE MATTER OR THE REAL WAR

Immediately after the imposition of List 1 tariffs, List 2 and 3 were released by the United
States of America, it became amply clear that that the slapping of tariffs on steel and
aluminium products etc. was just a curtain raiser of sorts for the real show. As stated by
Roberts (2018), Goncalves (2018) et al and several leading economists the real battle or tug
of war lay in the fight for market share in pharmaceuticals, high technology manufacturing
industries and the commercial knowledge intensive services in knowledge based sectors.
These are the sectors in which most of the value is added, thus giving rise to the term high
value added industries. These industries hold the key to dominating the world market as it
contributes about 33% to the world G.D.P while also in the American scenario contributing
immensely to the R&D expenditure which translates well to increasingly high profitability. As
has been long realised amongst economic intelligentsia, the magic potion to world hegemony
lies not in trade but in gaining ground in digital and knowledge economy as a foothold in
better technology is sure fire way to ensure global economic dominance as has been well
demonstrated by U.S. since the second world war.

About the state of the things at the announcement of the tariff lists, the US investment bank,
Goldman Sachs’ economists summed up the situation as follows “the US position as a global
technology leader remains strong. The US’s economy wide productivity remains high
compared to other advanced economies, and its shares of global R&D, patents and IP
(intellectual property) royalties remain impressive.”

This is no way means that China is not gaining ground on U.S. in the sphere of technology,
patents, trademarks, productivity etc... It would not be incorrect to say that China has been
the envy of the world in the last decade or so due to its strides in the sphere of economic
progress. It has been Asia’s new economic miracle and much more impressive than Japan ever
was. Despite the position atop the world economy of the U.S., its economic advisors have long
warned it about the false sense of security that might occur from this situation. China now is
quickly gaining and threatening the status quo.
CURRENT SCENARIO OF THE GLOBAL ECONOMY IN TERMS OF INTELLECTUAL PROPERTY,
PRODUCTIVITY AND R&D EXPENDITURE: THE BIG PLAYERS

SOURCE: WORLD INTELLECTUAL PROPERTY ORGANISATION, WORLD INTELLECTUAL


PROPERTY INDICATORS 2018

The total patents in force act as a reasonable proxy for control over new technologies by a
nation. Top 10 offices in the world that issue patent rights are in order U.S., China, Japan, U.K.,
Republic of Korea, Germany, France, Italy, Russian federation and Switzerland. Largest
number of patents are issued or registered with the technological ruler of the world namely
U.S. but China is not far behind and if we segregate total patents into those issued to residents
and non-residents then U.S. and China are basically equal in patents being issued to residents.
Then again the U.S. companies have much more of their operations offshore and the patents
issued to these companies count in the category of those issued to non-residents. At present,
the position of U.S. in the technological sphere is clearly at the top and that too by quite a
margin. Despite this, it is the movement up the technological ladder of China that worries the
who’s who of American economy. Reliable indicators of growth in technological sphere
include studying growth of each country in acquiring new patents, trademarks, industrial
designs, plant varieties, utility models etc.

The figure on the next page shows China’s advancing position in the recent years in all these
indicators. Though, U.S. and in some cases the European Union remains the overall leader in
technological sectors, China is without a doubt the fastest grower on the planet at the
movement. Of the total world over new applications received in 2016 and 2017 for patents
Chinese office accounts for over 43%, in the case of utility model applications it accounts
fornearly 96%, in the case of trademarks over 46%, over 50% of all the industrial design
applications received were submitted to the Chinese office and about 18% of the total
industrial design outputs were lodged in the China office.

This data though needs to be taken with a pinch of salt as the Chinese office is known to
receive several bogus applications and the majority of new Intellectual property rights
granted by the WTO in this time period still went to the U.S. based or originated firms.
Alongwith this it should be kept in minfd that though China is advancing quicker than the U.S.
on the path to technological improvement it still has a lot of ground to cover and there are
reasons to believe that China cannot go on endlessly growing without facing the hiccups and
bottlenecks that advanced countries usuall face after a certain time.
SOURCE: SOURCE: WORLD INTELLECTUAL PROPERTY ORGANISATION, WORLD INTELLECTUAL
PROPERTY INDICATORS 2018
SOURCE: THE CONFERENCE BOARD, GOLDMAN SACHS INVESTMENT REPORT

To see US’ dominance in the realm of high tech sector and knowledge based sector, we can
use the productivity of workers as a proxy for relative dominance in technology. We will use
output per hour worked as an accurate expression of productivity across nations. Using
Goldman Sachs data in this regard, we can clearly see American dominance over the world in
productivity of labour. Relative to the US even the most productive economies including those
of western Europe and japan lag considerably behind. As we are discussing US and China’s
trade war in particular, China’s productivity of labour lags far behind that of US, at a dismal
level of just 20% of the US.

In that regard, US has nothing to worry about presently. So what is ailing Donald Trump and
the American entrepreneurs. It is not the present situation but the trend that worries them.
China’s labour productivity may only be 20% of the US’ but it has quadrupled since 2000 and
it is still rising. In addition to this, China being world’s manufactory, it is forcing such foreign
enterprises into handing off their intellectual property via various legislations etc. The recent
forays of indigenous Chinese industry into aeronautics, pharma, knowledge based economy
of the US, in short the very source of US’s profits and trade surplus, is what is worrying the US
businessmen and the president alike.

It is a well-accepted fact that increasing expenditure in R&D acts as an engine for driving up
profits for an enterprise as well as a country. The R&D expenditure of a country acts as an
indicator of its growth in the realm of technology and consequently in labour productivity and
share in the fruits of world economy. Further, tightening up the analysis, it is better to look at
the R&D expenditure of a country as a share of GDP. Japan leads the race in this among
developed nations but US is not far behind and Japan’s R&D expenditure as a share of GDP is
plummeting while US’ is stable.
SOURCE: BLOOMBERG COMPANY REPORTS, STRATEGY&GLOBAL INNOVATION 1000, OECD

Further the size of US economy is a lot bigger than that of the Japanese economy. China’s
share though lags behind US as a percentage of GDP yet it is continuously rising and fast
catching up.

In absolute terms the United States leads the expenditure in R&D valuing at US$463 billion
while China is behind by around US$85 billion. South Korea which incurs relative to its GDP
the largest amount of R&D expenditure (more than 4% of its GDP) is quite behind in absolute
terms, as it only incurs around US$74 billion of R&D expenses.

China which runs a large trade surplus on USA right now does mainly so on the basis of low
and medium value added goods and services trade, it is fast intensifying its attack on what
has long been US’ bastion in world economy i.e., high tech industries of both goods and
services and this precisely what is being targeted via its increasing share of GDP being utilized
as R&D expenditure
SOURCE: National Science Board, Science and Engineering Indicators 2018

This data shows that United States is by and far the runway leader in output in high tech
industries. The only comparable economy by any means of sorts in china. Despite this, the
US contributes about US$ 400 billion of worth in high tech manufacturing, a value which is
more than a 100 billion US dollars more than its nearest rival i.e., China. In the last decade
the only comparable economy in this sector to US was the European union, which has now
fallen over the wayside. The US provides for around 31% of the world’s total share in high
technology manufacturing output, while China’s stands roughly at 24%. The meteoric rise of
China is self-evident from the figure especially after the outbreak of the great recession of
2008. It is not simply China’s inroads in high tech manufacturing which is a cause of worry
but inroads into this might mean inroads into the linkages which high tech industries stand
for, especially in the case of US.
PROBABLE BENEFITS AND LOSSES TO THE U.S. NET CORPORATE PROFITS DUE TO THE TRADE
WAR

SOURCE: U.S. BUEREAU OF ECONOMIC ANALYSIS

The trade war emanating from the U.S. is misdirected in another sense. Imposition of tariffs
by the U.S. on goods originating from foreign countries especially China is being viewed as
U.S.’ attempt to control Chinese advance in global export of goods and thus protect its hold
over the world economy. This simplistic explanation though convincing and appealing to
common economic sense is conceptually incorrect because this views export of goods as the
main parameter for hold over the offshore market. V.I. Lenin in his ‘Imperialism, the highest
stage of Capitalism’, written at the beginning of the 20th century pointed out that at the end
of 19th and beginning of the 20th century, capitalism has entered into a qualitatively
different stage in which export of capital takes precedence over export of goods, though
export of goods also develops side by side.

The figure ‘Trade war threatens U.S. foreign investment’ clearly demonstrates the fact that
the bulk of U.S. profit from overseas does not come from export of goods but rather from
export of capital. The share of U.S. net corporate profit resulting from foreign operations is
head and shoulders more than the share of profits contributed by the U.S. exports.
Moreover, the net overseas corporate profits are growing at a clip of 2.6% per annum
compared to 1.7% per annum growth of U.S. export profits.

The U.S. imposition of tariffs on goods won’t solve the problem of its falling profitability
because it will severely affect how other countries will treat U.S. foreign operations in their
home market, which definitely is the larger reservoir of profit making for the U.S. than its
export trade.

This leaves us looking at two scenarios-:

1) The U.S. government including Trump, the Federal Reserve Bank and all its economic
advisors have got it all wrong and their efforts are misdirected and are likely to be
counterproductive to their aims. Essentially, it is the equivalent of saying that this
U.S. policy is economic nonsense.
2) Second, more likely scenario (in which the author of this dissertation thesis believes)
is that simply targeting Chinese goods for the sake of dominating world economy in
global export trade is not the aim, rather the tariffs are only means to an end. The
end being the protection of high tech goods and services industries which form the
source from which U.S. economy, firms derives its profitability, which is ultimately
the sole aim of a capitalist mode of production.
SOURCE: National Science Board, Science and Engineering Indicators 2018

This data shows that United States is by and far the runway leader in output in high tech
industries. The only comparable economy by any means of sorts in china. Despite this, the
US contributes about US$ 400 billion of worth in high tech manufacturing, a value which is
more than a 100 billion US dollars more than its nearest rival i.e., China. In the last decade
the only comparable economy in this sector to US was the European union, which has now
fallen over the wayside. The US provides for around 31% of the world’s total share in high
technology manufacturing output, while China’s stands roughly at 24%. The meteoric rise of
China is self-evident from the figure especially after the outbreak of the great recession of
2008. It is not simply China’s inroads in high tech manufacturing which is a cause of worry
but inroads into this might mean inroads into the linkages which high tech industries stand
for, especially in the case of US.
LOOKING INTO WHAT THE KNOWLEDGE AND TECHNOLOGY INTENSIVE SECTOR AS A WHOLE
MEANS FOR THE U.S. ECONOMY WITH PARTICULAR EMPHASIS ON COMMERCIAL KI
SERVICES AND HIGH TECH MANUFACTURING OUTPUT

SOURCE: National Science Foundation, National Centre for Science and Engineering
Statistics, Business R&D and Innovation Survey (BRDIS), 2014

This figure indicates the contribution of various knowledge and technology intensive sectors
like Commercial knowledge intensive services, high and medium technology based
manufacturing and all other knowledge intensive sectors in three indicators, US business
R&D, Industrial output and US private sector based employment. The commercial
knowledge intensive services contribute around 29% to U.S. business R&D, 22% to the total
industrial output and 17% to U.S. private sector employment. The high tech manufacturing
contributes about 3% in industrial output and about 2% in US private sector employment.
The decisive role of high tech manufacturing in US economy hinges on the fact that it
contributes a lion’s share to US business R&D, which is nearly 50%. Since R&D expenditure
of a country directly correlates to its pie in global economy’s share, therefore, the high tech
manufacturing industry despite its lowly contribution to output and employment is pivotal
to US’ control of world economy. The commercial knowledge industries and High
technology manufacturing together contribute to around 75% of the total U.S. business
R&D. The KTI industries also account for around 21% of the total U.S. private sector
employment. It is in this light that China’s ‘invasion’ into US’ guarded territory of
Knowledge and Technology Intensive industries should be seen.

The protection of this fortress of US’ key to the throne of world economy is what Trump and
his advisors are mainly targeting in whole of the trade war with China.

SOURCE: INTERNATIONAL DATA CORPORATION


United States of America’s economy, like that of any other developed country’s, has come
to rely largely on what is labelled as the knowledge and technology economy, driven by
increasing R&D expenditure and swelled by productivity and profits.

One of the most important components of this in the current era is the Global Information
Technology industry. It is valued worldwide at a whooping total of US$ 5 trillion which
accounts for more than 6% of the total world economy and this share is continuously rising.

The US as expected is the world leader in this, contributing or enjoying 31% share of the
total information technology industry. Its arch-rival China has gained serious ground in the
recent times and its current share stands at 26% of the global information technology
economy. This battle to gain control over the information technology sector has certainly
contributed to the recent trade tensions especially in light of China’s meteoric rise.
SOURCE: CompTIA Tech Trade Snapshot

As is amply evident from this figure, US technology exports directly support more than 8
lakh jobs. Around 5 and a half lakhs job originate or are supported by exports of technology
exports. Along with this around 2 and a half lakh jobs are supported by technology service
exports. This is the employment creation effect of merely the export side of technology
sector. To protect and promote employment in this sector it is paramount to maintain the
robustness of the sector. This can only be done if US maintains its relative stranglehold on
the technology sector via advanced technology and other means. Once the other countries
or in the case of EU, a group of countries begin to catch up to US in this sector its progress is
bound to stagnate and the industry might shift out in search of greener (or in this case,
cheaper) pastures. The present regime by hook or by crook is struggling desperately to
maintain the status quo, for the time being, at least.

SOURCE: CompTIA, U.S. Bureau of Labour Statistics

Moving further along in this analysis of the vital importance of technology sector in US
employment, let us discuss a point of further and even more importance to the US
employment scenario. As we have just noted, the technology sector contributes in a big
show to US employment, what is of even more significance is the fact that it is a sector
which is actually creating more jobs, as observed, since the turn of this decade. US
technology employment has added about 1.6 million jobs from 2010-2018, bringing the US
net technology employment in 2018 to 11.6 million.

It might be asked why is this fact of such pressing importance? It is so because ever since
the onset of the recession of 2008, the world economy on all fronts has suffered but
employment has especially taken a hit at the world level. Most of the sectors have
registered a downward trend in both absolute and relative levels of employment. The
present crises has not provided a moment of respite ever since it announced its coming. In
such times, the technology sector has functioned as sought of a beacon of light, a ray of
hope for the US economy and its job seekers. Hence, the existing trade war for the
protection of US’ global position in the technology sector.
SOURCE: CompTIA, U.S. Bureau of Labour Statistics

This table breaks down the growth of employment in the US technology employment sector
to its component parts and sub sectors. From 2010-2018 technology sector contributed an
additional 11,85,600 jobs to the US economy. This quantum of addition of jobs during a
global economic downturn is pretty astounding. What is even more astounding is that from
its total employment contribution in 2010, the technology sector has contributed an
additional 44% to the creation of jobs in the US. This data alone verifies the importance to
this sector to the US economy.

Dissecting the component parts we find that the Software developers, applications, IT
support specialists, Tech occupations have contributed in absolute terms the largest
impetus to growth of employment. In relative terms, Cybersecurity Analysts as a sub sector
has grown the most rapidly, almost doubling its employment from the starting base of 2010-
11.

The Myth that is driving the trade war

The myth that drives the trade war is that ‘Nothing is made in the US anymore’. Many of the
US citizens were lured in by Trump’s pre-election logic that the policies of the previous
presidents have resulted in the absolute demolition of the manufacturing industry of the US
which actually contributed about 17.3 million jobs at the advent of the 2000s. Further,
Trump argued, that countries like China and Vietnam were actually the culprits that had a
leading role in manufacturing shifting out of the country as they provided a destination for
cheap labour. Thus, to bring back the manufacturing jobs to the nation and to make
‘America Great Again’, it is imperative to deal with the various policies and advantages of
the nation with an iron hand. This so called middle class dream did capture the imagination
of a large majority, which was then under the duress of the great recession, yet this
narrative is misleading on two accounts.
Before discussing what is wrong in this argument, it is necessary to accept that jobs in
manufacturing have been reducing in the US at a fast rate.

SOURCE: U.S. Bureau of Labor Statistics

The above figure clearly demonstrates the sharp decline in total employment that the
manufacturing sector has experienced since the 2000s, though it has shown a few signs of
recovery in the recent time periods.

This is unfortunately the only part of the whole argument that has a semblance of truth in it.
Let’s move on to the first basic fallacy in this argument that nothing is being made in the US
anymore. The fallacy in this is that decreasing employment has been equated with
decreased productivity and total production in US manufacturing. The whole argument
seems to say that US is not as industrialised as before.
SOURCE: US Bureau of Economic Analysis

This above figure released by the US BEA clearly indicates that instead of being de
industrialized the US manufacturing is actually quite strong as measured by its position in
the economy. It is the single largest sector in the US economy, actually contributing more
than US$ 6 Trillion to the US economy in 2014 accounting for nearly 35% of US gross
domestic production in 2014,2015 and 2016.

In addition to this the data released by the Federal Reserve Board of the US reveals that not
only is manufacturing a leading sector in the US economy, along with this it’s productivity is
actually growing.
SOURCE: Federal Reserve Board, US

The above figure utilizing a three month moving average for total manufacturing output
from late 1970s to 2015 taking 2012 as base year clearly indicates the meteoric rise in
output in manufacturing. The output of the manufacturing sector has actually doubled since
1984, much of the credit for such growth is attributed to the golden age of US technology
and manufacturing in 1980s. What is of even more importance is that the manufacturing
sector is producing twice the output with one third the workers that were employed in
1984. This thoroughly exposes the falseness of so called downfall of the manufacturing
sector.

The second big fallacy that is actually providing the ideological justification for the trade war
with China is that somehow China and countries like Vietnam by providing cheap labour
markets are taking away the centres of manufacturing from US into their own countries. In a
paper titled ‘Trade and Manufacturing Employment: No Real Disagreement’, Paul Krugman
argued that though trade had a role to play in both absolute loss of employment in the
manufacturing sector and the manufacturing sector’s employment share in total
employment, it is not the only and neither the major factor. Robert E. Scott of the Economic
Policy Institute (EPI), in his paper ‘The Manufacturing Footprint and the Importance of U.S.
Manufacturing Jobs’ clearly indicates that it is not trade that has affected the US
manufacturing jobs rather the slower recovery rates since the great recession, when
compared to the earlier recessions, as is evident in the figure below.

SOURCE: ECONOMIC POLICY INSTITUE

Anna Wharton of the University of Pennsylvania further argued that the main reason for
loss of jobs in the manufacturing sector is actually the rising efficiency in the manufacturing
sector, which amidst competition is increasing rapidly and shunting out workers at an even
quicker pace. The great recession has contributed to this by sharpening the contradictions
between the various industrialists, who to maintain their profitability have quickly
embraced technology with higher productivity and a capital bias.

G. Carchedi in a working paper pointed out that in the US productive sectors the value of
plant and machinery relative to the people employed has risen secularly in the last 60 years.
Thus the organic composition of capital has risen and the average rate of profit has clearly
declined as is evident from Carchedi’s findings given below.
ARP= Average rate of profitability
C/v= Organic composition of capital

Using a similar analysis, Michael Roberts has found out the organic composition of capital in
the US productive sectors has actually grown about 46% in the last 70 years. The last two
analyses, namely that of Carchedi and Roberts lead us to an interesting conclusion, which is
that it is the capital bias emanating from the race to drive profitability up that actually
causes a simultaneous rise in productivity and a loss of employment in a particular sector,
which in this case happens to be the manufacturing sector.

In this matter we can pretty much confidently conclude that the Trump orchestrated trade
war with China cannot actually bring back the jobs from Vietnam and China back to the US
for the simple reason that these jobs never went anywhere. The jobs in the manufacturing
sector were not lost, they were actually shed in a drive to improve efficiency by the US
capitalists. A drive to improve profitability was actually behind the drive to improve
efficiency which in turn meant that technology with a capital bias was introduced in this
sector which led to increased productivity and reduced employment.
SOURCE: NATIONAL SCIENCE FOUNDATION, WORLD TRADE ORGANIZATION, GOLDMAN
SACHS GLOBAL INVESTMENT RESEARCH

U.S.’ position in both global high-tech goods exports and commercial knowledge-intensive
exports remain strong though trade deficits exists in goods exports and China has been
gaining in both. Since, China joined the WTO U.S.’ positon has continuously but surely
solidified in both these fields. Excluding E.U. the U.S. still remains the largest producer of
commercial knowledge-intensive purposes.

As has been discussed before, U.S. real war does not target maintain or increasing the share
of exports for trade’s sake nor does it actually target the so called bringing back the
‘smokestacks’ to American homeland. The U.S. manufacturing sector jobs have not been lost
primarily to China or other low labour cost nations but rather in race to be more efficient in
order to boost up profitability.

So, the trade war targets the Chinese goods in those sectors precisely which contribute
immensely to U.S. profits, R&D and employment. The trade war is not simply to strengthen
U.S.’ export position in global high tech goods and commercial knowledge services which is
already solid since the turn of the century but to actually accomplish what dominance in these
sectors are a proxy for i.e., increasing profitability and technological hegemony in the world
economy.

FIGURE: Global KTI industries, by output and share of world GDP


SOURCE: National Science Foundation, National Centre for Science and Engineering
Statistics, Business R&D and Innovation Survey (BRDIS), 2018

The above figure has been taken to depict the vital importance of KTI or Knowledge and
Technology Intensive sector in the world economy. The commercial KI services account for
around 11.75 trillion US$ total which is around 16% of the world GDP. The four sectors i.e.,
commercial KI services, public KI services, Medium High Tech manufacturing industries and
High Tech manufacturing industries account for 7 trillion US$, 3 trillion US$ and 1.7 trillion
US$ which comes out to be around 10%, 4% and 2% of the world GDP thus accounting for
1/3 of the global economy.
The Commercial knowledge intensive industries and High technology manufacturing
industries also contribute around ¾ of all business R&D in the U.S., which actually is the
source for maintain competitiveness in the world market, along with profitability. These two
sectors need to be studied a little bit in further detail to observe how well does the U.S.
actually fare in these.

FIGURE: Global value-added shares of selected service industries for selected regions,
countries, or economies: 2016
SOURCE: National Science Foundation, National Centre for Science and Engineering
Statistics, Business R&D and Innovation Survey (BRDIS), 2018

This figure breaks down the commercial KI services into its three major components namely,
Business services, Financial services and Information services. U.S. is the clear world leader
in all three service categories and it is not even comparable. U.S. enjoys nearly one third
share of the global economy in all these three sectors. Through, its proposesd restrictions
on several Chinese exports it is targeting a lot of these services so as to maintain the status
quo in this sector. This is because of the pivotal importance of this sector in the world
economy and what it actually means for the U.S. economy.
Two major reasons for the U.S. to target Chinese goods in this sector are-:

1) The Commercial knowledge intensive services account for 16% of the world
economy. Thus, the keys to dominance of the world economy goes right through this
sector.
2) The Commercial knowledge intensive services actually contribute about 29% to the
U.S. business R&D and R&D is directly responsible for profitability.

FIGURE: HT manufacturing industries of selected regions, countries, or economies:


2016
SOURCE: National Science Foundation, National Centre for Science and Engineering
Statistics, Business R&D and Innovation Survey (BRDIS), 2018

Second industry in which the U.S. has concentrated its attack and which means a
world to the U.S. economy is the High Tech manufacturing industries. In this, the U.S.
has not been as patient as in the case of commercial KI industries and has mainly
targeted the Chinese imports in these industries in all its lists after the curtain raiser
of steel tariffs. Majority of the proposed and existing tariffs in the realm of KTI
industries seek to protect the High Technology manufacturing industries. The U.S.
enjoys a runaway control over aircraft and spacecraft industry and testing,
measuring and control instruments industry. On the other hand, it has almost lost
ground to China in pharmaceuticals and China has taken lead over the U.S. in ICT
sector. The U.S. is desperate to protect what it has not yet lost as is evident from its
aggressive stance against China in case of aircraft and spacecraft, pharmaceuticals
and testing, control instruments, while it is also looking to gain lost ground in the ICT
sector.
The reason behind this is not merely trade and employment value in abstraction as is
evident from the fact that the High Technology manufacturing industry actually
contributes only 3% to U.S. industrial output and 2% to U.S. private sector
employment. It wouldn’t be far-fetched to say that maintenance of indigenous
output levels for its own sake is not the prime agenda for tariffs in this sector. The
prime reason for protecting the High Technology manufacturing industry by slapping
tariffs on Chinese products emanates from the fact that the High Tech
manufacturing sector despite its measly share in both U.S. industrial output and
employment, contributes about 46% of total U.S. business R&D, which is the
reservoir to which whole of the U.S. economy owes its position of dominance and
relative profitability in the global scenario.

REBUKING THE IDEAL OF FREE TRADE:

There are still some economists parroting off the Ricardian model of free trade as
benefitting a larger portion of the society as compared to trade restrictions. There
are several problems with this so called egalitarian effects of free trade. First, is the
basic assumption that free trade has been declining for the major portion of the last
decade as state intervention has increased. This is belied by data regarding world
trade openness statistics over the years.
SOURCE: GOLDMAN SACHS INVESTMENT RESEARCH

This figure clearly demonstrates that openness in world trade has actually grown
considerably over time since 1981 until the great recession of 2008 after which it
dipped sharply. Since, it has recovered and is slowly creeping up to the pre-2008
levels. Thus, the argument that the world has moved away from the good old free
trade and is continuously coming up against protectionist regimes is incorrect, to say
the least.
The second argument is specific to our topic of US-China trade war. Donald Trump
has often quoted that though U.S. follows the rules of free trade, China has been
continuously violating it. He has accepted in no uncertain terms that if free trade is
resumed from both sides, it would actually benefit the masses of both the nations,
particularly the U.S.
Let us see, how accurate is this statement comparing it with factual data.
SOURCE: GOLDMAN SACHS INVESTMENT RESEARCH, FACT SET

Here is the data on seven categories of goods and services which are representative of
Commercial KI services and High tech manufacturing goods, the fulcrum of U.S. economy.
These are the goods and services which U.S. looked actively to protect from Chinese
competition. This figure shows the concentration ratio (share of top 5 firms in total sales)
and profits as a ratio of sales in these sectors when compared to the U.S. economy as a
whole. The top 5 firms are literally monopolizing the trade in biotechnology,
pharmaceuticals, software, Internet software and services, communications equipment and
internet and catalog retail, all accounting for at least more than 60% of the total share in
respective industries. Also, they are enjoying a humongous share of the profits, average rate
of which is quite low in the U.S. economy.

Contrary, to the myth that free trade benefits all, free trade would only provide further
benefits to these top firms and these top firms are the ones that Trump’s protectionist
policies are in reality protecting. In the words of Goldman Sachs, it can be summed up the
best,” Global trade is particularly concentrated, with “export superstars” accounting for a
very large share of exports in many industries and countries.”

Another point which follows from this is that trade is transacted not by countries (a la
Ricardo) but by companies, so free trade does foster development and improvements of
technology but capitalism as is its won’t, delivers these gains unevenly. The growing
accumulation of capital within few hands ensures that the gains from trade whether free or
protected is also concentrated in a few hands.

THE FALLING RATE OF PROFITS: THE DRIVER OF THE TRADE WAR

The final portion of the main chapter is an attempt to reconcile the data which we have
analysed. Some of this might sound conjectural but actually it is very closed interlinked with
what we have just proved. To state in brief, the U.S. levy on Chinese tariffs was not to just
protect its position in the global trade but to maintain its hegemony in the World economic
order which evidently depends on how profitable the corporations of a particular country
are and how quickly are their technologies evolving. For an evolving technology boosts
productivity which can in turn increase the competitiveness of an industry or a firm and help
it oust other firms to establish control over a market or markets. The logic of capitalist turns
not on total production which is just a means to an end instead it turns on the logic of
profitability. The reason for undertaking production is profit and more profit. The
penetration into other markets, increase in productivity and total production, adoption of
competitive tactics, establishment of monopolies are all means to the same end, that of
boosting profitability.

In the case of U.S. tariffs, it is amply clear that the sectors which Trump has looked to
actively protect are the ones that are the largest contributors to R&D and which the profit
shares are higher than the median profit rates. R&D in the economy plays a crucial role in
furthering technological advancement which boosts up productivity and profitability.

The imposition of tariffs in Trump’s regime should not be seen as the insanity and mental
imbalance of a particular person but rather be seen as a logical political step of an economic
situation which has pervaded world economy in general and U.S. economy in particular.
SOURCE; MICHAEL ROBERTS, US RATE OF PROFIT 1948-2015

ROP- Rate of profit

HC- Historic costs, CC- Current costs

The rate of profit in the U.S. is falling secularly since 1948. The rate of profit from 1948-2015
declined in America about 25%-33%, depending on whether this is measured by current
costs or historical costs. The Golden period of profitability occurred in 1964-65 where the
profits reached their peak and have been falling since then only enjoying a period of some
stabilisation in 1982. The slight peak that we see in 2003 and 2005 was the effect of the
bubble that subprime lendings in U.S. created back then, which obviously came crashing
down some time after. It is easy to see that the rate of profit or profitability which is the
sole cause of capitalist production has been declining regularly over more than half a
decade. This not only caused the great recession of 2008 but was the driving force of
Trump’s economic barriers posed on Chinese goods. The sectors which these tariffs seek to
protect are the ones which have the highest profit rates and contribution to boosting profit
making capacities. That some of these industries also contribute greatly to American
employment acts as a political mask for winning sympathy of the masses for these policies
but the fact remains that these industries are mass employers only because they are rapidly
growing and expanding and they are expanding because of profit reinvestment from
previously earned huge profits in a drive to earn even more profits in the future.

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