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Restrictions on investment and technology are more damaging than tariffs

The trade dispute between the United States and China has recently intensified, with both sides applying new tariffs to each other. While tariffs have a significant impact on the two largest economies in the world, restrictions on investment and the flow of technology will be much more damaging.

Many chinese companies and the leaders of the regime understand that this is not just a war tariff, according to Adam Posen, president of Peterson Institute for International Economics (PIIE according to the acronym in English), a study center based in Washington.

The tariffs are tariffs, but the barriers to investment and the flow of intellectual property are in reality much more important, he said to reporters after the recent meetings of economists of the EIIP with chinese officials in Beijing.

The current dispute between Beijing and Washington turned into a “technological war,” he said.

The Trump administration recently banned Huawei from importing American technology, which was considered a major escalation in the US-China trade war. The decision forced several US companies, including Google, Microsoft, Qualcomm and Intel, to suspend their operations with the Chinese company. However, the US government later softened the ban by issuing a 90-day temporary leave.

Tariff threats, which could affect a much larger amount of trade, did not change the message for Beijing much.

But once this case [of Huawei] was announced, we went from talking about commercial friction to talking about a commercial war. And now we have these highly nationalistic films about America’s struggle in the Korean War in the state media [Chinese], ” he explained.

According to Chorzempa, this issue is “the number one thing” in China and is being used by the Chinese regime to boost anti-American sentiment and gain more political power.

The Trump administration’s growing crackdown on china’s investment in the United States also amplifies the effect of the trade war, according to the IIEP. The new law of the united States, which became law in 2018, granted more power to the regulators to monitor chinese investments in the united States.

Regulators such as the US Foreign Investment Committee and the Federal Communications Commission have increasingly blocked agreements for national security reasons. As a result, China’s foreign direct investment in the United States fell 84 percent in 2018 compared to the previous year.

Currently having a setting of tariffs and the uncertainty and, even more, the hostility associated with it, and the concerns about the technology streams cross-border is something that decreases the useful investment, decreases the growth of productivity in a significant way.

He added that the direct effects of tariffs were significant but not enormous. However, the medium-term effects of the trade war on investment and therefore on productivity are substantial for both countries.

Clearly, we are much further away from an agreement than we were at the end of April and that in part is due to the increase of the friction on the front of the investment and on the front of high technology, said Jeffrey Schott, a senior fellow at the PIIE, who specializes in international trade policy and economic sanctions.

And that may make it harder to close a deal, but I don’t think the door is closed.

According to Schott, the Chinese are preparing for a long trade war and are not ready for an agreement in June. And China’s recent reprisals were strategic, as they avoided increasing tariffs on US products that are important to Chinese consumers and businesses, he said.

China announced on May 13 that it would increase taxes from 5 to 25 percent on 5140 U.S. products, worth approximately $ 60 billion. These new tariffs, however, do not include essential products for Chinese companies, as well as highly consumed foods in China, such as pork, soy, wheat and sorghum.

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