Competition Can Be Win-win
a U.S. economist and professor at the MIT Sloan School of Management, received the Nobel Memorial Prize in Economic Sciences in 1997 for his pioneering method for determining the value of derivatives. He attended the China-singapore Demonstration on Strategic Connectivity Financial Summit 2019 in the southwestern Chinese city of Chongqing on November 4-5. In an interview with
an online magazine published by the China International Publishing Group, Merton shared his views on China’s economy, its business environment and China-u.s. trade tensions. An edited version follows:
China Focus:
At present, the global economy faces downward pressure. How do you view the current state of the Chinese economy, as well as its digital economy, artificial intelligence (AI) and other emerging industries? Robert C. Merton:
In the short term, I can’t
predict what will happen, but in the long term, China’s economy is looking pretty good.
One of the many things I am impressed with is its technologies like in AI, public transportation and healthcare. These sorts of things are very important.
I can see that China is particularly developing these areas in order to make them much better. The long-term development plan also impresses me. We can always feel the business cycle, currency ups and downs, trade volume ups and downs, and trade disagreements. That is life. But the part where China really builds value is investing with a long-term view in infrastructure.
China must not forget the other areas that are part of its infrastructure. Much more important for the economy during the next quarter is the emphasis on investing in human capital, on people. From what I see, China is developing its educational system, from kindergarten all the way up to university. It is important to combine this knowledge with practice and experience.
I have seen this in Chongqing in the science and technology centers which focus on
bringing innovation and knowledge together. China is connecting universities where knowledge is created and students are taught, so with practice it has the potential to achieve positive results.
In the World Bank’s Ease of Doing Business 2020 report, released on October 24, China is ranked 31 out of 190 economies, up 15 spots from the previous year. How do you feel about the business environment in China? In what areas does China need to improve?
China has made some great progress. It is an excellent move in the right direction that China has chosen to open up and allow financial service companies from outside to enter the Chinese market. The World Bank report reflected many positive aspects of China’s development of its business environment, but in order to move toward a more secure environment, China could improve the enforcement of contracts and intellectual property rights.
It is still very complicated to set up a business in China. In many cases, you can’t open a business unless you have a Chinese partner, and sometimes it has to be a majority partner. Alternatively, a business has to invest $1 million in order to receive a license. But when you come to the state of Massachusetts where I live in the U.S., for example, you can set up a Chinese company at a cost of only $150, and you don’t have to have a partner. I am not saying that to be combative, I’m trying to be constructive. The high cost of setting up a business in China, in terms of requirements, such as the expense, is limiting the country’s potential to move many more spots up the list. More importantly, not only will China further improve its ranking, the Chinese economy and much of the rest of the world will benefit from this move.
The China-u.s. trade dispute remains unresolved and as such has negatively impacted both sides as well as the wider global economy. How can both sides develop healthy trade ties?
Trade issues alone are difficult enough to resolve. But when you combine non-trade issues with trade issues, it is a particularly complicated process. It is also indicative of perhaps a pattern forming whereby trade is used as a means of trying to achieve other political and social objectives.
I am less worried about losing some GDP per year or per quarter. But if there is loss of trust, then countries are going to have to protect themselves by having alternative supply chains for risk management reasons, which is a big expense, will reduce efficiency on a permanent basis and be a loss for everyone. This is my biggest concern about the trade war. I hope it doesn’t happen and everything can go back to normal.
Some people ask: Do you think China is going to outdo the U.S.? Well, I don’t really know how things will go. But frankly, it doesn’t matter.
Competition is and should be viewed as a benefit to both the U.S. and China. It makes them both better. One of the mistakes people make is looking at trade in terms of winners and losers. Some believe that if there is a winner, naturally there must be a loser. But with trade in general, I believe it makes both parties winners. It can be a win-win situation.
The U.S. has advanced some things that China has yet to develop, such as certain parts of the financial system. In order to develop in this area, it will likely take China years and cost a lot of money.
Things can improve if we develop an efficient and effective way of cooperating and facilitating technology transfer.
In this way, instead of reinventing the wheel, going down all the wrong paths, China can build on what already exists. And I will hold out hope that things will therefore improve.