US trade moves based on fear of competition
Editor’s Note:
Sino-US trade friction has been getting tense. An increase in Sino-US trade tensions might have serious consequences for the world economy. Seeking insights on US President Donald Trump’s one-man trade war, which bucks the trend of globalization as well as four decades of reform and opening-up in China, Global Times London correspondent Sun Wei (GT) talked to US economist Thomas Sargent, the 2011 Nobel Laureate in Economics (Sargent), after he gave a speech titled “Why Should Governments Pay Their Debts?” at the 120th Anniversary of the Peking University UK Symposium in Oxford last month.
GT: The US has hit China with tariffs and China has announced plans for counterattack. What do you think about this situation?
Sargent: Nobody wins in a trade war. Here are the basic principles an economist knows about: Free trade tends to benefit a big majority of the people; it benefits some more in the longer run; it also promotes competition, and competition brings down costs and creates new ideas.
The second principle is that competition doesn’t benefit everybody at the same instant, because it’s a process in which there are winners and losers. Even in a situation where a majority of people win, there are losers. It’s the losers or people who feel threatened who propose restrictions on trade. These are the two fundamental forces. It fits like a glove now. Some people in our country think that they have something to lose from free trade. They think if tariffs can be imposed to limit some forms of competition, they will be protected, despite the fact that it will hurt many other Americans. Right now these people have the ears of the president. But there’s a lot of opposition to that within Trump’s own political party. Most economists are like myself: they are for free trade. They hope these tariffs will be pushed back.
GT: In your opinion, what was China’s experience in the last 40 years?
Sargent: What China has done is a miracle. What Deng Xiaoping and the people with him did was that they expanded the role of the market, and diminished the role of government in deciding how things were going to be produced, who was going to be producing, and how people were going to be paid.
They unleashed the market forces, and redefined “socialism with Chinese characteristics.” Deng was a genius, and what he redefined was what it meant to be China without staying in the Soviet economic system. He was very practical, and it was not based on theory. He wanted to do things that worked. It was easier said than done to engineer and manage people to do this experiment, and then keep it going.
Now it’s a good thing for Chinese people to admire someone who has set up a business and earned a lot of money, but they couldn’t do that in the 1950s. Hundreds of millions of people have been lifted out of poverty, and have joined the middle class. That has never happened so fast in human history.
I don’t completely understand how they did it. I am still in the process of learning.
GT: China’s top leaders emphasized at this year’s annual Two Sessions that China will institute further reform and opening-up. What are the policies that you are anticipating most?
Sargent: One surprising thing for someone at my age is that, a year ago, Chinese President Xi Jinping went to Davos and made a speech about globalization, that’s the speech I wish my president would give. Globalization is going to keep going, and China is going to be a leader in it.
Something that interests me is that after World War II, the country that wanted to open up its markets was the US. We did lots of things and we wanted free trade. We thought Americans could out-compete anybody. We wanted markets opened, and we promoted a bunch of policies about reduced tariffs, and opened up markets especially against Britain. Britain had various kinds of trade barriers, and we tried to knock them down. We succeeded. We did that because we weren’t afraid to compete with anybody.
GT: China’s debts have risen dramatically in the past decade. The International Institute of Finance estimated in 2017 that China’s total debt level breached the threshold of 300 percent of GDP. Do you think China is facing a debt crisis? How can debts be reduced while maintaining economic growth?
Sargent: Growth helps in a big way. If I was at the central bank and I was allowed to listen to the people who are thinking about this, they would anticipate questions I would ask.
The Chinese government has some tools that are more powerful than those in other countries. That’s partly because they haven’t completely liberalized and opened up the market yet, so they still have some powerful tools. What I see them doing is probably thinking about the wish to gradually relax things. Those are the things that are not easy to do.
One thing I do know is that Chinese economists and policymakers have studied the US and Britain very carefully for examples and lessons from what we’ve done wrong.
About the 300 percent debt ratio, I have to look at what that number means. I would look at the accounts very carefully to know what was included and excluded. The debt to GDP ratio can be measured in various ways.
The officially reported number in the US is close to 100 percent, but the real number is much bigger than that. Here is one reason: We have debts that China doesn’t have. We have a social security and medical care system where we have made a bunch of promises. They are much bigger than we can keep, and we don’t have the revenues to support them, and nobody knows how this is going to be paid.
GT: China is transforming from high-speed economic growth toward high-quality economic growth. How do you suggest the challenges should be dealt with?
Sargent: The fundamental principle is that you want to encourage people to take risks, but you want them to take risks at their own expense. If I take a risk, I am taking a risk with my money and not yours. If you let me take risks with your money, I am going to take too great a risk. The fact that I know there are risks that I have to bear, that makes me manage better. When that is lost sight of, that’s when the economy takes too much risk.
People in banks in China know these principles very well. The problem was the provincial governments built up loans and debts, and they count on the central government to pay out. That’s a violation of the principle. People are aware of this in China.
Globalization is going to keep going, and China is going to be a leader in it.