China-US trade dis­pute en­ters se­cond half

China Daily (Latin America Weekly) - - Views -

China and the United States reached a con­sen­sus to sus­pend tar­iff hikes and restart trade talks at the meet­ing be­tween Pres­i­dent Xi Jin­ping and his US coun­ter­part Don­ald Trump in Ar­gentina on Dec 1. Yet the Cana­dian po­lice de­tained Meng Wanzhou, Huawei’s global chief fi­nan­cial of­fi­cer, and could de­port her to the United States where she could face charges for evad­ing US curbs on trade with Iran.

These con­trast­ing sig­nals show the com­plex­ity of China-US trade con­flict, and since the con­flict has reached a crit­i­cal stage, four ma­jor changes can be ex­pected.

First, the trade con­flict be­tween the two largest economies has shifted from be­ing a blitz to a stale­mate. The first half of the game, which has stretched from March to Novem­ber, can be seen as a fight for time and space. Tak­ing ad­van­tage of the time win­dow pro­vided by tax cuts at home and China’s re­form pains and shrink­ing room for stim­u­lus, the Trump ad­min­is­tra­tion adopted a “max­i­mum pres­sure” strat­egy. The first three rounds of trade sanc­tions were thus car­ried out one af­ter an­other in quick suc­ces­sion, each one more ag­gres­sive than the last one, with the aim of bring­ing China to heel.

Yet the land­scape of the con­test has now changed in two as­pects.

To be­gin with, the Trump ad­min­is­tra­tion’s strat­egy is tak­ing a bite out of the US econ­omy, made clear by volatil­ity in the stock mar­ket, the IMF’s down­grad­ing of its US growth fore­cast by a large mar­gin, as well as the mass lay­off plans of lead­ing au­to­mo­bile en­ter­prises.

Also both the Repub­li­cans and the Democrats have ar­rived at the con­sen­sus that the US should seek to con­tain China’s rise and safe­guard US supremacy. Threats posed by the Trump ad­min­is­tra­tion’s pre­vi­ous strate­gic ar­range­ments tar­geted at China, in­clud­ing the Indo-Pa­cific Strat­egy, US– Mex­ico–Canada Agree­ment and the an­nounce­ment it will seek trade agree­ments with Bri­tain, Ja­pan and the Euro­pean Union, will be around for a long time.

In these cir­cum­stances, the two coun­tries have bid­den farewell to the il­lu­sion of a quick vic­tory af­ter the G20 sum­mit and con­fronted the re­al­ity of a long-term stale­mate as the short-term pres­sure starts to mod­er­ate.

Se­cond, the tar­iff strikes on each other in the se­cond half of their con­test will be more tar­geted and ac­cu­rate com­pared with the rel­a­tively com­pre­hen­sive at­tacks be­fore. His­tor­i­cally, the dis­par­ity in strength with its op­po­nents and the con­ver­gence of in­ter­ests has de­ter­mined what kind of ap­proach the US adopts in such con­tests. When it had a huge eco­nomic ad­van­tage and weak bonds of shared in­ter­ests, it used the ex­treme so­lu­tion of eco­nomic block­ade and com­pre­hen­sive Cold War against the Soviet Union. While in the 1980s, its ap­proach against Ja­pan was less ex­treme as the US’ eco­nomic ad­van­tage was sig­nif­i­cantly less com­pared with the eco­nomic ad­van­tage it en­joyed over the Soviet Union and the two coun­tries had more shared in­ter­ests.

That the US’ eco­nomic ad­van­tage to China is rel­a­tively lim­ited and the two coun- tries are each other’s big­gest mar­ket with largest po­ten­tial de­cides that man­ag­ing a com­pre­hen­sive con­flict is a cost nei­ther coun­try could af­ford. This is ex­actly why the side ef­fects of Trump’s poli­cies were quickly am­pli­fied at home, also why the ad­min­is­tra­tion has slowed down its at­tacks.

Look­ing ahead, although the US will not eas­ily scrap the trade sanc­tions al­ready in place it will hes­i­tate to up­grade the stand­off to a com­pre­hen­sive con­fronta­tion. The third round of sanc­tions tar­geted $267 bil­lion worth of Chi­nese ex­ports in par­tic­u­lar is ex­pected to cause much pain on both sides, thus is un­likely to fully ma­te­ri­al­ize.

In the near fu­ture the US will prob­a­bly fo­cus on con­tain­ing the de­vel­op­ment of China’s high-tech sec­tor by, for in­stance, im­pos­ing high tar­iffs on im­ports from China’s emerg­ing in­dus­tries, cut­ting off the trans­fer of tech­nol­ogy, con­fin­ing the tal­ent flow and freez­ing the over­seas as­sets of China’s core en­ter­prises and in­sti­tu­tions, with the ul­ti­mate goal of im­ped­ing the up­grad­ing of China’s man­u­fac­tur­ing in­dus­try. On that ac­count, China’s rel­e­vant in­dus­tries should re­main alert and take pre­cau­tions, and the gov­ern­ment should of­fer nec­es­sary pro­tec­tion to key en­ter­prises, tech­nol­ogy, as­sets and tal­ents.

Third, the ri­valry be­tween China and the US will be­come a con­test with a global di­men­sion. As one of the core plat­forms for global pol­icy co­or­di­na­tion, the G20 Lead­ers’ Sum­mit has pro­vided the op­por­tu­nity for the two coun­tries to break the ice, but it also pro­duced a joint com­mu­niqué which has cut off the phrases of op­pos­ing pro­tec­tion­ism. This mixed sig­nal shows that apart from bi­lat­eral re­la­tions, mul­ti­lat­eral plat­forms and in­sti­tu­tions in­clud­ing G20, World Trade Or­ga­ni­za­tion and In­ter­na­tional Mon­e­tary Fund will be­come the key stages for China-US com­pe­ti­tion. Hereafter, the China-US trade con­tention, the progress and ret­ro­gres­sion of glob­al­iza­tion and re­form of the global eco­nomic gov­er­nance sys­tem will be bound to­gether.

In this sense it is ur­gent for China to take two global chal­lenges into its strate­gic con­sid­er­a­tions. One is the wave of pop­ulism that is un­der­min­ing the pol­icy ra­tio­nal­ity both in devel­oped coun­tries in­clud­ing Italy, Ger­many and the United King­dom and emerg­ing mar­kets rep­re­sented by Brazil and Mex­ico.

The im­i­ta­tion of Trump’s poli­cies in these coun­tries would weaken the con­sen­sus on mul­ti­lat­er­al­ism and fur­ther smash the tram­mels on Trump’s pro­tec­tion­ism and pop­ulism. In ad­di­tion, the global eco­nomic gov­er­nance sys­tem has come to a fork in the road. Un­der the re­peated as­saults from pop­ulism, pro­tec­tion­ism and iso­la­tion­ism, the flaws in the sys­tem have been ex­posed, mak­ing re­form a mat­ter of ur­gency.

Look­ing for­ward, the re­form of in­ter­na­tional in­sti­tu­tions in­clud­ing the WTO, IMF and World Bank may walk on two op­po­site and ab­so­lutist paths. Either yield­ing to the threat of the US’ pulling out, trade and fi­nan­cial is­sues are politi­cized and ex­panded into con­flicts over the rules, sys­tem and ori­en­ta­tion, which will even­tu­ally lead to the dis­cretiza­tion of global value chain and the ten­dency of clique-form­ing in pol­icy choices. Or, op­ti­miza­tion of the dis­pute re­solv­ing mech­a­nism and mul­ti­lat­eral co­op­er­a­tion mech­a­nism to al­lo­cate more say to de­vel­op­ing coun­tries ac­cord­ing to their con­tri­bu­tions, thus check­ing cer­tain coun­tries’ uni­lat­er­al­ism and pro­pel­ling the global econ­omy back to the path of open­ness, in­clu­sive­ness and co­or­di­nated re­cov­ery.

So in the se­cond half of China-US con­test, how to make good use of the mul­ti­lat­eral plat­forms, file rea­son­able ap­peals and lead re­form of the global eco­nomic gov­er­nance sys­tem while avoid­ing the con­tain­ment of an eco­nomic Iron Cur­tain will be a new prob­lem con­fronting China.

Fourth, the game the­ory will change from an­swer­ing chal­lenges to self-im­prove­ment. In the se­cond half the firm­ness, speed and depth of the two coun­tries’ re­spec­tive strate­gic re­form will de­cide the win­ner. China should hence fo­cus on im­prov­ing its econ­omy based on re­form and open­ing-up.

Do­mes­ti­cally the new round of re­form needs to be deep­ened and the gov­ern­ment needs to de­velop poli­cies to un­der­pin growth in 2019. On one hand, mar­ket ac­cess for pri­vate en­ter­prises should be sig­nif­i­cantly widened, pro­vid­ing more room for the de­vel­op­ment of pri­vate and small and medium-sized en­ter­prises, op­ti­miz­ing China’s eco­nomic struc­ture and its mar­ket.

This would also help build a mar­ket en­vi­ron­ment of com­pet­i­tive neu­tral­ity and weaken the pres­sure that devel­oped coun­tries ex­ert on China.

On the other hand, China should fur­ther strengthen the pro­tec­tion of in­tel­lec­tual prop­erty and pro­vide the same pro­tec­tion for for­eign com­pa­nies’ IPR to re­duce the ex­ter­nal re­sis­tance to tech­nol­ogy trans­fers.

Ex­ter­nally, a new round of high-level open­ing-up should be ad­vanced. The au­to­mo­bile mar­ket and ser­vice in­dus­try should be grad­u­ally opened and the use of neg­a­tive list for for­eign in­vest­ment be pro­moted to share China’s growth op­por­tu­ni­ties with other coun­tries and ex­pand the bonds of shared in­ter­ests with the US.

Bi­lat­eral co­op­er­a­tion with ma­jor economies apart from the US, for in­stance, the Euro­pean Union, Ja­pan and In­dia, should also be strength­ened to fur­ther in­te­grate to global in­dus­trial chain through tools and mech­a­nisms in­clud­ing the Re­gional Com­pre­hen­sive Eco­nomic Part­ner­ship and a tri­lat­eral free trade agree­ment be­tween China, Ja­pan and the Repub­lic of Ko­rea.

The more ex­ten­sive and firm China’s net­work of friends is, the bet­ter it will be able to pre­vent the US’ China poli­cies go­ing to the ex­treme.

The au­thor is an aca­demic com­mit­tee mem­ber of Pan­goal In­sti­tu­tion and chief econ­o­mist in the Re­search De­part­ment of ICBC In­ter­na­tional.


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