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Let US, China both be great again
2018-04-09, KEN DAVIES

Both China and the United States are engaged in striving to revive their respective country’s fortunes. US President Donald Trump’s top priority is to Make America Great Again, while China’s leaders have a vision of the Chinese Dream, which could be described as “making China great again”.

Chinese President Xi Jinping last year announced a broad vision of China as a leading world economic power by the year 2050 that is not impossible to imagine, though it would require further major political and economic reforms to achieve ambitious goals, including: Rule of law, innovative companies, clean environment, expanding middle class, adequate public transportation, and reduced urban/rural income disparities. 

Are the two dreams compatible? Can America and China both become “great again”, or must one succeed by forcing the other to fail?

For the past 40 years since China adopted the policy of reform and opening-up to the outside world, the belief of dominant policymakers in China and the US has been that their economies can only prosper by working together. 

Proponents of the alternative policy — keeping China poor to ensure that it stays weak — were thin on the ground, and fortunately were not listened to.

The consensus in the US was that a richer China would be a peaceful China, and an enormous market for American products and services. This point of view still predominates, despite the current shenanigans.

During his first year in office, Trump did not back down from his election campaign threat to punish China with tariffs, but neither did he put it into practice. His initial priorities were domestic policies like abolishing Obamacare, and then tax reform, while foreign policy was dominated by the threat of the Democratic People’s Republic of Korea’s nuclear weapons and continuing wars in the Middle East. In addition, his top advisers were broadly against protectionism. 

What changed in 2018? Having shelved or dealt with the domestic issues, Trump in recent weeks replaced his secretary of state, his chief economic adviser and his national security adviser with hawks and protectionists. He now has a team that will back, not block, his moves to start a trade war.

The first salvo in this battle was the US’ imposition of an additional 25 percent duty on steel and an additional 10 percent on aluminum imports from all countries apart from its North American Free Trade Agreement partners, Canada and Mexico, starting on March 23. It has backed down on these tariffs in the case of some allies, but not in the case of China. It wants to stop what it sees as China flooding the world with cheap steel.

The next stage was the announcement on March 22 of further tariffs on a wide range of imports from China, coupled with restrictions on technology transfer. The tariffs are to be imposed on approximately $50-60 billion of Chinese goods, partly as punishment for alleged violations of American intellectual property rights by China.

China has so far retaliated cautiously.

It responded to the initial announcement of US tariffs with a polite and measured rebuttal via the official Xinhua News Agency that said raising tariffs on Chinese goods is just like using 20th century or even 19th century tools “to tackle problems of the 21st century, an age of globalization”. Doing so would, it continued, “disturb the interconnected supply chain of many industries and increase costs for American businesses and consumers”.

Then China announced restrictions of its own. On April 1, it said it was imposing tariffs of up to 25 percent on 128 imports from the US, including fruit and pork, in retaliation for the US’ steel and aluminum tariffs. 

China also announced on April 4 a list of US products valued at $50 billion annually that are subject to additional tariffs. The planned measures include restrictions on imports of American soybeans and planes (which could hit Boeing hard).

Commentators in China made it clear that these measures are intended to demonstrate that China will counterattack only if attacked, while leaving room open for dialogue. 

The stage is therefore set for further exchanges of negative trade measures. There is no question that a sustained China-US trade war would do damage to the world economy. 

As a result, stock markets, led by those in New York, have fallen from their recent peaks. There is no doubt that an escalation of these exchanges between the two largest economies in the world would hurt everybody, starting with the two antagonists themselves.

There will eventually be a resort to negotiation. The sooner such talks can start, the better.

The author is former Asia chief economist and Hong Kong bureau chief of the Economist Intelligence Unit and senior economist in the OECD’s Investment Division.

 


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