The escalating trade tensions between China and the U.S. since the start of 2018 has serious implications not only on bilateral economic ties, but also on global economy. How to see current China-U.S. trade tensions? How to response to the U.S.-led trade dispute?
Ju Jiandong, Unigroup Chair Professor of Finance at PBCSF, lectured on “China-U.S. Trade Disputes and World Economic Reconstruction” recently in Beijing. He introduced the evolvement of China-U.S. trade tensions, predicted possible crises and countermeasures, and suggested strategies and tactics of which the key lies in preventing and mitigating crises while maintaining an effective economic growth.
Three stages of China-U.S. trade tensions
According to Prof. Ju, China-U.S. trade tensions have gone through three stages: I. Trump’s surprise action on tariffs and trade disputes; II. Tariffs were imposed on 50 billion USD imports; III. Trade disputesheated up.
At the third stage, the U.S. has finished adjusting its Chinese strategies in four aspects - technology, institutional system, finance and global value chain & economic governance. Its attitude towards China has shifted from strategic cooperation to strategic confrontation. Prof. Ju offered an in-depth analysis from the four aspects:
Technology: On July 10, 2018, the U.S. Senate passed its Foreign Investment Risk Review Modernization Act (FIRRMA) by a vote of 400:2. Shortly after, on August 23, Trump hosted the Foreign Investment Risk Review Modernization Act (FIRRMA) Roundtable at the White House, directing FIRRMA specifically at China to “guard” the U.S. against any threats of bad foreign investments. The two incidents indicate the determination to keep China at a safe distance away from its core technologies.
Institutional system: On July 26 and 27, 2018, the U.S. ambassador delivered remarks at the WTO General Council, accusing China’s economic model. This was the first time the U.S. government attacked China’s fundamental system through official documents since the two governments established diplomatic relations in 1979.
Finance: The successive outbreaks of financial crises on emerging markets over the past few years have attracted extensive attention internationally. In an interview with CNBC on August 28, U.S. Treasury Secretary Steven Mnuchin warned China against weakening its currency to deflect the impact of tariffs. Any attempt to devaluate RMB would be regarded as government manipulation. It is clear that the U.S. has extended its confrontation from trade to international currency and finance.
Global value chain & economic governance: On August 27, 2018, the U.S. reached a preliminary trade deal with Mexico, requiring 75 percent of auto parts in North America to be produced in the U.S or Mexico. It also includes new rules on intellectual property rights that go directly against China.
Comparative Analysis on China and U.S.
1. China’s situation
(1) China's retail sales of consumer goods grew to USD 5.42 trillion in 2017, higher than that of U.S. which is USD 5.07 trillion;
(2) China outpaced U.S. in the balance of aggregate nongovernmental financing, to USD 25.85 trillion. This figure indicate a larger financial market in China than in U.S.
(3) China showed a strong growth in Patent Cooperation Treaty (PCT) applications from 3.75% of the global total in 2008 to 20.08% in 2017. And some optimistic prediction may show it will out run U.S. within two years as the largest source of patent application.
2. China-U.S. economy and trade
Prof. Ju explained the status quo of China-U.S. bilateral investment:
The U.S. direct investment in China grew fast from 2013 to 2017. The Chinese direct investment in the U.S. has increased by 3 times in 2016, from USD 14.6 billion in 2015 to USD 40.4 billion before the steep drop in the first half of 2018.
Prof. Ju analyzed the implications that the two tariff lists has on both nation’s GDP. He believed that, although the tariffs will land only a minor hit to Chinese enterprises, social welfare and GDP, but it will have a serious impact on total trade volume. After all, the trade dispute will influence China quite negatively, and significant impacts will also be shown in U.S.
Core task: Preventing and mitigating crises while maintaining an effective economic growth
Based on academic analysis, Prof. Ju put forth his strategy and tactic to address the trade tensions. The core task is to prevent and mitigate crises, while maintaining a 4%-7% effective economic growth. Roughly, he identified three stages of the strategy and tactic.
The first stage (2018 to 2019): to stay strategically independent and tactically restrained, to ease shocks, and to identify guiding principles. Under the challenge from the US, China’s strategy with the US shall switch from strategic cooperation to strategic independence; and identify principles on global economic governance and national institutional building. Prof. Ju saw China-U.S. trade tensions as a consequence of interaction and evolvement of domestic and international conflicts. Therefore, top priority by 2019 is to ease shocks, and make clear of guiding principles through various measures.
The second stage (2020 to 2023): to prevent and mitigate crises, take active actions, maintain economic growth and keep the unity and independence of the country. According to Prof. Ju, crises are most likely to break out from 2020 to 2023. He also predicted even stronger disputes between the two countries, and suggested to take active actions.
The third stage (2024 to 2028): to reconstruct international governance system, accomplish domestic market institutional building, and gradually return to a healthy growth environment.
Predicated paths of China’s economic growth
Professor Ju pointed out that from long term development, the concentration should be put on developing hi-tech industries. He introduced three scenarios of China’s economic growth (see picture). Path I represents a normal path without China-U.S. trade dispute. It is clear that China’s GDP will catch up with U.S. in 2025 and grow 2.5 times faster than that of the U.S. in 2060. Path II, which significantly drifts away from the normal course as shown, explains how Chinese economy will perform under the China-U.S. trade dispute, when U.S. gained the upper hand. But if China deals properly with the trade dispute, it will regain the fast lane of healthy economic development after a decade of considerable adjustments, and reach national development goals in the middle of this century (Path III).
(Three development paths of the Chinese economy)
He emphasized that the outcome of the trade dispute cannot be measured in short-term, but only by the fact that whether China’s long-term economic growth can go back to normal track. He restated the importance of preventing and mitigating crises, and identified four major tasks – promoting fast progress of China’s hi-tech industries, promoting reconstruction of global governance system, promoting the reform and opening up, and promoting reconstruction of international monetary system.
To conclude his speech, Prof. Ju said, for China, the key to addressing the trade disputes is to establish open, competitive, fair and efficient markets of products, technologies, factors and thoughts.
