Author: Fan Gang, President of CDI

Editor’s Note: Eventually, China and the United States will need to sit down at the negotiating table to solve trade frictions.

Trump would sooner or later impose trade sanctions on China, but no one had expected such a big move. China’s exports to the United States amounts to over 400 billion U.S. dollars, while Trump is now seeking to impose tariffs on up to $60 billion of Chinese imports. Such a big move on trade shows that the United States treats China as its primary rival in trade. The action also illustrates that such superpower like United States can be brutal sometimes, adopting measures without any evidence or reasonable analysis and ignore rulings by the WTO.

American consumers will be the victims of trade war between the US and China. The trade war will also harm China as the consumer product prices could rise. It is necessary for China to consider the price elasticity of demand when deciding how much to export. Generally speaking, the trade war will impact on United States as much as China. There is the fear that if you want to fight this trade war and I do not fight back, you would probably be even less reasonable tomorrow. Thus, China will certainly take countermeasures.

Keep a level head in face of US-China trade war

As a rising middle-income country, China needs to be prepared for the possible suspicion, antagonism and even aversion from others. These reactions must be taken care of proactively but also with a cool head. This is not the first time for China to meet with oppositions from other countries, nor will it be the last. China shall keep a level head in face of the cacophony of voices as it rises.

Those who in the past believed the China’s growth depended on low-end manufacturing have now discovered that China is able to innovate and has even become a leader in certain high-tech industries. The western world now feels threatened as China becomes a stronger competitor. And the trade war is highly interconnected with the rise of rise since Trump has declared that the trade sanctions on China are to protect US interests.

China has worked hard for its own success. Chinese have lower per capita income but are increasingly capable of innovation. Most exporters in China are private companies not subsidized by the government. There are many foreign-funded products and services among Chinese exports as well, for example, products that are manufactured in China by American businesses, which also count as Chinese exports to the US when calculating the US trade deficit with China.

Structural conflicts exist in Sino-US trade

The Sino-US trade frictions is not simply caused by trade deficit but more fundamental structural challenges existing in the two kinds of economies. Initially, the US alleged that the deficit due to China’s low foreign exchange rate. However, trade deficit has persisted after China raised RMB’s exchange rate against the US dollar. Even after US conducted the 301 Investigation against China, trade deficit still stayed on the same level.

China is not only highly competitive in a wide range of industries and also benefits from low cost and high efficiency in many fields.  Even though, the competitivity in high-tech industries still needs to improve. Structural problems exist in Sino-US trade in the sense that China is not allowed to import the desired products as it exports its products to the US.

Stand up to US-China trade war

First, China needs to have reciprocal countermeasures. China will probably raise tariffs in response to the imposed higher tariff, which is something that China is capable of doing. Second, crisis management consciousness is crucial to preventing potential risks from developing into full-fledged crises. China needs to negotiate and defuse tensions where possible to avoid a completely hostile situation. Third, China-US trade only accounts for just 16-17% percent of global trade, and trade with Europe, another 16-17%. China also has the option to develop trade relations with emerging countries, including countries in Latin America, Middle East and Africa.

China’s core concern is still development. China welcomes foreign investment not just for the sake of attracting capital, but also creating jobs and bringing in advanced technologies and management. We observe how foreign-funded businesses operate and learn their experience in management. This is not stealing, as this kind of knowledge or expertise is universally shared. It is a common practice among all countries to model on existing products and come up with similar products on their own, not just in China. China is committed to staying open and will not shut its door for foreign businesses even though its own businesses are denied entry into a foreign country.

Globalization will not stop

Globalization was started by American capital and multinationals in the first place. American workers did not take it seriously at the beginning, but globalization has indeed spurred the development of China. As farmers leave villages to work in cities, China has seen a steady increase in per capita income, fast development of technologies and larger exports. Naturally, discontent in the US rises as local workers lose jobs to their foreign counterparts. In a sense, reversals and relapses in the process of globalization are inevitable. It is therefore important to anticipate challenges and be prepared.

However, globalization will not stop. Multinationals from developed countries now continue to promote globalization as they are still establishing their presence across the world today to maximize their gains. Two new forces have also joined to promote globalization nowadays, one being low-income countries which have discovered the benefits of attracting foreign investments for their own development from the experience of China and India, the other being middle-income countries like China.

China, as a middle-income country, needs globalization in the process of bringing in foreign capital and encouraging its businesses to go global. Going global is a must for China in view of its domestic excess of capital. Despite a moderate level of income in China, the high savings rate has resulted in a huge amount of capital, which will lead to overcapacity if invested within the country. Many Chinese businesses have also come to realize the importance of seizing the opportunity to develop abroad as China restructures its economy, thus starting to allocate global resources.

Despite opposing voices, globalization will continue in the long run. It is natural that the US wants to get some of its businesses back to accommodate the interest of domestic workers, as all governments wish to see more investment within their own borders. While there are many reasonable ways to do this - reducing interest rate in particular - fighting a trade war, however, is a bit of reversal of globalization.