About China-U.S. Trade Frictions

Author: Fan Gang, President of CDI

Editor’s Note: China and the US have achieved substantial progress following their several rounds of high-level trade talks. The two countries are striving to reach a win-win agreement. What are the causes and effects of the trade frictions? More importantly, what are the solutions to break the impasse?

What are the causes of trade imbalance between China and the US?

The U.S. has run trade deficits for years on end for the following general factors: first, low savings rate contributes to trade deficits; second, the U.S., as an issuer of the global currency, must maintain a certain level of deficits if it wants to make the currency a reserve currency or a trading currency.

Balanced trade between China and the U.S. can be achieved if both countries capitalize on their comparative advantages, for example, with 20 million shirts produced by China traded for a U.S. Boeing airliner. If China needs high-tech products, but the U.S. will not sell them to China, the already existing deficits between the two will grow. Hoping to balance China-U.S. trade by having China import more U.S. soybeans, natural gas and pork will not work, as this is not possible without both countries leveraging their comparative advantages.

What impacts do China-U.S. trade frictions have on China?

The impact that we are actually seeing now is mostly on investment. Last year, investment recovered fast in the first quarter but fell back in the second quarter as soon as trade frictions appeared. Not only China’s investment had to be held back, but foreign investment as well. Against rising uncertainties, everyone stopped and waited, causing a huge drop in investment and fluctuations in the capital market. If frictions were to continue, it would pop a bubble for the stock market.

How can China improve itself to solve China-US trade frictions?

It is not fair to put all the blame on the US, as China also contributed to trade imbalance. China has developed over four decades of reform and opening up. However, several adjustments need to be made in the process.

China does practice mercantilism to some degree and has certain policies encouraging exports. After the Trump administration reduced taxes, the tax burden for American companies was over 10 percentages less than that for their Chinese counterparts, shoring up competitiveness. But China has a policy of export tax rebate, and once taxes on exported goods are refunded, the actual tax paid by the Chinese exporter will be lower. The export rebate policy thus contributes to trade surpluses.

China joined the WTO as a developing country, therefore enjoying a 15-year transition period, after which China must scrap its protection policies and remove unequal conditions regarding labor, intellectual property rights, tariff barriers, and investment restrictions, etc. Fifteen years have passed, objectively speaking, certain protection policies are still being implemented, but the Chinese government has announced its determination to abolish such policies. Chinese companies need to foster international competitiveness with less government protection.

What opportunities have China-U.S. trade frictions brought to China?

It is important to bear in mind other markets in the world, which are increasingly diversified. Chinese exports to the US account for only 17% of its all exports. If China is able to do well in other markets, then the trade volume will not suffer much. The current industrial chain is globalized, and the transnational industrial chain makes everyone share the impact of trade frictions. If China is blocked in the US market, it only needs to look to other markets in the world and our domestic market. If China can make the pie big, then more investment will come from various parts of the world.

Aside from trade frictions, technical restrictions may also curb China's development. Now the US believes that China has stolen their knowledge and technology, and they did not expect China to learn so fast. So they deem it necessary to halt that trend. This is therefore not a short-term trend, but is here to stay for a long time. It is better for inevitable things to come earlier than later, compelling China to think about what to do in future reform and opening-up.