Incorrect calculation of the Trump – Nikkei Asian Review trade war

Just as a trade agreement between the United States and China seemed to be in sight, the negotiators found themselves at the beginning.

The immediate reason for the disruption was China's insistence on a substantially rewritten draft agreement, which, according to US President Donald Trump's administration, repudiates previously agreed conditions.

But the fundamental cause of the changes made to the project by China – the reason for its reluctance to meet US requirements – lies in a fundamental miscalculation on the part of the Trump administration.

In other words, the United States has played their hand too much. The agreement that China has rewritten would have forced the Chinese side to legislate some of the changes requested by the United States, and it was negotiated as part of an aggressive US-led campaign against the Chinese telecommunications giant Huawei Technologies.

The campaign included the addition of the company to the black list of US exchanges, which reduced its supply of critical technologies and encouraged US allies to also isolate the company.

If such actions will undoubtedly hurt Huawei, the company may eventually offset its losses by forging links with other fast-growing Chinese technology companies. For the rest of the world, however, the Trump government's attacks on Huawei – and against China in general – will have far-reaching consequences.

China is too deeply rooted in global supply chains to be able to disappear. The alienation of the world's largest manufacturer and industrial producer – with its consumer market of 1.4 billion people – will seriously disrupt global value chains and darken the global economy.

Trump administration 's miscalculations may have resulted in part from a hasty action, hoping to win a "victory" before the presidential election of the US. next year. But the United States also seems convinced that it will face a China whose hand is particularly weak, because of the risk of a hard landing of its economy. This is not the case.

While China imports relatively little from the United States, it may have more weapons than its opponent to deploy in this trade war. Beyond direct retaliation, through tariffs on agricultural products and commercial aircraft, it could strengthen capital controls, abandon its unprecedented holdings of US Treasury debt or allow its currency to depreciate. (The wave of competitive devaluations triggered by this latter option would destabilize the US dollar as well as international monetary institutions.)

Until now, however, China has shown a lot of restraint. For example, despite the recent depreciation of the yuan against the US dollar, the People's Bank of China has expressed its intention to maintain the stability of the exchange rate. While intensifying trade and technology tensions with the United States may require retaliatory action in the near term, China will likely maintain this restriction for the foreseeable future.

The reason for this is simple: this moderate approach serves China's long-term interests, both directly (by supporting continued economic growth and development, preserving social stability, and protecting the integrity of the economy. the State) and indirectly (by avoiding further costly disruptions of global markets). Ironically, it will also force China to engage in the structural reforms that the United States claims to demand.

The trade war has highlighted the risks inherent in maintaining an open economy. But, rather than close the door to the rest of the world, China is trying to protect the stability of the global economy.

Chinese leaders do not believe that the trend of capitalist-led globalization – in which China is both a major beneficiary and, increasingly, a major contributor – will be reversed soon. Because the United States remains, in the eyes of China, the defender par excellence of the free markets to which China is heading, its deviations from the orthodoxy of free markets and its abuse of power could undermine the foundations America and threaten its institutions.

Certainly, China and the United States will probably become more and more foreigners. China will develop its own core technologies to end its dependence on the United States and put in place the strategic sectors that will propel its economic development.

But such technological progress on the part of China will in any case force the country to implement structural reforms. In particular, it will protect intellectual property rights and establish more efficient financial markets, to encourage basic scientific research, technological innovation and entrepreneurship. Recognizing the role of financial markets in promoting technological innovation, China will open a Science and Technology Innovation Council on the Shanghai Stock Exchange in June.

This does not mean that China will close the door to trade negotiations. On the contrary, the US-China trade relationship presents structural imbalances that China is willing to remedy.

But, rather than letting the Trump administration push it to unilaterally increase its imports – a naïve and reckless approach – China insists on solving the problem in stages. The world should support this method, especially the United States, which eases export restrictions to China and welcomes Chinese investment in the United States.

For many, China and the United States seem to be falling into the "Thucydides trap," a self-fulfilling prophecy in which a hegemon, fearing a challenger, unleashes a war for world domination. But, even as the economic struggle between the two countries continues, this issue is far from inevitable.

The lack of mutual political trust has not prevented the United States and China from engaging in mutually beneficial trade collaboration over the past 40 years, nor has the recent increase in cultural, educational and other exchanges. At a time when both countries face many common challenges – including climate change, nuclear threats, terrorism, poverty and the stability of financial markets – we can only hope that the administration American shows once again the vision and wisdom needed to renew these relationships. cooperation with China.

Zhang Jun is Dean of the Faculty of Economics at Fudan University and Director of China Center for Economic Studies, a Shanghai-based think tank.

Copyright: Project Syndicate, 2019.

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