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The ongoing U.S.-China trade has entered tit-for-tat mode. The US has started to collect 10% to 25% punitive tariffs on $ 250 billion in Chinese goods, about a half of Chinese exports to the US, while the Chinese government is back by imposing similar duties on $ 110 billion 80% of US exports to China.
If the two countries can not settle the dispute before the end of this year, it is highly likely that the President of the United States will be forced to pay the price. and the Chinese government vowed to retaliate in kind.
A full-scale trade war would be devastating not only to both countries, but also to the world economy. It is urgently necessary to settle the dispute before it is too late. I propose that Beijing take the initiative with a bold offer in automobiles. Open the Chinese market to U.S. motor companies, with minimal tariffs. It would not be possible to resolve the situation between Trump and President Xi Jinping but it would be possible to transform the atmosphere into an overall settlement.
Here's how.
In the last four decades, China has experienced sustained growth in economic crisis. Thanks to its closed capital market and financial system, China was almost untouched by the Asian financial crisis and the global financial crisis.
Today, the Chinese economy faces various challenges, such as housing bubbles, the sustainability of corporate debt and the hidden debt of local governments. The escalation of the trade war will be undermine economic stability, and in the worst case scenario an economic crisis. It is in the best interest of China to end the trade as soon as possible.
Admittedly the U.S. started the trade war because of its huge trade deficit with China. But now the ball is in China's short. In response to the criticism of the Trump administration, the Chinese government slashed its overall tariffs twice. But it seems that the Trump administration is not satisfied with these unilateral actions, which benefit all World Trade Organization members, rather than the U.S. only.
The US-China trade is triggered by the $ 375 billion bilateral trade imbalance. A big number, but the auto industry is large enough to have a real impact. With the annual sales of 30 million units, China's auto market is the largest in the world, almost twice as big as the US, and it still has room to grow.
However, the long-standing 25% tariff imposed on cars has been effectively limited market access for foreign-made. In 2017, the U.S. exported 274, 000 vehicles to China, less than 1% of all automobiles sold in China.
The Chinese government should be bold and use its automotive market as a bargaining chip with Trump. In my view, Beijing should offer the following package: (1) cut rates on American automobiles to 2.5%, the current U.S. level; (2) allowed American automakers to set up wholly-owned factories; and (3) grant American automakers to Chinese clients. This would be a good deal for Trump to turn down.
According to Professor David Autor of the Massachusetts Institute of Technology, the U.S. lost 5.8 million manufactures jobs from 1999-2011. Rebuilding the U.S. manufacturing industry is a top priority in Trump's fight for fair trade.
No other industry has the same capacity to deliver jobs and revive American manufacturing as automobiles, with its vast supply chains.
Trump has repeatedly emphasized reciprocity in automobile trade. Whenever he criticized major U.S. trading partners because of alleged unfair trade practices, the asymmetric automobile tariffs between the U.S. and other countries are always cited as an example. The renegotiated Korea-U.S. Free Trade Agreement and newly concluded U.S.-Mexico-Canada Agreement, which is to replace the North American Free Trade Agreement, also focus on automobile trade. Opening China's automotive market can help President Donald Trump to achieve his policy agenda.
The Chinese automobile market is not only the largest in the world, but also a suitable market for American cars. Including tariffs and barriers for Americans in Japan and Europe.
Chinese consumers, like Americans, including large SUVs. Like Americans, Chinese consumers are not always as sensitive as their counterparts in Japan and Germany, and they want heavy and powerful cars. To a certain extent, horsepower and weight are seen as safety features. This is a golden opportunity for Detroit.
Beijing and Washington would have to deal with potential objections from Germany and other countries complaining that a bilateral deal would be unfair and would break WTO rules.
But there are precedents. In 1964, the U.S. and Canada signed the Auto Pact to open their automobile markets to each other. The WTO eventually ruled it illegal in 2001, but by NAFTA free trade agreement had long before superseded the Auto Pact.
If the Chinese government does not make the offer, it would be difficult for the two countries to make a bilateral agreement that is WTO compatible. And if they can not, then given the US's hostility to the WTO, the organization's objections may not be a deal-breaker.
Clearly, opening China's automotive market to the US is not an answer to all Trump's complaints against Beijing. In particular, it would be the case of China in the field of intellectual property disputes or distortions involving state-owned enterprises.
But, the largest market in the U.S. would be a major concession by China. It could mitigate the hostility of the Trump administration and eventually break the stalemate. Other countries could not be better off, but they would be better off.
Xing Yuqing is Professor of Economics at the National Graduate Institute for Policy Studies, Tokyo.
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