The US challenge to China

A breakdown in the relationship between the two countries would affect about 40 per cent of the global economy

Will the uninterrupted Chinese rise be affected by what some trade analysts are calling an economic cold war? By the end of September the United States and China had slapped tariffs on their trade that exceeds $635 billion annually. Trade experts anticipate ‘an economic partition’ reminiscent of the globe-splitting divide between the United States and the Soviet Union following the WWII. What is occurring is a fundamental reshaping of US-China commercial relationship after nearly four decades of growing interdependence. These growing links had ushered in a period of globalisation with shared benefits by all those who participated in the process.

The emergence of a global economy shook financial markets and reordered business supply chains. The United States-China annual goods trade almost doubled since 2006. If there is a real breakdown in the relationship between the two countries it would affect about 40 per cent of the global economy. Donald Trump, the United States president, says that he has resorted to tariffs to compel China to abandon a host of unfair trade practices, including making American companies give up their trade secrets in return for access to the Chinese markets. Washington is also unhappy that China subsidises state enterprises that dominate the country’s economy. Commercial relations with China do not take place on a level playing field.

The Trump administration is moving a bit more cautiously than indicated earlier, concerned that the American consumers will be hurt and punish the government in the November mid-term elections. On September 24, a 10 per cent tariff was applied on $200 billion worth of imports which was set to increase to 25 per cent if Beijing did not relent and adopt the changes in the economic management desired by Washington. China responded by imposing tariffs on $65 billion of American imports. Beijing cannot match Washington dollar-for-dollar since it imports much less from the United States — $130 billion in US goods in 2017. Trump warned that if Beijing retaliates, that would spark another set of tariffs on $267 billion in Chinese goods. Chinese official said that their country would keep fighting back with qualitative measures. American businesses have taken that to mean an array of regulatory measures: stalled visas, delayed licences and increase in port inspections.

Strengthening of the United States dollar would reduce the impact on consumer prices. Since early February, the dollar has gained more than six per cent against the Chinese, eroding more than one-half of the new tariffs impact. The effect in China will be opposite to that in the United States. The decline in that country’s currency with respect to the United States dollar will increase the impact of the retaliatory tariffs by Beijing.

The Trump administration has taken other steps besides the imposition of tariffs that will have consequences for economic relations with China. It is discouraging Chinese investment in the United States. Congress this year passed legislation, with the support of the White House, to investigate more closely potential Chinese acquisitions of American high-tech companies. According to one analyst, Michael Hirson, director for Asia at the Eurasia Group, some administration hardliners would be happy to see the trade and investment restrictions lead to the decoupling of the United States and Chinese economies. According to Caroline Freund, a senior official at the World Bank, a 25 per cent tariff applied to all US-China trade which results in the withdrawal of investors, the United States economy would be 1.6 per cent — or $320 billion — smaller than under normal trading relations while China would lose 3.5 per cent of its gross domestic product. The Shanghai Composite Index, the country’s main stock gauge, has dropped more than 20 per cent since January 2018.

Those who observe China argue that President Xi cannot show weakness to his people in the manner of his response to the American moves. The Chinese president is trying to show strength on the world stage as the Chinese public, whose respect is crucial to his sustained power, increasingly bashes Trump online for picking on China.

Delving into history, Paul Krugman, the Nobel Prize winning economist, reminded the readers of his New York Times columns, that the trade system President Trump is perverting was developed by the United States over a period of more than 80 years. In 1934, President Franklin Delano Roosevelt had Congress pass the Reciprocal Agreements Act. Henceforth, tariffs were negotiated via deals with foreign governments, giving export industries a stake in open markets. And these deals were subject to up-or-down votes, reducing the ability of interest groups to buy themselves special treatment. The United States innovation became the template for the global trading system, culminating in the creation of the World Trade Organisation. Trump’s moves have brought lobbying and corruption back into the trade game. On September 21, three days before the United States tariff moves, China cancelled trade negotiations that were scheduled a week later and scrapped military talks that were to start in Beijing.

Centuries ago, Thucydides, the Greek sage, wrote that when a rising power challenges the one that has been the dominant one, open conflict is inevitable. For him conflict meant war, not a trade war. There are several ways of looking at China’s rise not only in terms of the size of its gross domestic product. It may soon overtake the United States and become the world’s largest economy. China is gaining on the United States in other ways. Mary Meeker’s latest internet trends study shows that five years ago China had only two of the world’s largest publicly traded technology companies while America had nine. Today China has nine out of the top 20 while the United States has 11. China’s plan is to catch up with the United States in Artificial Intelligence. AI is built on how much data can be fed into machines and the fact that China has so many more people generating information it has a definite edge over the Unites States. Trump’s trade moves may slow down the Chinese economy but not eliminate its threat to the United States.

Published in The Express Tribune, October 1^st, 2018.

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