[China Macroeconomic Forum]Li Daokui: Analysis of Sino-US Trade War Based on Fundamental Causes

Li Daokui, Director of the Institute for the Chinese Economic Practice and Thinking, Tsinghua University

In terms of Sino-US trade, I will mainly talk about two points as below:

First, we shall analyze Sino-US trade war based on the fundamental causes. Specifically, Sino-US relations have entered a new era, which is reflected by the dramatic changes of social and political patterns of China and the U.S.. Before engaging in the Pacific War in 1941, the U.S. was a country adhering to isolationism. Over the past 300 years after its founding, the U.S. pursues the policy of trade protection for most of the time, and it started to promote global trade only after 1941. There are two factions in U.S. society, including the elite, who advocate liberalization of international trade, and the grassroots. Trump belongs to the faction of the grassroots, who advocate trade protection. It needs to be emphasized that Trump does not fight alone, but he is supported by a strong force. However, in terms of trade war with China, the elite and the grassroots in the U.S. have reached a high degree of consensus. The U.S. once boasts a GDP accounting for more than 30% of the global total, but that era is gone forever. Therefore, in order to maintain its status in the global arena, the U.S. has waged a trade war against China.

Changes are happening in China. Since the 18th National Congress of the CPC, President Xi called on the entire country to have confidence in our chosen path, guiding theories, and political system, and most importantly, confidence in our culture and adopt the overall plan of “Five in One”. The think tanks of the U.S. are concerned with the report of the 19th National Congress of the CPC, which has been carefully studied. After looking into the development of China, the U.S. intends to change China's chosen path and political system through WTO, but this idea did not work. Therefore, both sides of the Sino-US relations have changed. The above-mentioned conflict is just the tip of the iceberg on the trade issue. There are also many conflicts beyond the economic field, such as countermeasures against Chinese students, against the Recruitment Program of Global Experts of China, against the cross-border mergers of Chinese companies, and so forth. We must be highly aware of the real situation.

We must have the bottom-line thinking. Today, China and the U.S. are not Soviet Union and the U.S. in the cold war, because China and the U.S. have converged interests. According to the statistics of UK, the average sales and profits of American Fortune 500 companies achieved in China exceed the proportion of the Chinese economy in the global total. Recently, BMW announced that it would build its third factory in Changshu, China to manufacture Mini Electric vehicles. Therefore, we must have the bottom-line thinking that there is huge room for cooperation between governments and enterprises of China and the U.S., for which we shall keep clear heads.

Meanwhile, China is constantly making technological breakthroughs, including nuclear energy, manufacturing of basic machinery and robot arm and fast shipment at factories. Chinese robot arms are adopted in the assembly lines in China, and even in three major automakers in Detroit, the U.S.. The editor of the trade column of New York Times said that he was very shocked to realize that Chinese robot arms were adopted in Detroit and that China could know the modification of American car models in advance. In addition, China is so fast in catching up with the developed countries in technologies, which has shocked UK, Germany, the U.S. and Japan. China has 1.2 million graduates with engineering background every year. The engineering programs of Chinese universities are far more reliable than that of economics. According to the report of US media, the engineering program of Tsinghua University has been ranked first for two consecutive years. Last December, the principal of MIT held the meeting of the board of directors at Tsinghua University to learn its training mode. On the whole, China is still catching up in technologies.

I believe that the economic development of major countries cannot rely entirely on international trade. For example, Germany adopted trade protection in 1871. The north of the U.S. which adopted trade protection won the American Civil War. After the Meiji Restoration, Japan also promoted its economy through trade protection. Based on our experience over the past 40 years of reform and opening up, the biggest help is not from the funds of international investors and the larger international market, but from the open-mindedness and learning from the developed countries. Young people used to work and learn advanced concepts in foreign companies first, and then started their own businesses. For example, Jack Ma used to visit the foreign companies from time to time, and then he founded Alibaba based on what he has learned. After Robin Lee completed his education in the U.S., he founded Baidu. These are the biggest help we gained from opening up. The help of international trade to the economy is relatively insignificant. The most important thing is to maintain the learning attitude. Germany, Japan and the U.S. did it, so will China.

Second, make judgments on the current situation. Although the new era of Sino-US relations has arrived, there are mutual benefits of both sides and there is still room for cooperation. If the Sino-US trade war is regarded as a battle, it is part of the all-out confrontation between both countries. It consists of three levels:

First, Sino-US trade involves negotiation, confrontation, and talks. As for the issue of trade war, although China is the trade surplus country, we are at a relative disadvantage. Under this circumstance, China shall spare no effort to negotiate with the U.S., and this is why the central government proposes to retain foreign investment. From a historical perspective, we always have a strong sense of war and have been in a war against poverty for a long time. We shall stick to our own tactics of war, choose the time and place by ourselves, make full use of our own advantages and fight the war under the most favorable conditions for us.

Second, domestic economy. The trade war between China and the U.S. is actually the competition between the economy of China and the economy of the U.S., whoever can achieve sustainable development and maintain fast innovation will win. First, continuous learning. On this battlefield, I agree that we shall continue to deepen reform and opening up, especially open our mind. Despite that the U.S. has set obstacles to prevent Chinese students from studying in the U.S., the Chinese government must support our students to do so. It is the key for continuous learning and reform and opening up. The key for reform and opening up does not lie in the growth of trade volume, or in the increase of foreign capital investment, but in learning from others, not only from the U.S., but also from Germany. Second, reform of state-owned enterprises. The reform of local state-owned enterprises is good. The current reform of central enterprises has serious problems, which need to be solved urgently. Third, technological innovation. The government shall motivate technicians and scientific research personnel. For instance, for the businesses started by professors using the National Natural Science Foundation of China, instead of intervening at the initial stage, the government shall supervise whether the businesses contribute to the technological innovation of China rather than raking in money for individuals. The state encourages professors to start their own businesses, with the intention to motivate scientific research personnel. Under this circumstance, if the operation of domestic innovative companies gets improved, the government will take the larger share, and the people will enjoy the benefits brought by economic growth, and the personal income will increase. It is the driving force of technological innovation. Fourth, stability of financial policy. The financial guidance policy of this year is wrong. De-leveraging shall be targeted. Since finance is the sector where a slight move in one part may affect the situation as a whole, if the direction of financial measures is not correct, there will be great negative impacts on the real economy of China. The problems facing the financial sector of China include too many bad debts due to leveraging, and failing to figure out the key issues of leveraging.

Third, public opinion. We shall focus on people engaged in social sciences at various fronts in China, and make sure that they understand the truths of China. In specific actions, we shall also learn to express our opinions in a moderate manner. Finally, this year marks the 40th anniversary of reform and opening up, we shall continue to call for emancipation of the mind. Our new task is to seriously summarize theories with universal relevance based on our economic practices and thoughts over the past 40 years, including deficiencies during the reform, so as to make people at home and abroad understand.

(It is the keynote speech by the guest at the Macro Economy Study Report Release Conference (2018 Q3) of National Academy of Development and Strategy, RUC on September 22, organized according to the recording without my review)