[China Macroeconomic Forum]Li Xiangyang: Sino-US Relations Are Facing Repositioning

Li Xiangyang, Director of NIIS CASS

In terms of Sino-US trade, I will talk about three issues:

First, I will talk about my basic judgment on the nature of trade war and the relationship between the traditional major country and the emerging major country. China and the United States are both major countries. The U.S. is the traditional major country and China is the emerging major power. The trade imbalance reflects their relations. The trade balance needs to be traced back to the Chinese model, which is the ultimate cause of divergence leading to Sino-US trade war. We can see from a number of speeches delivered by Donald Trump that the United States will face two major challenges in the future: the challenge of civilization, namely the challenge from Islamic extremism and fascism, and the challenge of development model, namely the confrontation between the Western liberal capitalism and China and Russia, which is inevitable. Trump wants to make the United States great again. Whoever prevents the United States from being great again will be subject to containment. For him, China is the biggest obstacle hindering the cause of making the United States great again, and therefore Trump adopts peaceful containment to confront peaceful rising of China. If we accept such a premise, there are some mistakes in our judgments on Sino-US relations in the past, for which rethinking is required at least.

Second, I will talk about the disputes among a number of judgments made on Sino-US relations. The first is how we think of Trump. It is controversial to think of Trump as a businessman without “professional knowledge, policy framework and strategic consensus”. It is difficult for us to make rational decisions based on this view. The second is the judgment on Sino-US relations that China and the United States are interdependent and mutual benefit is an important condition for mutual trust between China and the United States. From an economic point of view, the dependence between the China and the United States is particularly high. However, we need to rethink it if we take into consideration the game between a traditional major country and an emerging major country. The third is the judgment that Sino-US relations will not get deteriorated. We cannot simply assume that China and the U.S. will maintain not-so-bad relations in the future based on our experience over the past 40 years. Sino-US relations may get worsened to a certain extent. The fourth is the saying of "ballast stone". In fact, it fails in case of significant political and economic problems, which requires reflection.

Third, where is the equilibrium point of the game of the Sino-US trade war in the future? In what way the trade war will end? The equilibrium point of the game of trade war may be found in theory, but it is very difficult to figure it out in practice, depending on the judgment made by one side on the motives of the counterpart. The logic of game theory ultimately depends on the cost-benefit valuation of one side, and the cost-benefit valuation of the counterpart, including dynamic and static evaluations. In the static evaluation, there is no doubt that the U.S. has the advantage considering the interdependence between China and the United States. We are indeed in an asymmetrical trade structure. If the ultimate goal of the United States is to target China's development model and impede the peaceful rise of China, under such a premise framework, any concession made by us may be the basis for our counterpart to ask China for more. In addition to the static evaluation, two dynamic evaluations have been set up. In terms of time and space, we are at a disadvantage in the short term. If we make corresponding adjustments over a period of time and change the factors of cost and benefit, the behavior of the counterpart may change. For example, the reform of China may achieve significant progress, and the independent research and development capabilities of China may get improved. If we make directional changes in chip research and development within 3-5 years, and China does not need to rely on the United States, or if we make significant progress by means of cooperation with Europe and Japan, the behavior of the counterpart may change.

In addition, it involves government judgment and economic judgment. Many people hope that Trump will fail in the mid-term election or get impeached. Even so, the U.S. will not change its policy to impede the peaceful rising of China. The Democratic Party and the Republican Party have many differences, but they have reached consensus on impeding the peaceful rising of China. Even if Trump fails, the basic direction of Sino-US relations will not change. And I believe that when the economy of the U.S. reaches a turning point, it is possible to change the equilibrium point, because the economic recovery of the United States started in 2009, and it has been nearly 10 years since then. The next 2-3 years is an important time window. It is crucial for China to withstand the short-term pressure brought by the trade war. In addition, establishing a model of sustainable economic development of China is the most important factor in determining the equilibrium point between China and the United States.

It is still in doubt that whether the concept and behavior of global governance of China and the United States can be recognized by the majority of countries in the world. In fact, at in terms of the multilateral trade, China and the United States actually put forward completely different directions. For example, China emphasizes inclusive globalization, while the U.S. advocates returning to the model of fairness, trade protectionism, or bilateral economic cooperation. Whether these two models can be recognized by most countries will be a very important factor affecting the equilibrium point. If one of our ideas or behaviors can be recognized by most countries, then the United States will be isolated. But we shall also pay attention to the variables in the non-economic field, and if the trade is considered together with a number of other issues, such as the South China Sea issue, the Sino-US trade war will become more complicated.

In short, no matter in what way the Sino-US trade war may end, Sino-US relations are facing repositioning. That is to say, Sino-US relations cannot return to the state of cooperation before the trade war. Of course, we do not want to have a Sino-US trade war. We must spare no effort to avoid the worst consequence.

(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, organized according to the recording without my review)