27
Sep
Hua Min, Professor of School of Economics, Fudan University
Facing the current Sino-US trade friction, we have seen that Western economists, American economists and the media are calling for no trade war. What is the view of Chinese economists? My point is that we shall not fight a trade war with the U.S. for three reasons:
First, in a historical view of point, all trade wars ended in crisis.
Second, in terms of economics, the trade war will bring welfare losses both in the United States and China.
Third, the original static equilibrium will become dynamic imbalance. On one hand, if we advocate a trade war and accumulate pressure of public opinion, the original static equilibrium will become dynamic equilibrium and then cause imbalance. On the other hand, in terms of policy, suppression and counter-repression will change the decision-making environment, and the imbalance will get increasingly serious. At last, it will end in a crisis, and therefore we shall not fight a trade war with the United States. It is the appeal from an economist to policy makers.
But what impacts will the trade war impose on Sino-US trade?
First, the rise and fall of a country relying on trade. In brief retrospect of the previous data and historical development process, it can be seen that countries having trade opportunities enjoy fast economic development, and those having no trade opportunity suffer from slow economic development. For instance, Russia boasts vast territory. However, it has only a small GDP as it has no seaport and thus there is no trade. Song Dynasty was the most prosperous era in China. Since Tang Dynasty, the emperors started to marry their daughters to foreign countries for establishing diplomatic relations and peaceful trade. However, the Northern Song Dynasty had the Grand Canal, which promoted domestic trade, as shown in the Riverside Scene at Qingming Festival. The Southern Song Dynasty built a maritime silk road, which greatly changed Europe and contributed to a new world economic development system. The fundamental reason was that the industrial civilization defeated the agricultural civilization. It was not caused by conflicts between colonies and their sovereign states or against invasion. In terms of economic growth, the industrial civilization defeated the agricultural civilization. The more important factor driving Europe to shift from the agricultural civilization to the industrial civilization was trade. Trade can expand market space and break through barriers. From the perspective of national interests, there were Mediterranean trade of Italy, rubber trade of Netherlands and trade of manufactured goods of UK. UK was different from any other country, for its currency had a fixed exchange rate, which helped traders to choose the shortest shipping routes towards Asia and minimize costs. In this way, UK became an empire on which the sun never sets. Therefore, the rise and fall of a country relies on trade, and economic growth will be under great pressure in a trade war.
Second, significance of trade to the economic growth of China. In terms of statistical data, the economic growth of China mainly comes from the demand market. The first factor is consumer demand. Consumption is determined by permanent income. Income mainly comes from salary, with an average annual growth rate of about 10%, and the consumption growth rate is 10%, so there is no big consumption. It is absurd to describe digital consumption as big consumption. As the total consumption has not changed, it is the result of innovation of consumption technology. Consumption is not stimulated. Consumption is determined by permanent income. Consumption is the result rather than the cause of economic growth. Exports are the engine of China's economic growth. Generally, in low-income countries, as long as the agricultural population is quite large, with the demographic dividend according to W. Arthur Lewis, the peasants can be transferred from the rural areas with decreasing returns to the industries with increasing returns. The export-driven countries must focus on manufacturing. The trade and exports of manufacturing and processing have a fixed exchange rate. They are underestimated and their competitiveness could be improved as long as the demand constraint is removed. From the above, we figure out the basic logic of China's economic growth. Export, consumption and investment are not independent variables and independent functions according to the statisticians, they are interrelated. Among them, export is a function of investment, investment is a function of employment, employment is a function of income, and income is a function of consumption. And export trade is highly important for China.
Third, impacts of trade on economic growth. There will be four different trade impacts. First, the impact of trade liberalization is absolutely positive. After entering WTO, China has established bilateral and multilateral trade relations with other countries so as to reduce trade costs. Second, make adjustment on the impacts of the exchange rate. There are positive and negative impacts. The official depreciation is positive while the appreciation is negative. Third, the impact of the economic and financial crisis is generally negative, which will certainly reduce the demand. Fourth, trade conflicts bring about negative impacts. The most important thing is that cost growth will produce trade diversion effect rather than creating trade. Trade liberalization will bring about a trade creation effect, and once a trade war is waged, it will give rise to the trade transfer effect. In terms of trade impacts, the approach of Germany is worth learning. In 1958, Germany and Japan was facing the impacts of Plaza Accord. The Japanese made the wrong decision, while and the Germans made the right choice. Germany cuts taxes for the first time, so as to hedge the rising cost of trade, and guarantee the competitiveness of enterprises. There are three main bodies in a country, namely government, trade union and enterprises. Only enterprises create wealth. If enterprises are in trouble, the government will have no taxes, and families will have no income, which will lead to all sorts of crises. The response of German government is correct, and we shall make positive responses rather than negative countermeasures.
Fourth, the negative impacts already occurred. When the Southeast Asian financial crisis broke out in 1997, the contribution rate of imports and exports of goods and services fell from 44.4% to 15.5%. External demand disappeared and trade was gone. At that time, the decision of policymakers was to stimulate consumption by means of car and property sales, and actively join WTO in 2011. This is a positive impact and the economy was back on track. When the financial crisis broke out in 2008, the contribution of imports and exports to GDP fell from 2.6% to 2.0%. At that time, the government responded by vigorous development of real estate industry and infrastructure. Today, the Internet promotes big consumption, savings are consumed, and investment is squeezed. It is difficult to achieve economic growth. The situation is grim and we are getting increasingly deviated from the course. In response to this situation, if there is a large-scale trade confrontation with the United States, if we want to simulate consumption and local investment, both the government and people will be short of money. There will be huge losses, which will lead us to the debt economy.
Therefore, the conclusion is that we cannot fight a trade war without odds. The reasons are as follows: First, in retrospect of the history, the surplus country was always defeated by the deficit country. The deficit country will achieve trade balance, while the surplus country will face overcapacity. Second, we have no effective countermeasures due to China's dependence on Sino-US trade and unbalanced bilateral import and export trade. Third, it is not appropriate for China to engage in trade conflicts with the United States. Considering the aggregate trade balance of China, we have a total trade deficit of more than 100 billion USD with Germany, South Korea and Japan. If our trade surplus of more than 100 billion USD with the U.S. is gone, how can we balance the trade deficits with Germany, Japan and South Korea, the entire industrial chain of China is likely to collapse. Fourth, the issue of deviation from the course. Fifth, the currency crisis.
How to deal with Sino-US trade conflicts? There are some advices. The first is cooperation. Trade is not all about war and surrender. We shall continue to promote internal reforms and trade liberalization. The second is to figure out the best solution. We shall shift from Plan A to Plan B, unilaterally reduce the tariff, and unilaterally make coordination of policies, do not take countermeasures, hold our end up and find the best solution. The last but not least includes irrational response, trade war, short-term negative trade shocks and recession. I don't think that we shall fight a long-term trade war. The industrial chain of China will transfer to other countries under a long-term trade war.
(It is the keynote speech delivered 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)
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