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AugTrump took two reckless steps in the trade war
Trump was obviously even more irritated during this hot summer because he couldn't “tame” China for a long time. Two rash policy moves exposed Trump’s agitation.
First, 48 hours after the conclusion of the 12th Round of China-US High-level Economic and Trade Consultations in Shanghai, Trump announced that the US will impose a 10% tariff on the remaining 300 billion US dollars of Chinese exports to the US starting from September 1. The decision was clearly not well thought, and had not been carefully examined by Trump’s technocratic team, otherwise, it would be difficult for us to understand that in less than half a month, the US Trade Representative Office announced that it would postpone the tariff on some goods to December 15, with many goods removed from the taxation list. This type of inconstant and self-flustered decision making makes it hard for people to believe this is a strategic competition with a strong and tough opponent.
Second, on August 5 when both the onshore and offshore yuan broke 7 against the US dollar, the US Department of the Treasury verbally announced that China is a “currency manipulator” under the direct pressure from Trump (the Treasury issues two currency reports each year, and the report for the first half of this year released on May 28 believed that the major trading partners of the US did not manipulate the currency, but included eight countries including China, Germany, Singapore, Vietnam and South Korea in the watch list. The time for releasing the report for the latter half of the year is to be determined). However, this decision was not supported by any country or international organization, especially the IMF. As an authoritative international agency responsible for regulating global finance and exchange rates, the IMF reiterated in its report on its annual Article IV Consultation with China released on August 9 that “the RMB exchange rate is basically in line with China’s economic fundamentals”. Professionals believe that “exchange rate manipulation” has basic technical standards, and with Trump easily politicizing this technical issue out of his revenge sentiment, the objectivity and impartiality of the US in judging the currency exchange rate of other countries have been greatly weakened.
Excessive anxiety can lead to the loss of patience, and the loss of patience can lead to irrational actions, which are often the beginning of a tragedy. The above two moves have exposed the chaotic and unprofessional nature of Trump’s economic and trade decisions against China, which once again struck the “legitimacy” of the extreme pressuring behavior of the US in its trade with China, and further cast the trade war it launched into a dilemma. This will undermine the policy credibility of the US permanently.
Of course, criticism is not the whole battle. The Sino-US trade war is about strength, wisdom and resilience, and does not depend to a large extent on how high the tone is. Trump’s “self-flustered” moves actually provide an opportunity for China to reverse the situation. In the face of Trump’s aggressiveness and arrogance, if we show enough calmness and do not follow the beats of the US, carefully deal with and solve the “real problems” exposed in the trade war, and supplement these with fine policy operation, it is entirely possible for China to be invincible in this battle.
Consequences of RMB depreciation shall be carefully examined
We do not have to worry too much about Trump’s “currency manipulator” label on China. According to relevant US laws, the identification of a “currency manipulator” merely provides a legal basis for the president to conduct tariff retaliation, and to affect the expectations of market participants and thus creating invisible pressure on the opponent by releasing signals to the market. But to this day, the Sino-US tariff war has hit the stage of almost covering all trade products. The US no longer needs justification for any additional tariff against China. Moreover, since the “currency manipulator” identification has not been supported by the IMF and other major developed countries, China will not encounter much international pressure on the exchange rate issue, which is completely different from the market pressure on the RMB from 2003 to 2008. Therefore, Trump’s decision is only symbolic and has no real value.
What China needs to think about are another two “real problems”: First, is the depreciation of the RMB a powerful cannonball against the tariff war with the US? Second, how to respond to the possibly imminent US “financial war” against China?
China has long been deeply integrated into the global industrial chain and the international financial system. The impact of changes in the RMB exchange rate has become increasingly complex. The rough judgment model of “whether RMB exchange rate changes are beneficial to China” is no longer a reflection of in-depth thinking. The so-called “Chinese interests” have actually become complex and multidimensional. The negative consequences of the devaluation of the RMB caused by trade environment deterioration may be just as many as positive consequences. We must think independently. First, the most immediate consequence of RMB depreciation is a shrink of China’s dollar-denominated economic aggregate. If the RMB depreciates sharply, the trend in the past few decades in which China’s economic aggregate is quickly catching up with that of the US may be reversed. This will lead to very negative expectations of the market. Second, with China already becoming a major importer, the overly quick depreciation of the RMB will inevitably raise China’s import cost and limit China’s import scale. This will not only affect China’s ability to fulfill its commitment to share economic development achievements and opportunities with other countries, but also increase the cost of domestic production and living. It may even intensify domestic inflation pressure, which is not conducive to the formation of a consumer market. Growing into a major consumer country is the best recipe for China to deal with the long-term trade pressure from the US.
Therefore, we must have clear and calm consideration about the negative consequences of the depreciation of the RMB. Since the economic literacy of Trump and even his team can not guarantee the professional level of various judgments, in terms of the exchange rate issue, we do not need to “firmly support whatever the opponent opposes and firmly oppose whatever the opponent supports”. Nonetheless, we need to stay highly alert to the “financial war” the Trump administration may launch. At present, Trump’s exchange rate accusation is far from the “financial war” stage with extremely severe consequences. There are many approaches to this type of “financial war”, such as investigating the flow of Chinese capital in the US financial market, especially using various excuses such as national security to investigate Chinese companies listed in the US or cut off the US dollar’s incoming and outgoing channels among Chinese companies, and freezing partial Chinese assets in the US in severe situations. Of course, in the American politics bound by democracy and many interest groups, there is no way for Trump to do whatever he wants. The tariff he imposed on Chinese goods does not exceed 25%, which in large part is because his trade authority is limited by the US Congress. Similarly, the reason why Trump has not rashly launched a “financial war” with China largely lies in the constraints of US financial interest groups, because once the “financial war” starts, the status of the US as a world capital center will also be affected. A large number of financial interest groups will also suffer.
Disintegrate Trump’s “united front”
The best way to deal with Trump lies in two respects: one, to work with Europe and Japan to pressure the US; two, to mobilize the power from within the US to counter Trump.
We still need to be patient and wise to win over US multinational corporations, financial interest groups, universities and research institutions. Trump’s approach is to build a strong consensus against China within the US through various forms of political mobilization, and to use this consensus to justify his trade war, thereby paving the way for his presidential re-election. What we should do is delay and even prevent the formation of this consensus.
Since last year, China has introduced a series of measures to deepen reforms and expand opening up in the financial sector. The China (Shanghai) Pilot Free Trade Zone is also preparing to launch breakthrough initiatives. These show that China is taking a right path in coping with the trade war. China’s market-oriented reform and deep opening up will further reinforce the “magnet effect” of China on multinational corporations and other major exporters. This can be seen from the growth of China’s foreign trade and foreign investment in China in the first half of this year against the trend. To a certain extent, China’s strong import capacity and the value creation ability of the Chinese market constitute the basis of strength that enables China to exert influence in the international economic arena in the future.
The greater the trade opportunities and development space China provides for the international community, the more motivated the international community will be to stand up against trade war and trade protectionism. Under the pressure of US sanctions, Huawei of China has been striving for the support of multinational providers. Its effective chip is that it can bring about huge profits! It will be difficult for any US multinational company to accept the losses from losing a large client like Huawei. This is true for both companies and countries. Each of our measures to accelerate opening up and every effort to play the role of a responsible big country can weaken the basis for Trump to try to build at home and abroad a consensus to suppress China. Only when China is open enough and the interests of US companies in the Chinese market are huge enough will Trump be more cautious in launching new wars against China.
China still needs to take Sino-US economic and trade consultations seriously, and can not rest its hope on the possible presidential change in the 2020 US presidential election. We need to conduct a more detailed analysis and interpretation of the negotiation framework, and figure out what can be moderately compromised and what are our unshakable bottom lines, and release clearer information to US negotiators so that they have a clearer judgment about our intentions. In the Sino-US economic and trade consultations, a clear strategy is more effective than an ambiguous one. We might as well task Trump, who is good at calculating, with an “arithmetic question” and let him calculate how much he can gain by reaching a trade agreement on the basis of mutual compromise and mutual understanding, and how much he would lose if he lets the trade war continue.
Long-term tariff war will inevitably fuel the redistribution of the global industrial chain, and the resulting industrial transfer is clearly not good news to a growing country like China. Neither Trump nor China can afford long-term economic and trade frictions, and working to reach an agreement instead of a final breakdown is, at least at this stage, still the option that best reflects the common divisor of the interests of China, the US and the international community.
(The author is a Research Fellow at the National Academy of Development and Strategy, RUC and a Professor at the School of International Studies, RUC)
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