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AprThe Ching Ming Festival is an eventful one.
On April 3, the U.S. released a proposed list of products imported from China that would be subject to additional tariffs pursuant to Section 301 investigation, imposing a 25% tariff on 1,333 items of Chinese exports worth of 50 billion U.S. dollars. The products involve multiple areas such as aerospace, information and communication, medicine and high-end medical equipment, and machinery. On April 4, China took a countermeasure and announced that it intended to impose tariffs on such U.S. products as soybeans, automobiles, chemicals and aircrafts, involving about 50 billion U.S. dollars of American exports to China in 2017. On April 5, U.S. President Trump stated that he was ordering the Office of the United States Trade Representative (OUSTR) to consider imposing additional tariffs on 100 billion U.S. dollars of Chinese goods.
What are the root causes of the escalating Sino-U.S. trade friction?
On April 6, the National Academy of Development and Strategy(NADS), RUC held a special seminar on Sino-U.S. bilateral trade situation. Yu Chunhai, Research Fellow at NADS and Dean of the Department of International Economics, pointed out that trade frictions between China and the U.S. have entered a new stage, and substantive actions will be coming soon.
Why did the Trump administration take these seemingly extreme, unreasonable and even self-damaging policy actions? Yu Chunhai believes that this shall be traced back to the fundamental reasons why the Trump administration adjusted foreign trade policy and resorted to trade protectionism. He summed up three points.
The first is the issue of employment and income gap. After 2008, new features emerged in the dynamic changes of the income gap. In developed countries, including the U.S., not only did the income gap widen, but the actual income of low-income groups saw an absolute decrease. The relative shrinking of the manufacturing industry is the crux of the problem, though it is the result of the combined effects of technological progress, preference changes, and globalization. However, at the policy level, trade policy is the most feasible. The income redistribution policy and structural adjustment policy that are truly needed are quite difficult for implementation because they need to go through complicated legislative procedures and are also subject to issues like financial capability and space. Relatively speaking, the implementation of trade protectionist policy is relatively easy, as it falls within the scope of the authority already granted to the president or the administrative department and requires no financial support.
The second is the mid-term elections faced by the Trump administration. Attitudes and policy measures that deal with employment and income distribution issues are in themselves a very important issue. Moreover, the Trump administration must also respond to promises made during the election campaign.
The third is the interests of American capital. The current U.S. government has always been emphasizing “America First.” Its ambition is also to maximize the benefits of capital elements on a global scale. The services sold by U.S. businesses in foreign countries is more than twice the size of their direct service exports. U.S. multinational companies’ revenue and profits from foreign countries are much higher than that at home. Therefore, the appeals of American companies lie not only in the access conditions of overseas markets but also in the business environment of overseas markets, such as market order, state-owned enterprise subsidies, and intellectual property protection issues. Under multilateral frameworks, these issues have been discussed for many years, yet rendering no results. The dilemma in the Doha Round is a clear proof.
Therefore, the attitude of the Trump administration is to give the country overall strength and use all possible means. Trade protectionism is certainly the most direct option. After all, the U.S. is the world’s largest net source of demand and its market is greatly depended on by other countries. To obtain favorable conditions for entering the U.S. market, changes must be made.
Concern over long-term strategic interests is an important consideration behind the Trump administration’s policies
Yu Chunhai concluded that due to the consideration to transfer domestic political and social pressure for the short term, the U.S. government has the motive to provoke trade disputes and implement trade protectionist policies. In response to the declined share of labor income and the widened income gap, protectionist policies are often more likely to become the government’s choice. Especially in times of crisis or economic downturn, since the room for domestic macroeconomic policy is significantly reduced, protectionism against manufacturing will become the first choice for the U.S. government to solve short-term economic, social and political problems. For the sake of long-term economic interests, the U.S. will continue to actively use trade protectionism to test the boundaries of rules and the bottom line of its trading partners to promote and lead the renegotiation and creation of international rules. For the U.S. as the world’s largest net demander, policy measures and threats restricting import is the most powerful bargaining chip.
On these issues, China is bound to be the most direct and main target. China is the largest manufacturing country in the world, the largest exporter of manufactured goods, the main source of U.S. trade deficit, the fourth largest export market of the U.S., the third largest service export market of the U.S., and the largest source of income (besides Singapore) for U.S. multinational companies in East Asia. The U.S. is also China’s largest commodity export market and the largest source of trade surplus. Proactively launching trade investigations or trade disputes with China is not only a campaign promise, it also helps to force China to change market access conditions and market rules in subsequent negotiations. In all free trade agreements signed by the U.S., China is an outsider and has a clear competitive relationship with many of the member states. When the U.S. negotiates restructuring rules with relevant members, trade restrictions imposed on China will become effective bargaining chips.
Although the trade friction U.S. has provoked against China seems self-damaging from an economic view (whether or not China adopts countermeasures and retaliation measures) and hardly renders political benefits (China can take countermeasures against the Trump administration’s votebank. The countermeasures currently published seem to reflect this point), Yu Chunhai pointed out that these views are logically right except for ignoring a very important issue. That is, behind the Trump administration’s policy choice are the more important long-term economic benefits and even the overall strategic interests of the U.S.. The Trump administration’s first National Security Strategy defines China as a “strategic competitor.” Lighthizer commented on the results of Section 301 investigation that “deficit is only for now, and technology is the future.” All these mean that attention to long-term strategic interests is an important consideration behind the Trump administration’s policies.
The U.S. has the ability to force other trade partners to “take sides”
So, is the relationship between China and the U.S. competitive or cooperative?
Yu Chunhai analyzed that for many years, the core competitive advantage of the U.S. comes from two sources. One is that it is the world’s major sci-tech innovation center, and the other is that it is the main maker of international rules. With the improvement of China’s economic strength and international influence, as well as the in-depth adjustment of development strategies and opening up strategies, China’s interest appeals in international economic and trade relations have changed. With the full implementation of the innovation-driven high-quality development strategy, China will form a direct competitive relationship with the U.S. in a number of emerging industries.
The U.S. is the world’s largest economy, the largest net demander and also an established major country in the existing international order. China is the world’s second largest economy and the largest emerging market. It is also an emerging force that can influence the evolution direction of the international order. The changes in Sino-U.S. economic and trade relations and their respective strategic choices can not escape the influence of multilateral economic and trade ties and will inevitably further affect and change multilateral economic and trade relations.
The U.S., as the world’s largest net source of demand, can use the transfer effect of trade protectionist measures in bilateral or regional negotiations to force or lure compromises out of its negotiating counterparties, given that many countries are competing for the U.S. market. This enables the U.S. to compel other trade partners to “take sides” when it provokes trade frictions with China. Therefore, the extreme, unreasonable and even self-damaging policy measures of the Trump administration may be explained.
For the sake of long-term economic interests and the overall strategic interests of the country, it is necessary to use the overall strength of the country to implement some extreme policy measures, or feasible to choose policy means that will not be worth the loss for the short term, as long as this can render long-term economic and strategic benefits. Therefore, there may be deviations in the current judgment on the trend and impact of Sino-U.S. trade friction. Economic losses in the short term may not necessarily restrict the extreme policy choices of the Trump administration. The “irrationality” under the existing system of international rules has natural rationality under the target orientation of the Trump administration. Given the economic strength and market size of the U.S., it becomes necessary and feasible to use secondary sanctions to force other trade partners to “take sides” and jointly pressure China as the U.S. heightens economic security to the level of national security.
Sino-U.S. economic and trade frictions have become long-term and complicated
Trump’s move may be unusual, but in the long run, it will impact China’s emerging industries. Yu Chunhai stated that China-U.S. trade friction at this stage has a more complicated implication.
The controversy over the market economy status not only directly points to China’s market-oriented reform process, but also the fundamental issues, such as China’s industrial policy, status of state-owned enterprise, and even the CPC’s leadership position in economy. In the case of refusing to acknowledge China’s market economy status, the “surrogate country” approach in the “anti-dumping and anti-subsidy” investigation has given the U.S. government much flexibility. This not only affects China’s traditional manufacturing industries that are undergoing de-capacity, but also the various strategic emerging manufacturing industries that China is vigorously developing. The 301 investigation conducted by the U.S. based on its domestic legislation not only points to China’s industrial policies and foreign-funded companies’ technology transfer requirements, but also impacts the new business forms and industries that have been flourishing in recent years in China. These will have adverse effects on the enhancement of China’s position in the global value chain and the improvement of international interest distribution pattern.
The long-term and complicated economic and trade frictions between China and the U.S. are posing new challenges to Sino-U.S. economic and trade cooperation and have a profound impact on China. The economic and trade frictions between the two countries have, to a certain extent, surpassed the traditional trade areas and extended to economic operation mechanisms, reform processes and even overall economic development strategies. The frictions not only directly affect China’s import and export, possibly making it inevitable for China to face more selective trade protectionist measures from other countries or regions, and creating challenges for China to implement the “going out” strategy and participate in global economic governance. They are also more likely to affect the orderly advancement of supply-side structural reform in China for a period in the future, interfering with China’s economic restructuring, economic growth pattern transformation, and economic growth impetus rebuilding.
China should take countermeasures and make allies
How should China respond?
Yu Chunhai bluntly stated that targeted countermeasures and retaliation actions must be taken by China whether they are required by short-term interests and policy game, or by long-term economic benefits and strategic interests. At the same time, China needs to take advantage of the opportunities for forming interest alliances resulting from the differentiation of multilateral interest relations. Moreover, to ensure the legitimacy of the interest alliance under the multilateral framework, cooperation and policy coordination should be carried out under the WTO framework or at the bilateral and sub-multilateral levels that do not violate WTO rules. Given China’s position as a manufacturing and processing center in the global value chain, China is an intermediate link for the value added of many countries to enter the U.S. market. China not only needs but also can use multilateral interest alliances to deal with trade frictions initiated by the U.S..
Yu Chunhai emphasized that the current trade friction between China and the U.S. may require short-term losses in exchange for long-term gains. Therefore, whether the judgment of possible U.S. strategic choices and their impacts, or the analysis of the influence on China and the coping strategies, shall not be confined to short-term and partial gains and losses.
However, strategically speaking, we still need to be meticulous and calculate each and every loss. This is where policy legitimacy lies. Short-term and long-term gains and losses shall be weighed and judged.
For now, since the fight for long-term economic benefits and strategic interests is of great significance and inevitable, the idea of “taking a step back” will not stand, as what the U.S. wants is not just one step back, but one by one.
(The author is a Research Fellow at the National Academy of Development and Strategy, RUC and Dean of the Department of International Economics, RUC)
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