China Center for International Economic Exchanges

Chen Wenling: The Illusion of “China, the No. 1” May Mislead the Strategic Shift of the United States
Date:May 28,2018    Source:CCIEE

In the past few months, the US-China relations have undergone many dramatic changes and attracted worldwide attention. As the world’s most important bilateral relationship, the turmoil in the short-term between China and the United States cannot be separated from the track of long-term relations. How will the US-China relations evolve in the long-term? To answer this question, the Jiemian News interviewed Ms. Chen Wenling, the Chief Economist of China Center for International Economic Exchanges (CCIEE), and the Chinese representative of the 10th US-China CEO and Former Senior Officials’ Dialogue, who will give us a comprehensive analysis of the US-China relations.

The United States has shifted its strategic focus

Jiemian News: The frictions between China and the United States have increased since the beginning of this year, is this because of the US mid-term election? Or the US-China relations have reached a turning point and a long-term confrontation has been formed?

Chen Wenling: This is not just a matter of mid-term election because the election is only temporary. The main reason is that the United States feels uncomfortable with the rise of China and fears that China will become a powerful nation in the future. In addition, the US government must maintain the idea of “America First” and put its interest above anyone else and thus, the trade frictions between the two nations is like a long-term marathon, not a sprint or a 100-meter race. In the future, we will find out who has better endurance and strategically concentration. China may be a bit slow at the start but it will run faster and faster. On the contrary, the United States will start at a relatively faster speed due to its “big size and better nutritious”, but it may slow down in the future.

Jiemian News: What has changed in the long-term strategy of the United States?

Chen Wenling: The United States divides its opponents into three categories. Counter-terrorism fell into the third category. The issues of North Korea and Iran fell into the second category while China and Russia have become the first category.

In other words, the strategic focus of the United States has shifted from counter-terrorism to direct competition with China and Russia, and China ranks ahead of Russia.

Jiemian News: Why did this happen?

Chen Wenling: Nowadays, a lot of people in the American society have started to have doubts and anxieties on its strategies and this has naturally led to strategic misjudgments.

This is mainly based on the background of a historical development: China is moving in an upward trend, while the United States is going downward. This is supposed to be a relatively long historical process and will have a longer timespan.

However, Trump and the US hawks have misunderstood the current situation because in their view, China has already become the world’s number one.

According to a poll conducted by the Pew Research Center in the United States, there are now more people who consider that China has surpassed the United States and become the world’s most powerful country. Furthermore, some international organizations, institutions, think tanks and scholars have also agreed with this argument. Even some scholars in China believe that China has far surpassed the United States.

Many people in some developed countries in Europe and America now have an illusion: China has become a very powerful country and hence the future will be very unpredictable. As a result, the entire society has made a serious strategic misjudgment.

Trump keeps saying that making the United States great again, letting the United States and putting America first. He made people feel that the United States is no longer the world’s No. 1 country and not so powerful as it was. This is why the US has made some unwise decisions.

The illusion of the western countries: “China, the Number One”

Jiemian News: How do you understand the changes in the status of the United States?

Chen Wenling: First of all, the US dollar will remain its hegemonic position in the world in the next several decades. Since 2008, the proportion of the US dollar in global capital flows has gone up, rising from 60% in 2008 to the current 75%. The proportion of the countries that use the US dollar as an anchor currency increased from 30% in 1950 to 50% in 1980, and to the current 83%. Although the renminbi has already started its internationalization process, it accounts for only 1.12% of the world’s foreign exchange reserves, far behind the US dollar.

Secondly, the United States will continue to have the world’s largest economic output for a long time. In 2017, China’s GDP was about 63.2% of that of the United States when calculating with an average annual exchange rate. If China grows at an average annual rate of 6% in the future and the United States increases at an average annual rate of 2%, China’s economic aggregate will be equal to that of the United States by 2035. Even if that is true, the GDP per capita of the US will be more than four times higher than China as China has a population of 1.37 billion while the United States currently has only 320 million people

Thirdly, from the perspective of science, technology and education, especially the high-tech industry, the United States will continue to be the world’s No. 1 in the future. More than 70% of the world’s Nobel Prize winners are from the US, about 80% of the world’s leading scientific and technology come from the United States. Among the world’s top 500 scientific research institutions in 2015, 198 universities and scientific research institutions come from the United States. Of the top 10 research institutions, 9 of them are from the United States. Apart from that, 8 of the world’s top 10 leading technology companies come from the United States.

In terms of manufacturing development, the U.S. is generally at the mid-and high- end of the value chain and its innovation ranks the first in the world. Although China’s manufacturing output exceeded that of the United States in 2010, making it the largest in the world, it is still in the process of transition from the low- to the high-end of the industry. Miao Wei, minister of the Industry and Information Technology of China, once divided the global manufacturing into a four-tiered echelon. The first echelon is the global technology innovation center led by the US, the second is the high-end manufacturing sector, including the European Union and Japan, the third echelon is the mid-and low-end manufacturing sector and the fourth echelon is mainly the resource-exporting country. Currently, China is still in the third-tier echelon.

Finally, in terms of military strength, the United States will remain the world’s number one for a long period of time. In 2018, the US military expenditure exceeded US$700 billion, accounting for one-third of the world’s total. China’s military expenditure is only one quarter of the United States. The annual military spending of the United States is even greater than the total expenditures of the other nine countries in the world’s top ten. The annual sales of military weapons of the US account for 34% of global arms sales, sold to 98 countries and regions.

The gap between China and the United States cannot be eradicated in the short term. Therefore, Trump’s current change of strategic focus has treated China as a strategic competitor, which is totally unnecessary. He has chosen the wrong time, wrong opponent, wrong direction, wrong way and the wrong venue.

Jiemian News: Why does the West have the “China, the No. 1” illusion?

Chen Wenling: I think there are four reasons.

First, the World Bank and the International Monetary Fund (IMF) conducted a global competitiveness evaluation based on Purchasing Power Parity (PPP) in 2014, and China was named the largest economy. Earlier, the US Pentagon also reckoned that China has now the world’s No. 1 economy.

Second, China’s economy has developed rapidly in the past several decades. With an average annual growth of 9.5% for the past 40 years, China is the only country whose economy developed so fast and for so long. At the same time, China’s international trade in goods has also become the largest in the world, the total output of its manufacturing ranks the first in the world and the RMB has also joined the IMF Special Drawing Rights (SDR).

Third, the information obtained by foreigners is rather one-sided despite the large-scale flow of people between China and the rest of the world. For example, most of the foreigners who visited China only see the high-rise buildings, large airports, high-speed rail and other modern infrastructure, but they do not see the life of the people living in the poor areas. The recent surge of outbound travel made by Chinese people and their large spending overseas made people think that Chinese people are very rich and China has already become a developed country. Indeed, there are now more rich people go overseas for holiday but many of the Chinese people use a large portion of their life savings to pay for the once-in-a-lifetime travel.

 Fourth, some of the public opinions have contributed to such kind of illusion. In fact, the challenges facing China are still quite severe. We still have 30 million impoverished people and the gap between urban and rural areas and the regional disparity are still relatively large. In the future, China will have to pay a very high cost for improving the ecological environment. Even if China’s GDP has become the second-largest in the world, with a population of 1.3 billion people, its GDP per capita still make it one of the developing countries, even after Kazakhstan.

We should not be arrogant, nor should we be too self-satisfied. We should not magnify our achievements and only report good news. We must have a sense of anxiety, crisis and responsibility. We still need to keep a low profile and make progress step by step. Only by doing so, we will be able to achieve our long-term goals in the future.

When I was attending a conference in Germany, I told many economists that they should not regard China’s 2050 blueprint as something that has already been achieved. To achieve this goal, we must also make strenuous efforts, we must not make mistakes, not be interrupted and we must produce disruptive changes.

Trump’s Trading-type Government

Jiemian News: How to understand the current strategic shift of the US?

Chen Wenling: On the one hand, we must realize that the essence of Trump’s objectives is as same as the previous US presidents: to safeguard the US’s leading position, influence in the world and suppress potential competitors. At the same time, we should see through the characteristics of Trump’s administration.

Trump was a successful businessman but he is relatively new to politics. His behavior and speeches are very different from the time when he just took the office one year ago. He is now becoming more like a politician but he is not yet a real politician. I think that he has not yet completed the transition from being a businessman to a politician and leader. He still needs more time to finish his own transformation.

Compared with the previous presidents of the United States, Trump has the following three major differences.

First, he has softened many soft things that the United States once used as a core competence, and even talked about victory over nothing. He turned the traditional means of exporting the so-called universal values to other countries to the pursuit of interest maximization throughout the world. His administration has become a transactional type. He emphasizes hard power, current interests, and America first.

Second, the Trump administration has changed the United States to a closed, isolated, conservative, populist and super-protectionist.

Third, Trump is a non-traditional politician, non-constitutionalist, non-mainstreamist, and non-elite faction. His personal experience and style are prominent in his governance. We can summarize his actions into absolute mercantilism, hegemonism, absolute pragmatism, egoism, and protectionism.

Apparently, he has no tricks in global politics but in fact, he incited international contradictions and magnified contradictions into a geopolitical and geoeconomic conflict by using provocative means strategically, making China and Russia the so-called strategic rivals and tried to contain them.

Jiemian News: How should we comprehend the transactional government you just mentioned?

Chen Wenling: Trump’s disadvantage is that he is a businessman and hence has less experience in politics, and his advantage is precisely the experience he has in the market game. One of the most direct tricks his administration uses is to play as a loser in order to gain benefits by asking other countries to buy more products from the US.

For example, he visited Saudi Arabia and received orders of US$100 billion, US$250 billion from his trip to China, and India ordered 300 units of the fifth-generation fighters from the US, each of them costs US$100 million. Japan’s Shinzo Abe even made a “home delivery” by investing US$150 billion in the United States, and is planning to invest another US$450 billion in infrastructure. Even when the Prime Minister of Vietnam visited the United States, Trump also complained about the trade deficit between the United States and Vietnam, which resulted in an order of US$8 billion from Vietnam.

He asks for deals not only from China but also from the entire world, including its allies.

We must highly value original innovation

Jiemian News: What can we learn from the trade frictions?

Wenling Chen: In summary, the US has initiated three trade wars. The first one is to impose tariffs on steel and aluminum by applying the 232 article. The second time he used the 301 article to attack China’s strategy of “Made in China 2025” and the military-civilian integration. The third trade war is the ZTE incident.

Although the ZTE incident is related to the improper operation of the company itself, it is also a result of the US strategic shift, reflecting the US strategic intention in the economic and trade field.

This incident has taught us two important lessons. Firstly, we must fully consider all the risks when making the global industrial deployment. In addition to investment risk and market risk, we must not ignore political risk and legal risk. Secondly and more importantly, we must ensure that the core components are under the control of our own hands, otherwise, we will suffer a great loss if we experience the extreme practice of the US again.

The connection of the modern industrial chain is relatively strong and once a problem arises in the chain, all the enterprises along the chain will be affected. In the era of globalization, cutting off the industrial chain means cutting off the market and the economic link with the world.

From another perspective, however, this is actually a good thing. It sounded the alarm for us and we must pay attention to it. On the one hand, it is necessary to rationalize the layout of the global industrial chain. On the other hand, we must speed up the industrial upgrading and move from the low- to the high-end of the industrial chain as soon as possible. During the process, we must first improve our weak link.

Jiemian News: How can we promote innovation in core technologies?

Chen Wenling: We must improve China’s ability to produce original innovation, not just import and improve the innovations from other countries. In fact, the introduction, digestion and absorption of innovation is a high-level model of imitation. Integrated innovation is also an imitation as it is based on the concentration of integrated experience.

Our weakest point is lack of original innovations, or original research. Such kind of research can take up several decades but it is worthwhile to do so.

In fact, many original innovations are not able to produce immediate return but we need to make a continuous investment, which requires our entire society to be patient and invest in long-term R&D.

The United States misunderstanding of international trade

Jiemian News: The US-China Joint Statement stated that the two sides agreed to reduce the trade deficit substantially by taking effective measures. What are those measures?

Chen Wenling: If the United States can relax the export restrictions on high-tech products, it will be able to increase its export of chip to China from less than US$100 billion to 200 billion. If the two sides can get the next generation of digital trade ready, then China may import more products through the E-trade platform and increase the trade by more than 100 billion. If the United States does not restrict China’s investment in the United States, the trade volume will probably increase by another 10 billion.

In 2013, the Peterson Institute for International Economics and the China Center for International Economic Exchanges jointly conducted a research of the Free Trade Agreement between China and the United States, which concluded that if China and the United States can establish the FTA, they will be able to increase US$500 billion in trade and 4.8 million jobs.

The so-called E-international trade is the product of the fourth scientific and technological revolution. In short, it is a new trade form triggered by a new generation of information technology based on the Internet, Internet of Things, big data, cloud services, cloud computing, and artificial intelligence. It is also the electronicization of international trade, an online and offline integrated trade mode which is highly integrated, intelligent and internationalized. It is an expression of the contemporary digital economy, sharing economy, platform economy, information economy and knowledge economy.

Jiemian News: Having considered the evolution of international trade, will China be able to maintain its status as a trade surplus country?

Chen Wenling: The international trade is changing, especially the labor-intensive products. China’s costs of land, labor, resource, energy and environment are on the rise and hence the labor-intensive industries are shifting to countries in Southeast Asia, South Asia, and Africa.

From a long-term perspective, China may become a trade deficit country in 8 or 10 years’ time. The process of surplus shifting has already begun. From January to April this year, China’s trade surplus decreased by 24% year-on-year, and the trade surplus in April decreased by 27%.

Jiemian News: finally, what is your opinion on the outlook of the US-China relations.

Chen Wenling: I think that the US-China relations can still return to the normal track but not the same track we had before. The two nations may build a new type of relationship in the future. There are still a few favorable factors.

First of all, the leading diplomacy of the heads of state will eventually play a decisive role. As can be seen, President trump has maintained a smooth relationship and friendly interaction with General Secretary Xi Jinping since he took office. Under such circumstances, there is a hope for better relations between the two countries.

Secondly, the US-China relations, especially the economic and trade relations are a long-term issue, which did not occur suddenly. This issue has been magnified by Trump administration. Generally speaking, the US-China economic and trade relations are still the ballast stone of the bilateral relations and have a direct impact on other relations between the two countries. Therefore, the two sides still have the will to properly handle this issue.

Regarding the US-China economic and trade relations, I believe that it will not produce any satisfactory outcome if the US chooses to use the unilateral domestic rules to deal with international trade issues. We should return to the framework of the WTO and handle the problems with multilaterally recognized rules. At the same time, we must also look to the future and recognize that under the current global industrial layout, the trade and industry have undergone tremendous changes and hence, many rules need to be adjusted and improved.

In addition, the United States should also respect the rise of emerging market economies and developing countries, respect the choices made by the people of these countries, respect the path they have taken and respect their achievements.

 

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