China Center for International Economic Exchanges

Chen Wenling: The Direction of the U.S.-China Economic and Trade Relationship Determines the Two Countries’ Destiny and Global Trend
Date:Jun 08,2018    Source:CCIEE

Chen Wenling: I am very pleased to exchange my views with the experts in the financial field on the U.S.-China trade war and the bilateral relation. Besides China, the rest of the world is also paying attention to the U.S.-China relations, the impact of the U.S.-China trade war on China, the United States and other countries.

Recently, I have received a few important foreign delegations at CCIEE. For example, I had a two-hour discussion with the Norwegian Ambassador to China yesterday morning, discussing the U.S.-China relations and their impact on China and Norway. Last month, I was with the Australian Economic Minister-Counsellor, the officials of the Singaporean Embassy to China and the of officials of think tanks from different countries. The Conference Board of the U.S. will send representatives to China next week and discuss the U.S.-China relations at CCIEE. On March 25 this year, I led a team to visit the think tanks and industry organizations in the United States and we discussed the U.S.-China relations. The U.S.-China relations have attracted worldwide attention recently, especially the people in China. Perhaps the US society is not so concerned with the U.S.-China relations as we do. As a member of the expert group, I went to the United States, a visit organized by China’s Ministry of Foreign Affairs. When the Chinese officials contacted their U.S. counterparts, the U.S. government departments refused to meet us. Eventually, we conducted discussions with the U.S. think tanks, industry organizations, and international strategic experts. These American experts have great expertise in the U.S.-China relations, for example Scott Kennedy, who participated in the section 301 report.

The U.S.-China relations have now been widely discussed. Everyone here has a research interest in securities and the capital market and thus, you should understand the importance of studying the U.S.-China issues continuously. Trump said very proudly at the World Economic Forum at the end of last year, “the U.S. stock market has risen seventy-four times since I became the president more than a year ago.” He has taken the rise in the stock market as one of his important achievements, but a fierce trade conflict with China broke out shortly after his remark. Initially, we considered this as a trade war but later called it a trade conflict, and some people suggested that “trade friction” is more appropriate. Regardless of the term used, the fact is that there has been an intensified game between China and the U.S. During the outbreak of the trade war, the stock market in the United States was full of ups and downs. When Trump proposed an escalated trade war, the U.S. stock market fell. Whenever Trump said that he and Xi Jinping are “good friends”, a consensus has been reached on the ZTE incident, or the two countries would not impose extra import taxes on each other, the US stock market rise.

At present, the rise and fall of the U.S. stock market is accompanied by three factors: the rhythm of the trade war between China and the United States; the possibility of a meeting between Trump and Kim Jong-un, and the game between the two leaders; the major global strategy and other events of the United States, such as the military strikes against Syria, the withdrawal from the Iranian nuclear agreement and so on. Right now, the US stock market is experiencing the biggest turmoil. One analyst even believes that Trump may be a master of the stock market. For example, the stock market will go up when he said that he wanted to meet with Kim Jong-un, and vice versa. Maybe Trump was buying stock when the market fell, and selling them when the market rose. In the past one year, the entire U.S. stock market made a profit of US$12 trillion.

As you can see, Trump’s presidency indicates that the US economy, society, and culture are tearing apart. Trump’s victory in the election is a product of the American social contradiction and his election has intensified such a contradiction. From the end of last year to the present, Trump’s popularity among the people is on the rise. When we visited the United States at the end of March, the most authoritative and world-renowned survey company, the Pew Research Center, conducted a public opinion poll, showing that Trump’s popularity had risen to 42%, which is the highest supporting rate since he took office. In a survey conducted by CNN, the forthcoming meeting between Trump with Kim Jong-un has given him a supporting rate of 55%, the opposition only accounted for less than 40%, and some people chose to abstain from voting. Why is the approval rate of Trump rising? There are several important reasons which can be explained as follows:

First, Trump’s shifting to the anti-China strategy has received support from the U.S. community. The U.S. community has launched a major debate on the China policy of the U.S. and a consensus has been formed. This is also a consensus among the different circles of the U.S. societies, including the Democratic and Republican Party, who believe that the U.S. policy toward China is a complete failure. The policy toward China at that time was to bring China into the world’s opening system, establish diplomatic relations with China, lead China to adopt the market economy, and let China join the WTO. They believed that as long as China is integrated into the world’s economic system, the Chinese economy will become the same as the economic system of the United States, the next generation of China will certainly change their “color”, and China will become a follower of the United States. Now when the U.S. looks back, it suddenly realized that China has now become stronger but it did not change much: China’s socialist system has remained the same, the leadership of the CPC has not changed and China’s cultural values ??have not changed. The only change is that China has changed from a poverty-stricken country to a prosperous and strong nation, it has become the world’s second largest economy.

Last year, China’s total GDP reached US$12.2 trillion, accounting for 67% of the total U.S. GDP, which was US$19.36 trillion. The past experience taught us that whenever the strength of a country is catching up with the United States, the US will begin to suppress this country. The collapse of the former Soviet Union and the previous trade war between the United States and Japan are good examples of the antagonistic game between the US and other countries. China’s economy accounts for 67% of the United States and it has become the world’s largest trader. In 2010, China has overtaken the U.S. and has produced the largest manufacturing output value. Currently, the manufacturing output of China accounts for 25.5% of the global manufacturing output. The most important thing is that the RMB has become the international currency since 2016, making it one of the five major currencies in the IMF’s currency basket. With a share of 10.92%, the RMB was in the third place behind the U.S. dollar and the euro but before the sterling and yen. The pace of China technological innovation is accelerating and its military strength is also increasing.

After the American society had reviewed the failure of the U.S. policy toward China, it started to treat China as its strategic rival in a series of reports released recently, such as the U.S. national security report and the nuclear safety report. In the national security report, China and Russia are ranked as the biggest security threats to the United States, followed by North Korea and Iran and the last one is terrorism. Recently, the United States issued another report and ranked the threats to the U.S.: China, Russia, Iran, North Korea, and extremism.

One example of Trump’s tough policy toward China is that all the important positions in his administration have been replaced by hawks. So far, only 60 of the 150 posts at the White House have been filled. Many positions only have the person in charge but no second-in-command. For example, the Secretary of State Tillerson has been working without a deputy secretary for more than a year. Trump has sacked more than 480 U.S. diplomats since he took office. All the diplomats who were appointed by Obama were removed from their positions. Even now, many US embassies still do not have an ambassador. For example, the U.S. embassy to Australia did not have an ambassador until a few months ago, when Harris, the former commander of the Pacific Command, was nominated as the ambassador. Right now, the U.S. has created an atmosphere of anti-China and the situation is getting worse.

The public opinion survey conducted by the Pew research center in the United States found that 46% of the American people consider China as the most powerful country in the world while only 30 percent of the American see the United States as a the most powerful country. The United States is accustomed to be the leader of the world. In his speech made at the West Point Military Academy before leaving office, Obama said that countries like China cannot be allowed to have the final say in the formulation of rules and the United States must lead the world for another one hundred years. Obama and Trump will not be able to see that but everyone can see that Trump insists on promoting “America First” and “Make America Great Again”. The first thing Trump did after taking the office is to change the entire style of the White House, for instance, the purple curtain and carpet were changed to golden color.

Trump turned the United States into a “United States of America, Ltd.” and he is the chairman of the company. He trades everything in the world as a bargaining chip and the biggest trader is China. China is the largest and fastest growing export market for the United States. Since 2011, China has increased its imports of the U.S. goods at a rate of 11% for several consecutive years. The total bilateral trade volume between China and the United States has reached US$550 billion. Trump said that the statistics of the U.S. Department of Commerce shows a trade surplus of US$375 billion with China, but the statistics of China’s Ministry of Commerce has a different figure of US$270 billion. Trump said that China makes an annual profit of US$500 billion from the U.S., which is completely wrong. Not long ago, I discussed the U.S.-China economic and trade relations with a senior researcher from the Peterson Institute for International Economics. I said that the U.S. president advocates a weak U.S. dollar but the Federal Reserve wants to increase the interest rate, who is exactly in charge? He said that according to their research, the Federal Reserve has the final say because the Federal Reserve is a financial expert and will be more rational. Trump, on the contrary, does not even know what is a weak dollar. He does not understand international trade either. According to his understanding, trade surplus is profit and trade deficit is loss, and China made a profit of US$500 billion. That means China made a 100% profit in international trade with the U.S., which is absolutely incorrect.

On the one hand, Trump was elected as the president is a result of the social division of the United States. On the other hand, Trump has accelerated such kind of social division. Now, Trump has shifted the domestic contradiction to the confrontations and frictions between China and the United States, which has increased his approval rate.

I think the second reason why Trump is gaining popularity is that Trump is a businessman, who has no ruling experience at all. If assessed according to the criterion of China’s Central Organization Department, he is not even qualified for being a township chief. Surprisingly, he actually became the president of the United States. During my discussion with America’s strategic experts, they even thought that Trump might be re-elected. Of course, there is a big difference between the United States and China. The presidential victory of Trumps showed us that the U.S. does not stick to one standard only when selecting talents, however, trump is not talented.

Trump’s weakness is that he is a businessman who has no political experience and his strength is that he has no burden. Apparently, Trump does not look at documents, including the one signed by Obama. When he signs an executive order, he will abolish Twenty-two administrative orders previously signed by Obama so that he can reconstruct the U.S. Another great advantage of Trump is that he understands the economy well and dares to make decisions quickly. The Republican Party has a majority in the National Assembly and he has a few more votes than the Democratic Party, thus, he has received support from the Congress. For example, he introduced tax cuts in the U.S. in December last year, the income tax was reduced to 21% and the personal income tax was reduced through three different ways, including reducing the one-time tax rate of the capital returning to the United States by 10%. This has led to a “siphon effect”, that is, a lot of capital, wealth and industrial has flowed back to the United States.

The U.S. has now the best economy since the breakout of the international financial crisis. The unemployment rate is at the record-low because all Mexicans are driven out and a very high wall has been built. This year, the U.S. is planning to build a Mexican wall of more than 500 kilometers and repair 612 kilometers of the existing wall, adding up to more than 1,100 kilometers in total, with a height of between eight and nine meters. The construction has been included in the government’s budget and it will make it impossible for illegal Mexican immigrants to work in the United States. Furthermore, Muslims are also prohibited from entering the U.S. The employment of the blue-collar workers in the United States began to rise and the unemployment rate fell to a minimum. The goal of maintaining the inflation rate at 2.5% has been realized. The stock market has had its ups and downs but it is still rising after Trump took office. The American people think that Trump understands the economy well. The U.S. has now the best economy since 2008 but it must be pointed out that the entire global economy is also stabilizing. The IMF predicted that the economy of many countries will recover in 2018 and the U.S. is one of them. The rebound of the U.S. economy is more evident than other countries due to its large economic size.

The third reason behinds Trump’s popularity is that many of the policies launched by Trump are in the best interest of big capitalists and consortia. For instance, the relaxing financial supervision has given capitalists the opportunity to make money; reducing environmental supervision, withdrawing from the Paris agreement and not making any commitments have promoted the recovery of traditional manufacturing industries. In terms of the pharmaceutical industry, Trump has loosened supervision, even allowed drugs not to be functionally tested. Under certain circumstances, special patients can use the medicine which is still in the experimental phase. Therefore, Trump has received the support from many capitalists and financial groups. At the U.S.-China CEO and Former Senior Officials’ dialogue held in Beijing from May 15 to 16 this year, the U.S. delegates said that Trump’s approval rate is on the rise and there is a possibility of re-election. Thus, we have to learn more about Trump and to some extent, we must re-evaluate Trump. He is still a semi-finished product and it will take some time to transform him from a businessman to a politician. However, as a businessman-type president, he will pose the greatest threat to us in terms of business and finance.

Now you understand what is the trade war between China and the United States about. So far, there has been three major battles in the trade war.

The first one is the battle of steel and aluminum. The U.S. imposed a 25% tax on imported steel and a 10% tax on aluminum. At present, there are 101 countries have trade surpluses with the United States. Among the countries that have exported to the United States, 8 countries and regions of the top 15 have applied and were given a tariff exception by the U.S., including Canada, Mexico, and the European Union, etc. China ranks 11 in terms of steel export to the U.S., accounting for only 2% of America’s total imported steel and less than 1% of China’s total output value. Therefore, countries like China, South Korea, Japan and a few others are the real victims of the tariff on imported steel and aluminum. Japan will also be punished and the main target is China. The United States has proposed to impose tariff on US$30 billion of Chinese goods, and China has responded with similar sanctions, mainly targeting soybeans, aircraft and other commodities from the U.S.

The second battle is the section 301 investigation report. The tariff imposed by the U.S. on China’s washing machines and toolboxes before this report was released can be seen as trade fiction, but the tariff imposed after the report is certainly trade conflict. We were visiting the U.S. when the report was published. The English version of the report has 185 pages, 1339 vertices subscripts and five attachments. This is not just a trade conflict, but extended from trade to manufacturing, high-tech industries, military-civilian integration strategies, leadership and pretty much all the areas.

The section 301 investigation report is not simply a trade dispute. According to this report, the U.S. will impose 25% tariff on US$50 billion of Chinese goods. This is wrong! How can the U.S. use the documents of China’s state council and the ministries as the basis of the sanctions? This is a serious interference with China’s internal affairs. Does the United States have no strategy for its own integration of military and civilian? Does the United States have no strategy for revitalizing its manufacturing? The information super highway built during the Clinton administration is an industrial strategy; the current strategy for revitalizing the manufacturing industry is an industrial strategy; maintaining an advanced U.S. manufacturing industry is also an industrial strategy. The U.S. decided to impose tariff on China’s goods just because the industrial strategies applied by China, this is an international joke. Moreover, this section 301 report also uses China’s President Xi Jinping’s report on the 19th CPC National Congress as a basis for sanctions against China, this is also a big international joke. The 301 report listed the documents of different ministries and listed companies of China, such as the National Development and Reform Commission, the Ministry of Industry and Information Technology, the Ministry of Commerce, local governments, the articles of scholars, and the reports of listed companies. In the future, the listed companies need to be more prudent about the public reports they issue, because the United States keeps a close eye on them. The section 301 investigation report used many works like “possible”, “seemingly” and “heard”, which means their sanction against China is based on many vague and unproven figures and statements. They said that China is not transparent, they heard that the US companies experienced hindrance in China, and they heard that China has restrictions. We told them immediately, what you heard is just what you heard, they are not facts.

Therefore, we can see that this so-called trade war is imaginary, and it is actually a competition between China and the U.S. in the manufacturing industry, the high-tech industry and the national strategy. The U.S. trade representative Robert Lighthizer made it clear that if the goal of “Made in China 2025” is achieved, the strategic industries of China will fully surpass the United States. What will the United States do at that time? Therefore, the United States must impose sanctions on China. This is so unreasonable. Furthermore, the so-called section 301 report is based on the “US Trade Act of 1974”, which is a domestic law of the United States. How can a country use its domestic laws as a basis for imposing sanctions against other countries? International sanctions must be based on international rules, that means we must resolve trade disputes, conflicts, and frictions under the WTO framework. This is a normalized mechanism. On the contrary, the United States is applying an outdated domestic rule to punish other countries, this is absolutely wrong.

The 232, 337, 301, and 334 clauses proposed by the United States against China are outdated and are based on the 1974 Trade Law and the 1930 Tariff Act. The world has changed significantly in the past decades but the U.S. still uses the outdated laws as a basis for imposing sanctions against other countries. No wonder a U.S. scholar wrote a paper called “Trump is making great strides on behalf of the United States toward the nineteenth century”.

The current world faces the following five major choices: to be an open or closed world? Shall we go forward or backward? Shall we choose unilateral or multilateral? Shall we be overbearing or benevolent? Should one country put its interest above other country, or should we work together to build a common community with a shared future for mankind? All these choices can be summarized in two paths, two directions, and two choices. China will choose to be an open country, go forward, embrace multilateralism and work together with other countries, while the United States has chosen the opposite path. A just cause attracts much support, while an unjust one finds little. Openness, advancement, economic globalization, and the establishment of a common community with a shared future represents the future and justice, and the cause of justice is invincible.

Practically speaking, there is still a big gap between China and the United States. In 2011, Dr. Henry Kissinger made an important speech at the Global Think Tank Summit hosted by China Center for International Economic Exchanges, saying that it took the U.S. dollar a long time to replace the British pound. What he implies is that the renminbi should not rush into internationalization because it will be a long process for it to replace the U.S. dollar. During the 2nd U.S.-China CEO and Former Senior Officials’ Dialogue held in Washington in 2011, Dr. Kissinger organized a small banquet for Zeng Peiyan, former vice premier of the State Council and Chairman of CCIEE, and said that cooperation is the only correct choice for China and the U.S. If the two countries confront each other, other countries will be under tremendous pressure to choose their sides, which will lead to the malfunction of the international order and rules.

As can be seen from the trade frictions between China and the United States in the past months, the battle of steel and aluminum, the section 301 investigations and the current trade negotiations, China has shown the greatness and generosity a big country should have. China’s Minister of Commerce once stated that we will not have a dialogue on the unilateral sanctions imposed by the U.S. on China, but if the U.S. demands negotiations, our door is open. The United States sent a delegation of seven Hawks to China and they formed a consensus after the negotiations, which is to carry out further negotiations. They invited Vice Premier Liu He to continue further negotiations in the United States and a joint statement was released after the negotiation, saying that both sides agreed not to fight a trade war and impose tariffs on each other. On June 2, the U.S. Secretary of Commerce came to China. Before his arrival, he sent a large group of 50 people to China for negotiation. On May 29, Trump announced on Twitter that the U.S. will impose tariffs on US$50 billion of China’s goods, which will be implemented on June 15. All the Chinese, Chinese companies, and the Chinese government were shocked by Trump’s sudden change of mind. In response, China issued a unilateral statement on June 2, which has three implications: first of all, China agrees to expand imports from the United States, including agricultural products, electronic information products, energy, and China also mentioned a few major categories of imports. Secondly, China and the United States still need to negotiate with each other and work together in the same direction. Lastly, the commitment made by China will be invalid if the United States insists on imposing tariffs and other sanctions against China.

In this century and the second half of the last century, China was the biggest variable in the world. That is, China’s has developed rapidly, become a member of the international community, and has push forward the development of the international politics, economics, and cultural diplomacy. The rapid rise of China has changed the world’s pattern, including the relations among emerging countries, developing countries, and developed countries. In 2011, the total economic size of the developing and emerging countries exceeded that of the developed countries. This will not be possible without China’s rise. Now the share of developing countries and emerging economies accounts for more than 56% of the world’s total, which has changed the north-south pattern of the world. More importantly, the downward trend of the United States is unavoidable and China’s realization of the two hundred-year-goals and the task of building of a socialist modernized country by 2050 will not be changed. This is the general trend and the future direction of world’s development. Therefore, we need to take the long-term development trend into account when considering all issues, including the current trade dispute between China and the United States. How can we grasp this trend so that China’s development process will not be interrupted? This is the focus of President Xi Jinping when dealing with all issues, and the major deployment of the Party Central Committee.

Therefore, it does not matter who will be the U.S. trade representative and who will be the president of the United States as their term of office is limited. Promoting peace, development and cooperation to achieve a win-win situation, realizing the dream of the great rejuvenation of the Chinese nation and making China a world-class country is a strategic issue. I have written a papered titled “The illusion of China the No. 1 may misled the US strategic shift” not long ago, analyzing the huge gap between China and the United States, including the gap in economy, technology, education, culture, and military. We should not underestimate ourselves, nor should we be arrogant and edgy. The path we have taken in the 40 years of reform and opening up is a miracle of human social development. Yesterday, the Norwegian Ambassador visited CCIEE and said that he came to China in the 1980s and could not imagine that China would become so successful. I said we did not expect that either.

We should be confident about our path, theories, culture, and system but at the same time, we must not overestimate ourselves and consider us as the invincible country. It is like the martial arts novel written by Jin Yong, you feel that you have already become the best martial arts master but you need to prove that by fighting with numerous competitors. China needs to compete with many countries as well, especially with the United States. Some articles talk about the gap between China and Japan, between China and Russia. When the Norwegian ambassador visited CCIEE yesterday we talked about the gap between China and Norway. Norway is the biggest oil-exporter in western Europe and has been rated as the happiest country in the world in 2017, with more than five million people enjoy universal welfare. With a population of 9 million, Sweden has 34 Fortune 500 companies and has the largest innovation hub in Europe. When the old Chinese society was oppressed by the three “big mountains (imperialism, feudalism and bureaucratic capitalism)”, some people appealed to open our eyes to see the outside world. Today, China has become much stronger than before, but we still have to open our eyes to see the outside world. We should learn from the countries and regions which have better technology, product and business model. We have our own strengths and the biggest achievement of the reform and opening up is that it has stimulated people’s creativity and mobility, and improved our ability in global resources allocation. At present, there are more than 60 million overseas-Chinese and more Chinese companies are going abroad. Many year ago, China relied on the introduction of other countries’ technology but now, China has started to go abroad and allocate resources globally, which is an earth-shaking change. The operational mileage of China’s high-speed rail accounts for 80 percent of the world’s total and 102 countries have railway construction projects built by China.

Now the U.S. and China have started a trade war and in the future, they might begin a financial war which will be far more dangerous. The U.S. dollar is closely linked to gold, oil, and commodities, which gives the U.S. great advantages. Currently, the Chinese yuan only accounts for 1.23% in international settlements. Although the renminbi has started to go international, for example, using RMB for trade settlement, establish oil futures and iron ore futures, this is only the beginning and China still have a long way to go. However, the United States see all these activities as great challenges and the financial competition between China and the U.S. is bound to be fiercer than ever. The U.S. stock market has risen 74 times in one year since Trump took power, and it has become more volatile. The U.S. Treasury yields rose 3.1% after the Fed contracted its balance sheet. The main strategy of the U.S. in the past one or two years can be summarized as attracting capital, wealth and industry to the United States so as to make the U.S. economy the best one in the world, put America’s interest above anything else and make America great again. Under such circumstances, the appreciation of the US dollar is likely to become a trend in the next one to two years and the U.S. will continue to contract its balance sheet. Consequently, the world’s capital will flow to the United States while the emerging economies will be in turmoil. When the capital outflows and contractions reach certain extent, it will probably lead to economic crisis or collapse, which is what the United States desires. I predict that the U.S. dollar may still depreciate in the future after the United State amasses a large amount of global wealth, and the United States will even force the renminbi to appreciate because the people who are currently fighting the trade war with China are those who dealt with trade frictions between the United States and Japan. At that time, they forced the Japanese yen to appreciate by asking Japan to sign the Plaza accord, which put Japan into a recession for twenty consecutive years. So, the current trade friction between China and the United States is just a prelude, which will not hurt our fundamentals but the financial disputes in the future will hurt us badly if not dealt with properly. Therefore, China’s financial industry should conduct forward-looking research on the possible financial war between China and the U.S. so that we can make better preparations in advance and take preventive measures. Thank you!
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