China Center for International Economic Exchanges

Zhang Yansheng: The US Trade War Endangers World Economy
Date:Aug 12,2018    Source:CCIEE

The trade war launched by the United States will not only damage the interests of the Chinese and American enterprises and people, but also seriously threaten the global free trade and multilateral system, and hinder the world economic recovery. As the Chinese saying goes “A just cause attracts much support, an unjust one finds little.” The trade war harms both the United States and other countries and eventually, the US will be isolated.

Why did the United States start trade wars worldwide?

The main reason is to establish a multilateral trading system based on the so-called fair trade principles of the US because the US believes that it has suffered from unfair treatments. For example, the trade surplus with Germany is considered as unfair by the US; in the North American Free Trade Agreement, Canada and Mexico have not taken more responsibilities, this is unfair; China’s share of the world GDP has risen while the United States has fallen from 1990 to the breakout of the international financial crisis, is also considered unfair by the US. The US thinks that it has shouldered too much international responsibilities and suffered from serious unfair treatments. Therefore, it wants to correct the “unfairness” of the existing multilateral trading system by applying the so-called fair trade and reciprocal principles.

Another reason for the US trade war is to create a global interest pattern based on the “America first” principle. For example, the United States and Europe recently issued a joint statement, pledging to eliminate tariffs and trade barriers so as to avoid a trade war. The truth is that the United States threatened to impose a 20% tariff on cars imported from the EU, which means that the three major German car manufacturers could lose the US market. As a compromise, the three major German automakers proposed a zero-tariff scheme. The United States agreed not to impose tariffs on EU cars and in exchange, the EU agreed to import more soybeans and natural gas from the US. Trump said that this is a big day for free and fair trade. However, the French Finance Minister Bruno Le Maire opposed Germany’s plan, emphasizing that if the United States imposes tariffs on the auto industry, the EU should fight back.

Opposing the trade war launched by the US.

The trade deficit is an excuse often used by the US but many experts, including American scholars do not believe that the trade deficit is a big problem for the US.

First of all, the so-called big power responsibility of the United States is to supply the world economy with a huge amount of dollars through the trade deficit and to profit from it. Many Chinese goods are sold cheaply to the United States in exchange for America’s cheap debt certificates. Nonetheless, the United States still consider the trade between China and the US unfair and wants to fight a trade war. The good thing is that China’s economy has shifted from high-speed growth stage to high-quality development. The trade war will accelerate China’s development of independent intellectual property, brands, and marketing channels.

Secondly, the low savings rate of the United States caused by the abuse of its financial hegemony and dollar privilege is the real reason for the US trade deficit. Since 1990, the relative proportion of the US manufacturing value added has continued to decline, while the relative proportion of finance, construction, and real estate has continued to rise, eventually leading to a hollow phenomenon in the US economy and industry. From 2002 to 2008, the growth rate of invention patent applications in the technical fields dropped dramatically. Many excellent engineering and technical personnel went to the financial sector and fell into the financial crisis. Economists suggest that raising the US savings rate is the right move to reduce the trade deficit.

Thirdly, globalization and the IT revolution have created a system of international process division and the global surplus to the US has been transferred to China, including the surplus caused by the products processed and assembled in China by American companies before shipping them back to the US. In fact, the trade imbalance between China and the United States will be halved if the value-added method is being used in world trade statistics. If we use ownership statistics, there will be no trade deficit between China and the United States. In order to reduce the trade imbalance between China and the United States, the United States must increase its savings rate and industrial competitiveness, create an industrial environment that revitalizes the manufacturing industry and brings the global supply chain back to the United States. It must accept the reality that the surplus has been shifted from China to South Asia and Southeast Asia. This adjustment should be a natural and market-driven outcome, not a result of the trade war. As a market economy, the United States should follow the laws of the market economy, instead of choosing a trade war to pass the adjustment costs to other countries.

The United States started the trade war when it has the lowest unemployment rate. Since the beginning of this year, the unemployment rate in the United States has decreased. In May, the unemployment rate fell to 3.8%, which was the lowest level in 18 years. In the past few years, China’s contribution to world economic growth has exceeded 30%, making it the major stabilizer and source for world economic growth. Instead of showing appreciation for China’s contribution, the US launched the trade war. Does the US want China to continue to help it in the next decade with the increased trade deficit, fiscal deficit and debt caused by interest rate hike, tax cuts, and infrastructure investment? Will China suffer from long-term stagnation while the United States benefit from the new economic boom featured with IT revolution?

The purpose of the US trade war is to emphasize “America First”, which has damaged global common interests, including China.

China sticks to the principles of promoting the opening-up of global trade and investment, the transformation and development of the global governance system, and the rebalance of the world economy. More details can be described as follows.

First of all, China continues to promote global openness. China is convinced that “opening-up brings progress while closure is bound to fall behind. The US trade war has become more unpopular worldwide and its withdrawal from the Paris Agreement indicates that it has failed to fulfill the responsibility a major power has. It forced China, the European Union, Canada, Mexico and other countries to make compromises.

Secondly, China continues to promote global governance reform. The Chinese and EU leaders issued a joint statement during their recent meeting, saying that they are firmly committed to build an open world economy, increase trade and investment liberalization and facilitation, resist protectionism and unilateralism, and promote a more open, balanced, inclusive globalization. The two sides firmly support the multilateral trading system of the WTO and committed to comply with the current WTO rules.

Lastly, China continues to promote global development. China adheres to the road of openness, mutual benefit and win-win cooperation. Furthermore, it will build an open world economy, promote trade and investment liberalization and facilitation. One of the efforts China has made is to include the development issues in the global governance framework and build a common community with a shared interest for mankind.

Undoubtedly, China opposes the trade war launched by the United States. On the one hand, China has brought the case to the WTO and hopes that the conflict can be resolved within the framework of the WTO. On the other hand, China pointed out that dialogue must be based on mutual equality and respect, unilateral threats and pressures will only make things worse. As two great powers, China and the United States should take their responsibilities and restart negotiations on the basis of maintaining the principles of free trade and the multilateral trading system. The trade war between the great powers will hurt the world economy and their own people. China and the United States should maintain a peaceful international environment and a stable international order.

The trade war: impact and countermeasures

The trade war launched by the United States is likely to push the world economy and trade into recession. In 2017, the global GDP experienced a clear growth. If the United States is determined to launch a global trade war, the prospects for global trade and economic growth will become worrisome. For example, the rapid growth of global manufacturing, especially the high-tech manufacturing, which has had a good momentum in recent years, may be reversed. Furthermore, the global economic trade and industry disorder will trigger a recession ahead of schedule.

The trade war may evolve into a “war of rules” that changes the world’s bilateral, and multilateral trading systems; changes the world’s scientific and technological pattern and growth momentum, and the world economic landscape. Whether we can build a world order based on coordinated development of fair trade, a sound relationship between China and the United States, and maintain a peaceful and stable international environment will not only determine the future of the two great powers, but also affect the prospect of the world.

After 40 years of reform and opening up, China has become the world’s second largest economy, the largest industrial country, the largest trader of goods, and has the world’s largest foreign exchange reserve. China has great advantages in dealing with the trade war for five reasons.

First, China has the largest middle-income group in the world. Second, China has the most complete industrial system. Among the world’s more than 500 major industrial products, China’s production of 220 products ranks the first. China’s economy has shifted from a high-speed growth stage to a stage of high-quality development, and the proportion of its modern agriculture, manufacturing and service industries in the total economy will continue to increase. Third, China has a relatively higher savings rate, which can be effectively converted into high-quality investment, accelerate consumption through further reform. Fourth, China’s economy has great potential and resilience. Lastly, China is implementing a new pattern of comprehensive openness, and the high-quality development will make China better prepared for the trade war.

Both the hard and soft power are important for winning the trade war, which has positive and negative impacts. In response, we must fully implement the spirit of the 19th National Congress of the Communist Party of China, actively promote economic globalization, enhance international competitiveness of our industry and national strength, vigorously build a modern economic system, accelerate the high-quality economic development and enhance national governance systems. China and the United States will eventually return to the track of cooperation, establish a sound relationship, conduct win-win cooperation, and jointly build a common community with a shared future for mankind.

 

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