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China and the US Should Manage Their Trade Dispute Before It's Too Late

Jul 04, 2018
  • Yu Xiang

    Senior Fellow, China Construction Bank Research Institute

The clock is ticking down to July 6. US President Donald Trump will place a 25% tariff on $50 billion worth of Chinese import. The first round of those duties, worth $34 billion, will take effect on that day. The second round, about $16 billion is under further review.

The Trump administration is also pushing a bill through Congress to strengthen national security reviews of US acquisitions or investments by China. Such a bill will allow the Committee on Foreign Investment in the United States (CFIUS) to review transfers of minority interests in companies dealing with critical infrastructure or critical technology.

What's worse, Trump is pursuing more control on US trade practices. Trump administration officials revealed they are considering the use of the 1977 International Emergency Economic Powers Act to impose new restrictions on China, an act widely used to freeze assets after the 9/11 attacks in 2001, which is deemed an extreme and hostile measure against China.

We wish this was fake news. If those rumors are true, a trade war between US and China is sure to break out. China is bound to impose its own tariffs on imports from the US.

Trump claimed it’s easy to win a trade war between China and US. But his judgment is baseless. There is no winner in a trade war; this has been proved by history. There is little doubt that protectionism harms prosperity. That is the one unequivocal lesson of the 1930s. A trade war will disrupt supply chains and shock global stock markets. The war will damage both China’s economy and the US’.

Economists estimate that should the US impose tariffs on $34 billion of Chinese goods as the White House has planned, that would shave 0.1% off China’s growth in the first year. The damage could rise to 0.3% if the tariffs increase to $200 billion worth of Chinese products, as President Trump has threatened.

Barclays recently estimated the impact in the worst-case scenario of an all-out trade war for US companies across sectors and US trading partners. The bank calculated that an across-the-board tariff of 10% on all US imports and exports would lower 2018 earnings per share for S&P 500 companies by 11% and, thus, completely offset the positive fiscal stimulus from tax reform. As Trump pushes to upend the status quo of global trade, companies that initially took a wait-and-see stance are starting to take action to shield their businesses from shifting trade policy.

If the US economy is weakened by the trade war, US's world leadership will be under threat.

Compared to the US, China's political system enables it to concentrate more resources to fight against foreign bullying. China's huge domestic market gives it more resilience to outer shocks.

Though it's still early to say China has given up on solving disputes by negotiations, it's obvious it’s preparing for the worst. Chinese central bank governor Yi Gang pledged again to use monetary policy “comprehensively” to fend off any “external shocks.” In his monetary toolbox there are tools like reduction in banks’ reserve-requirement ratio, increasing lending quotas for banks, relaxing mortgage restrictions for home buyers in some cities and easing limits on local governments to borrow. In terms of fiscal policies, China has sufficient room for stimulus plans. China's debt is still at manageable levels. China’s government debt is almost entirely denominated in local currency and owned by domestic institutions. In addition, the government has cash savings equivalent to 6% of GDP in the People’s Bank of China. This situation shields the economy against government debt crises.

Trump is very aggressive on China. China is tempered. Trump's hard stance will motivate protectionism in China. When China steps into the mud of protectionism and closes its domestic market and refuses to share its development welfare with the world, this will be a great danger for the world economy and politics.

It has taken many years for both sides to build up trust. China and US should find a way to manage their disputes without stumbling into a trade war.

US has some dissatisfaction with the WTO system. Both sides could work on it. Now China and EU have begun the talks to modernize the WTO system. Similarly, the US and China could launch a working group to upgrade WTO regulations and address the problem of state subsidies and other unfair trade practices.

More urgently, both sides should pivot right away from confrontation, and instead take a more productive approach that sets out clear short-term demands and pursues effective and visible solutions.

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