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Economy

China-US Relations Should be Reshaped through Trade War and Negotiations

Feb 25 , 2019
  • Zhang Monan

    Senior Fellow, China Center for International Economic Exchanges

An important turning point in the China-US trade war occurred during the G20 Summit in December last year, when the two heads of state reached an agreement for a ninety-day ‘truce’. The agreement guided the two countries towards resolving their conflicts. Seven rounds of high-level economic negotiations have been held since February 2018. The high frequency of close consultations suggests that the trade war is in the critical final stage.

The impact of the trade war is starting to be felt. The latest WTO data shows that global trade growth is the weakest since April 2010, with a series of warning signals: decreasing exports, international air traffic, car manufacturing, and trade in electronic components. As the global economic recovery weakens, the effect of tension between China and the US on the state of the global economy will be drastically amplified and will seriously impact the global production and value chain.

China-US economic relations are of special significance to the world economy. Economic ties naturally feature cooperation. One fifth of Chinese products are sold to the US and 22% of total American imports come from China. The US depends heavily on China for many of the 7,311 items over which increased tariffs have been imposed. China is America’s only source for some products. It is impossible to ‘decouple’ the two economies. Because of this, the two countries and the rest of the world should wind down the trade war.

Negotiators have indicated that the focus of negotiations has already shifted from the issue of trade deficits to so-called structural problems such as compulsory technology transfers, IPR protection, non-tariff barriers, opening of the service industry, and policy subsidies. There is no need to be pessimistic in the short term, but it is also hard to be optimistic in the long term. At present, trade imbalances may make it more likely for China and the US to sign an MOU but it is still rather difficult for the two to agree on a comprehensive framework.

On the one hand, the two sides seem to be comparing different notes and following different measurement standards. The US still doubts Chinese market access promises while China still wonders whether fair trade is the true objective of the US. It seems rather difficult for the two sides to reach a common understanding of the open market. They also have rather significant differences on structural and implementation issues. Behind the structural issues are differences in rules and competition over economic development models.

On the other hand, trade disputes may well evolve into long-term rivalry. China and the US are now entering into a more ‘competitive’ era. This raises tension in many areas, including the military, geopolitical, and hi-tech fields. The US is quite ready to set up hi-tech walls by restricting investments in advanced manufacturing such as airplane manufacturing, semi-conductors, and artificial intelligence. The biggest danger may be a cold war in science and technology.

Trump hinted that the deadline to raise tariffs on Chinese products may be extended. So March 1 may bring a truce or escalation. In the long term, China and the US need to clearly define their relations in a way acceptable to all and develop benchmarks and baselines for handling problems between them so as to prevent fundamental deterioration of the bilateral relationship.

It must be reshaped in and through the trade war and negotiations. Is it a strategic partnership of cooperation from the Clinton period, or a relationship between strategic competitors as in the eyes of the Trump administration, or a new model of major country relations as proposed by China? Will the two countries choose to engage in a peaceful contest or comprehensive confrontation? All in all, their game should be a competitive but not a confrontational one. China and the US still need to maintain and consolidate their economic ties, develop a new strategic framework accommodating both countries’ core strategic interests, and steer their relationship from strategic partnership towards constructive cooperation via strategic competition.

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