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China-US Trade Friction Needs Soft-landing

May 07 , 2018

Treasury Secretary Steven Mnuchin, Commerce Secretary Wilbur Ross, Trade Representative Robert Lighthizer and other senior U.S. officials just ended their visit to Beijing. The bilateral talks on economic and trade issues made limited progress, with limited consensus in a few areas and an agreement to establish new mechanism to continue consultations. The international community now worries that the Trump administration is very likely to launch more aggressive moves, which may lead to a real trade war between the two largest economies in the world. Such an outcome would severely damage global growth prospects. It has become imperative that Washington and Beijing should work together to maneuver a “soft landing” for the escalating frictions.

Earlier this month, Trump announced additional tariffs on about $100 billion of goods imported from China, covering more than 1,300 items ranging from toys to garments, from computers to furniture. The announcement immediately invited criticism from numerous institutions at home worrying that a “trade war” will inspire Chinese retaliation, damage the momentum of the U.S. economic growth, harm consumer rights and interests, and cause turbulence in the financial market.

“Trade war” is surely mutually diminishing. On one hand, the US relies heavily on China as a main source of daily consumer necessities. If it fails to find a timely alternative, prices of consumer goods will rise, thus turning the punitive tariffs on Chinese imports into a “consumption tax” on the American public.

On the other hand, import restrictions on Chinese products will see the cost of manufactured goods to rise, hence endangering employment in related areas. For instance, the largest American supplier of canned fruits and vegetables, Seneca Foods, has ordered about 10,000 tons of tinplate from China. Without tariff exemption, the company will suffer a loss of $2.25 million.

Facing the Trump administration’s economic and trade offensive, the Chinese government has adhered to a resolute position of “not wanting to fight a trade war while not fearing to fight one”, and stated it will respond accordingly. If the Trump administration puts the plan into action, besides reducing imports of such American agricultural products as pork and soybean, China could also cut orders from Boeing. People in states such as Iowa and Ohio are very concerned about a “trade war”, which will affect the Republican Party’s chances in this year’s mid-term elections.

Just as Scott Kennedy, director of the Chinese economy program under the Center for Strategic and International Studies, has said, Washington has underestimated its Chinese opponent, the Trump administration mistakenly assumed China would soon give in, and is surprised at the latter’s counter-attack.

The international community, too, is against the US offensive. Europe and Japan worry that US protectionism and unilateralism may get worse, putting the global trade regime at risk. IMF Managing Director Christine Lagarde warned on April 11 that dark clouds are gathering over global economy, and restricting imports will harm everyone.

Although Washington and Beijing are expected to eventually avoid a “trade war” of tariff retaliation, to address the bilateral economic conflicts will be a long and bumpy journey.

First, at the strategic level, the Trump administration has clearly labeled China as a main competitor or “rival”, the orientation of US China policy getting increasingly tough can hardly be reversed in a short term. Economic and trade pressures are only part of the US’ efforts to contain China. 

Second, at the political level, given Trump’s failure to honor such campaign promises as building the wall along the US-Mexico border and enhancing infrastructure construction, as well as the pressures he and the republicans face in the coming mid-term elections, he will inevitably take full advantage of the “trade war” against China so as to shore up his image as a tough leader.

In order to implement his “America First” policy, Trump has almost completely dismissed the “globalists” at the White House, appointing such hardliners as Robert Lighthizer and Peter Navarro. Trump has appointed Tea Party leader Mike Pompeo as Secretary of State, making sure a team that is thoroughly committed to his motto of “America First”. This may greatly complicate the trade frictions with China.

Third, at the economic level, this round of trade conflicts is about old tiffs such as IPR protection and market access and new issues such as digital economy. The “trade war” is at the same time aimed at containing the rise of Chinese technologies. The Trump team may ask China to limit government subsidies for corporate research and development. As China is too determined to seek technological breakthroughs, however, the negotiations will be very difficult.

Also, economic and trade negotiations may be interrupted due to strategic and security issues. When the new site of the America Institute in Taiwan is unveiled in June, the U.S. side may send senior cabinet officials to attend relevant ceremonies; some U.S. congressmen are planning to propose a “Taiwan security act” in a bid to upgrade US-Taiwan military cooperation. Meanwhile, Philip S. Davidson, commander in waiting of the US Pacific Command, has proposed to increase military deployment in such areas as the South China Sea. In the future, if major troubles arise over Taiwan or the South China Sea, China-US economic and trade talks will be negatively affected, and there may even be major turbulence in bilateral relations.

China has just announced a new round of reform and opening up, its financial and insurance markets will open wider, the Trump administration should understand that China is sincere about solving problems, but will not accept blackmail.

Both China and the US need to act pragmatically and constructively so as to maneuver a “soft landing” for their economic and trade friction. It is especially important to prevent other strategic and security troubles from resonating negatively with economic and trade conflicts. In a word, repairing the economic and trade ties - the pillar of the bilateral ties - is critical to prevent the relationship from being derailed.

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