After the most recent round of trade talks in Shanghai, tensions between China and the U.S. have escalated rather than calmed down because U.S. President Donald Trump imposed 10% of tariffs on another $300 billion of Chinese exports and then mislabeled China as a “currency manipulator.” These actions have broken the consensus reached by Chinese President Xi Jinping and President Trump during the Osaka G20 Summit. However, these unilateral actions will not significantly alter China’s attitude to the U.S. and the trade war.
The trade dispute has lasted longer than people have expected, in part due to President Trump’s unstable expectations and policies. Trade frictions have affected both countries, but it is the U.S. that suffers more consequences. Over the last two years, exports from the U.S. to China have declined and America’s GDP growth has also weakened. By contrast, China’s economy has been comparatively robust, with average growth of 6% of GDP since 2012.
The U.S. and China are the two largest economies in the world. Their interests are so intertwined that de-coupling the two economies would be highly unlikely and detrimental to both sides. For example, in 2017, sales of the US companies in China earned $700 billion, with profits of more than $50 billion. According to the US-China Business Council, US exports to China supported more than 1.1 million jobs from 2009 to 2018. Tariffs on China will not make America great again, but will rather cost more jobs in the U.S.
Despite the uncertainties between China and the US, it is still very possible for the two countries to achieve a trade deal if President Trump and the U.S. government is willing to be committed to the Osaka consensus.
The U.S. accuses China of discontinuing Reform and Opening-up. In fact, since 1978, China has become more open and transparent in terms of trade and investment, especially in recent years. Multiple laws and regulations concerning intellectual property rights have come into force. Chinese companies, rather than American companies, are now the main group who pursue IPR protection.
This year, at the Dalian Summer Davos meeting, Chinese Premier Li Keqiang said that China will remove caps on foreign ownership of brokerages, futures dealers and life insurers by 2020, a year ahead of schedule, as part of the efforts to further open up the financial and other modern service sectors. These moves signal the determination of China to integrate into the international system.
China’s opening-up policy is beneficial for the U.S. and the rest of the world. Most importantly, it is in China’s own interest. For example, small businesses, especially in private sectors, have long had issues in getting loans from state-owned banks in China. If foreign investors and foreign banks enter the Chinese financial market and fund small businesses, it will not only greatly boost the private sector in China, but also create an environment for healthy competition in China’s financial sector. It will also give small businesses more momentum for innovation.
Regarding the demand of some changes to law brought up by the U.S. during the trade talks, it is not easy for China to do this quickly where the U.S. insists China should change laws that have already come into force, since China is a sovereign state. However, there are opportunities arising from the new foreign investment law that China has just adopted this year. The U.S. and China should focus on the implementation details of this law if the U.S. really wants China to address some of their legal concerns.
Concessions are needed from both sides to achieve the trade deal. China has been playing an active role in the trade talks and made compromises during the negotiations. By contrast, the U.S. has not respected the spirit of negotiation. After trade talks in Shanghai, the U.S. not only imposed 10% tariffs on China’s goods, but also accused China of being a currency manipulator.
In fact, the depreciation of the Chinese Yuan was a result of the currency market reaction after the US increased tariffs on Chinese exports. This does not fit the three criteria set by the U.S. to define currency manipulation. Actually, China has been devoted to maintaining the Yuan as a stable currency. For example, China did not allow the Yuan to depreciate significantly to get through the Asian financial crisis in 1997 or the global financial crisis in 2008. Even during the trade war with the U.S., China has not used currency depreciation to retaliate. In light of this history, the American accusation is unfair and unreasonable.
If the U.S. continues to put extreme pressure on China, it may push China away. China now is seeking more cooperation with other countries, including Japan, South Korea, ASEAN countries and the European Union. The Regional Comprehensive Economic Partnership (RCEP) will be hopefully achieved by the end of 2019. The China-Japan-South Korea FTA is under negotiation. It is not impossible that China will join Comprehensive and Progressive Agreement for Trans-Pacific Partnership(CPTTP) in the future. Furthermore, the Belt and Road Initiative (BRI) and the Asian Infrastructure Investment Bank (AIIB) are also deepening ties between China and other countries.
The relationship with the U.S. is highly significant for China. But if the U.S. is not willing to return to the negotiation table, China will have no choice but to seek other options.
As President Xi pointed out, economic and trade cooperation between China and the U.S. will benefit both countries, while the trade war will hurt both sides. The extreme pressure put on China will not change the stance of China to the U.S. But we may need more patience to see the trade deal signed.