In August 2012, western academics came up with the word “Chimerica,” which reflected a honeymoon-like apogee for China-U.S. relations. Since then, however, the two countries seem to be drifting apart. If the “Pivot to Asia” strategy gave China a taste of containment, the escalating trade tensions have done real harm to the Chinese people, and they grow anxious about what the United States is really after – merely to take China’s money, or to provoke all-out confrontation? The trade war is bad for China and bad for America for a number of reasons.
First, trade imbalance is caused by an imbalance of business interests. The U.S. business community should stay rational. Admittedly, trade relations are imbalanced between the two countries, but each and every transaction is done on a voluntary basis and not imposed on either side. From tariff hikes to IPR violations, from enforced technology transfer accusations to multiple flashing points, the Chinese business community has been caught off guard by recent U.S. maneuvers. The Chinese still believe it is more constructive for both sides to sit down for talks, crunch some numbers, find out the root causes, listen to each other’s grievances and come up with a more balanced and sustainable trade rule framework, which holds more promise of a mutually beneficial solution than the sable-rattling currently unfolding.
Second, trade tensions will hurt the most vibrant sectors in China, namely the private sector. As a rough breakdown of their proportion of the overall trade volume, the private sector accounts for 50%, foreign companies for 30% and SOEs for 20%. The private sector deals mainly in processing manufacturing, which is the key component of trade, hence the high proportion of private sector contribution. But that also underlies that China is not in an advantageous position in the value chain. Trade tension has inflicted harm on privately-owned businesses in China. On top of that, due to the supply-sided structural reform launched in 2016, low-end capacity is being phased out. The combination of the two factors has created a far more challenging environment for small private businesses in China.
Third, the trade war has cost some jobs in China, but it certainly hasn’t created any for American workers. For manufacturers in China, it is difficult to strike the pot of gold these days. The newly released Hurun China Rich list reveals that internet gurus and real estate moguls typically top the list. Whereas, on average, the hardworking 120 million Chinese workers in the manufacturing business make less than $8500 each a year. These low paying jobs will not migrate to the US. Trade tensions will only force more jobs into the service sector in China.
Fourth, while not a decisive factor, the trade war does pose a drag on China’s economy. Since Q3 2010, China’s GDP growth rate has been slowing from almost 12% to a little over 6%. Whether it is the GDP, trade volume or manufacturing sector, friction between the two biggest powers will inevitably spike uncertainty for both countries and the world at large. As a reminder, China’s manufacturing sector accounts for one quarter of the global total, and related investment is worth $3 trillion per year. Sluggish trade will shrink imports, and it is increasingly clear that both countries stand to gain from cooperation and to lose from confrontation.
Fifth, the trade war has eroded the warm feelings harbored by the Chinese towards the United States, and stoked misgivings as well. China as a nation has endured ups and downs over the past two centuries, and faced humiliation and struggle. To this day, China is a developing country with annual per capita income of less than $10,000. Income distribution and environmental protection are pressing tasks for China. The Chinese are not shy about their preference for the United States as a destination for investment, study, property purchase and immigration. The Chinese are keen to learn from the United States. If the United States wrongly attributes China’s development in manufacturing to trade deficit, enforced technology transfer and IPR violations, or even went so far as to decouple from China in trade, technology, investment, finance and other sectors, it would only serve to deepen suspicion and misgivings. It begs the question whether the United States is seeking to address the trade deficit, or if its judgement is clouded by the Thucydides trap mindset?
Chinese and U.S. economies are highly complementary, and cooperation between them has an important bearing on the efficacy of global governance and the sustainability of global economic growth. Yet the trade war has pushed 1.6 billion people to a crossroads. It risks causing a disengagement between China and the United States that would pit the two nations against each other. Or, both sides could show wisdom and vision to solve the dilemma.