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Trade War Won’t Derail China’s Strategy

May 23 , 2019
  • Zhang Monan

    Senior Fellow, China Center for International Economic Exchanges

As talks between China and the United States hit a snag, the trade war re-escalated. On May 10, at a time when the talks moved to the stage of discussing a trade deal’s draft text, the Trump administration suddenly announced that it would raise punitive tariffs on Chinese goods worth $200 billion from 10 percent to 25 percent, and indicated that it would soon impose 25 percent duties on Chinese goods worth $325 billion that had previously not been subjected to additional tariffs.

The trade talks have long been a focus of global concern. To date, it seems, the talks are not completely broken, but it has become increasingly difficult for them to move forward, with the two sides still having big differences on some major issues. The Chinese side has reiterated that its core interests must be guaranteed: First, removing all punitive tariffs. Punitive tariffs were the starting point of the ongoing trade disputes, and should be removed completely once a deal is reached. Second, the trade balance should be set at a feasible level. The two sides had already reached consensus on this issue during trade talks in Argentina in December, and neither side may unilaterally change the agreed amount. Third, the deal’s text must be fair and balanced. Every country has its dignity and non-negotiable limits. Therefore, if the two sides are to return to the table, it should be based on mutual benefit and trust, not dictated by the intent to change the nature of the other society, or the logic of “you’re either with us or you’re against us”. No party should pursue any extreme or unequal measures, such as randomly resorting to sanctions and extreme pressure—nor should anyone rely on a sort of “shock therapy” to change a country’s development path. China will never compromise its principles and core interests.

Today, China and the United States combined account for 40 percent of global GDP and 50 percent of global growth. Among the list of products targeted by tariff increases, the proportion of capital goods and intermediate goods rose, with intermediate goods rising to account for 52 percent. This would greatly drive up costs for American producers and consumers, impeding economic growth, damaging consumer welfare, and increasing inflation risks. According to a report by the International Monetary Fund, if a 25 percent tariff is levied on all trade between China and the United States, it would cause a 0.3-percent to 0.6-percent drop in the growth of US GDP; while China’s GDP growth would decline by 0.5 percent to 1.5 percent. Trade between the two nations would also suffer, which would trigger sharp fluctuations in the global financial market. The trade war would eventually turn out to be a “lose-lose” game.

Where, then, is the China-US relationship headed? In fact, the United States is operating from a deep-rooted strategy in initiating the trade war with China. As its strategy of engaging with China over the past four decades drew to a close, the United States is exploring a new China strategy—one that puts competition first. It’s true that China-US relations have undergone major structural changes, with the US Congress recently debating whether China is an enemy or friend. US representatives and experts have developed three schools of thought on China: first, China is a rival constituting America’s biggest challenge and threat; second, China and the United States are highly interdependent; and third, the United States has yet to define its relationship with China.

A trade deal cannot solve the underlying structural issues between China and the United States. China should take the trade war as an opportunity for a new round of deepened reforms and opening up. It can’t be denied that at this time, when China is taking on difficult issues and navigating through treacherous rapids, a sort of lazy attitude may emerge that makes the country reluctant or unwilling to commit to difficult reforms. Therefore, it is urgent to develop a new driving force for reform, and to call for an institutional and incentive mechanisms to vigorously promote new reforms.

The pace of China’s reform and opening-up accelerated over the past two years. To date, more than 96 percent of foreign investments in China have been subject to a system of geographically-defined registration. Today, a new system–termed pre-establishment national treatment plus negative list—is now applied across the country, with the negative list of forbidden foreign investments getting shorter and shorter. Before the end of June, China is expected to issue a new version of the negative list for foreign investments. Furthermore, to supplement the Foreign Investment Law which was adopted in March, China has kick-started legislation that support the new set of rules and regulations, to develop a detailed legal system governing foreign investments. In the future, China will further lower tariffs on automobiles, pharmaceuticals, and consumer goods, and announce 22 measures to further open the finance, automobile, shipbuilding, railway, agriculture, mining and electric grid sectors to foreign investment. Meanwhile, in the banking, securities and capital fund sectors, controlling foreign ownership will soon be allowed, and foreign investments will be encouraged to participate in the reform of state-owned enterprises through means such as equity joint ventures.

Wider and easier market access, which is already listed as one of the reform measures, at this point is no longer a simple step of merely opening the market. It is rather a move to drive forward the important transition from what the Chinese government calls a model of “opening up based on flows of goods and factors of production” to a new model of “opening up based on rules and related institutions.” This model means a new era of “high-quality” opening up. And in this new era, reform and opening up will be comprehensively boosted in terms of market rules, competition policies, environmental protection, intellectual property and business environment so that Chinese standards match those of high-level free trade agreements and high international standards—the international business environment will be promoted in all free trade zones throughout China.

In retrospect, China’s accession into the World Trade Organization was an important event, and it was the WTO accession that helped promote the process of China’s modernization and economic globalization. History will prove again that the present trade war will also become a bellwether event in the course of China’s reforms and opening up; even though the trade war, in the eyes of many, seems to be more a “crisis” than an “opportunity.” As long as China can transform external pressure into an internal driving force for long-term development and the promotion of high-quality growth and opening up, the current trade dispute will certainly merit equal historic significance in promoting China’s reforms, opening up, and modernization.

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