28 Nov 2018

AWER-18

This opinion editorial was written for the Asia in The World Economy Roundtable 2018 (AWER 2018). The Roundtable is a high-level forum discussing Asia in the global economy, bringing together academic experts and other policymakers from both Asia and the West. Download the AWER 2018 report.

A version of this article was first published in Nikkei Asian Review on 28 November 2018.



In China, most analysts and government officials misread President Donald Trump’s trade war as a well-orchestrated plan to stop their second centennial goal of building a strong, modernised country. Many of them believe this approach stems from US fears that China will soon become the world’s primary power. There is no doubt this fear is indeed shared by some segments of the American establishment. But it is a misunderstanding to think that Trump’s trade plan is primarily about containing China’s rise.

In fact, the trade war is in large part designed to appease America’s silent majority: low-income white voters. Trump’s win in 2016 tells us how badly this majority dislikes their
country’s establishment, a point that American liberals, or “white leftists” --- as they are sometimes called by Chinese Americans --- do not fully grasp.

However, for the US, the trade war is not actually about balancing the trade. It would be simplistic to believe that Trump and his team, including trade advisor Peter Navarro, would think Sino-American trade imbalances can be eliminated in this way. Instead, as well as aiming to bring jobs back to the US, the trade war serves two other fundamental purposes.

The first is to level the playing field for US businesses competing with Chinese companies. Over recent decades the US government tolerated China’s mercantilist approach because its elites believed bringing China into the global system would draw it closer to the US. But this belief had already begun to wither during the Obama administration.

America’s change of heart was reflected during negotiations for a possible Bilateral Investment Treaty, when the US made clear it wanted either a “platinum” agreement or nothing. China found the conventional bargaining chips it used to win round the US — gradually cutting tariffs and opening domestic markets, or purchasing more American goods — no longer worked.

Trump has merely accelerated this approach, despite often blaming Obama for failing to deal with trade imbalances. The trade war’s second purpose is to compensate for a
kind of regret. US elites long wished to draw China into the American sphere. The years following the global financial crisis proved this was unrealistic. China has benefited from its distinctive economic model, while its political system has become stronger.

It is an unspoken regret among American elites that the US treated China “too nicely” in the past. To compensate, now they want a correction. America’s moves against China
are not geared so much to stop China’s bid for supremacy, because not many American elites actually believe the US will lose its supremacy in the near future. Rather, it is to correct its own past “mistakes”.

Unfortunately, most Chinese analysts and government officials do not understand this. Instead they believe the trade war marks the start of a new era of explicit competition between China and the US.

Accordingly, China shows no signs of giving ground to US demands for substantial economic changes, especially regarding subsidies to state-owned enterprises, industrial policy, and opening of domestic markets. This leads the trade war into a dead end.

The best strategy for China is instead to focus on policies that can be positive for both the Chinese economy and its people. If tariffs are bargaining chips on the negotiation table, China should simply take steps gradually to get rid of them. If stateowned enterprises are inefficient, China should not resist reforming them simply because the US asks for it. If industrial policy implies wasteful subsidies, China should review it and comply with international practices. If protecting domestic markets no longer improves domestic capacity, China should not be shy about removing protections only because the US has also asked it to do so.

With Trump in office, there is little hope that there will be any change of direction on the US side. His first one and half years in office have shown that President Trump is not someone who just wants to cut deals. He wants real changes, be it bad or good. To unlock the deadlock of the US-China trade war, China needs to take the lead.