Trade War with China

China's May 2019 Customs that was recently released paints a trade picture that seduces me to contemplate an intriguing question, and perhaps also the unthinkable. What would happen if China entirely writes off trade with America?

I know the global value chain production theory holds sacrosanct among many trade economists, and I would be accused of being an autarkist. I know corporate America's operation in China represents something like 400 billion U.S. dollars of business interest, and they will pound me for being nationalistic.

But one of the goals set by U.S. President Donald Trump and a few people around him, for instance, U.S. trade representative Robert Lighthizer and trade advisor Peter Navarro, is to precisely whip corporate America back to the U.S., or if not at least out of China.

So this is indeed a scenario that has a real probability of becoming true. A few days ago, I gave a speech at the "China and World Order" conference in Singapore sponsored jointly by Harvard University, National University of Singapore and China Science Academy.

In that speech, I did propose, perhaps too audaciously, the scenario of a bifurcated world order comprising two spheres, one being China-centric and one being U.S.-centric. Well, the May Customs data provides the empirical basis for assessing the real impact of that possible scenario on China's economy, particularly China's exports.

Even amidst a very difficult time caused by both the trade war and the slowing global economy, China's export in May still booked a 7.7 percent increase year-on-year. Export to the European Union and ASEAN countries increased by more than 10 percent. Export to BRI-participating countries other than these two regions also saw significant increases.

The trade with the U.S. was expectedly dropping, and I think it will keep dropping in the face of the 25 percent tariffs introduced on 200 billion U.S. dollars worth of Chinese goods so far.

Export to the U.S. dropped by 3.2 percent. But America's trade deficit with China keeps expanding, by almost 12 percent in May compared with the same period last year, primarily because import from the U.S. was curtailed dramatically, by nearly 26 percent.

China's foreign exchange reserve still stands at a venerable 3.1 trillion U.S. dollars level. That is the cushion that the Chinese side can rely on to deal with the worsening current account balance with the U.S. if the current trend continues.

How critical is the U.S. market to China? This question can be found in other statistics in the press release. Of the 200 billion U.S. dollars exports subject to the current tariffs, only 124 items see a U.S. market accounting for more than 50 percent of the total overseas market.

That means that only these exports are likely to be heavily hit. Reduced export of other products to the U.S. should be able to be picked up relatively easily by increases in other markets.

In short, the American market is not as critical as some experts have been saying. Today China's American trade only accounts for about 11 percent of China's total good exports, as opposed to over 50 percent decades ago.

However, don't get me wrong. I am not advocating a wholesale economic decoupling from America. On the contrary, I have been steadfastly arguing for reaching a trade agreement that benefits both sides.

The Thucydides traps in history have never seen the extent of economic intertwining and trade complementarity as we are currently seeing between China and the United States. So this so-called Thucydides trap is different. It means there is still hope of escaping from that trap, as we have 800 billion U.S. dollars trade serving as ballast for our bilateral relations.

If the Trump Administration wants to throw that ballast into the Pacific Ocean, so be it. We still have the European market. We still have the ASEAN market. We still have markets in the Middle East, in Africa and South America.

If unfortunately we indeed ended up in that bifurcated world, the China-centric trading bloc would, in fact, be a much larger one vis-à-vis the U.S.-centric trading bloc, which is mostly with Canada and Mexico. Now it is up to President Trump to make the call if this is something he wants for America.

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AndrewS said:

@Josh Luo

We can see the Pentagon are planning for a China with a larger economy/military than the USA. So the USA will no longer be the "unrivalled global superpower" as you put it.
The Australians have already published a few government white papers on the same theme.



So if China can likely outspend the USA in a cold war military arms race, it follows that the US would want to avoid a full-scale cold war with China.
From the Chinese perspective, China doesn't want to get into a full-scale cold war with the USA either, as it would divert from China's domestic development.

So whilst there are some die-hard cold warriors who believe the US will always be superior or that there can never be a compromise, we will see pragmatic US military leaders strenuously warning against a cold war against China. And they wouldn't want to see a trade war turn into a cold war.

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Josh Luo said:

Actually, the Huawei game is still ongoing. We are not sure if more countries would ban Huawei, but given EU countries' alliance with the U.S., I am leaning toward the EU's eventual ban on the company. Things could be very different for non-U.S. allies along the Belt and Road. Still, losing the EU, Japan, South Korea, and the U.S. would literally be a bifurcation of the future of communication technologies. You might be right that things could turn out to be better for Huawei. Nevertheless, we still live in a world dominated by nation states, and the U.S.-led alliance system matters directly to the very survival of NATO members (including EU), South Korea, and Japan. If pressured to choose between the U.S. and China, most developed nations would still eventually choose the U.S. given their dependence on the U.S. alliance system for survival. Nevertheless, I am not ruling out what you have said. The U.S. alliance system MAY not be as credible as I think, but currently, I see the U.S.-led alliance system and hegemony working just fine. Also, until the next recession, the U.S. economy has been the healthiest since the 1950s.

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Josh Luo said:

What about the quality of research institutions? I am asking about this because the U.S. still has an edge in human capital and research institutions that could out-innovate (out-offset) China in basic research relevant to future weapon and command systems.

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The Philippines' attitude toward Huawei is worth pondering. As one of the oldest US allies in Asia, the country is moving ahead with plans to use equipment from the Chinese telecom giant in upcoming trials of 5G wireless systems, the South China Morning Post reported Tuesday.

China's explosive rise has been an economic success story but a shock to Asian geopolitics. China and some of its neighboring countries including the Philippines have learned to live with one another when it comes to unresolved territorial disputes and historical issues, but it is precisely because of this that some local people in Southeast Asia fear the rise of China and its companies, which form a key part of the triangular relationship among China, Southeast Asian countries and the US.

Now the Philippines may want to break the status quo of the triangular relationship. Although the US is waging a campaign against the Chinese technology giant, the Philippines is reluctant to exclude Huawei from its 5G construction. Why? Southeast Asia is still eyeing Huawei's 5G technology because it is considered equal to or better than those of its Western rivals, while often being 20 percent or 30 percent cheaper.

Huawei's presence in Southeast Asia is driven by economic benefits, not Beijing's strategy. The benefits prove to be too tempting to resist.

This can be taken as the essence of China's economic rise. China contributed more than 30 percent to world economic growth and brought economic dividends to Southeast Asia. Those dividends underlie the development of the Asian supply chain.

China is now a key part of the supply chain involving most Southeast Asian countries, and its role cannot be replaced by the US.

If China's rise creates enough profit for Southeast Asia, the region tends to suppress its negative emotions toward China, which might provide time to create a virtuous circle for relations between the two sides.

If the US can't persuade Southeast Asia to exclude Huawei, then it means Washington faces trouble in advancing its influence on Asia.

This is not because the US strategy for Asia is problematic in itself, but because the US can't bring Southeast Asia dividends that are equal to or better than those brought by China's economic growth. The Philippines' attitude toward Huawei reflects a changing Southeast Asia.

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• ‘The trade deal is going to be thousands of pages,’ he tells a US business news channel
• ‘The G20 is not a place where anyone makes a definitive deal,’ Ross says

The United States has been accused of demanding “enormous, even hundreds” of changes to Chinese laws to protect intellectual property, according to a Chinese government adviser, who said it was a key factor in the collapse of the trade talks.

Shi Yinhong, a prominent international relations scholar from Renmin University, said the gap between the two sides was widening as Washington demanded a strong enforcement mechanism while Beijing wanted more leeway.

He said China could only agree to a “relatively weak enforcement mechanism” without too much scrutiny and there should not be automatic penalties for violating the agreement.

Shi, who is also an adviser to the State Council, the country’s cabinet, was speaking on the sidelines of a security conference in Hong Kong.

He continued: “From early May, China began to think that no deal might be better than a bad deal, and right now China and the US have fundamentally contradictory attitudes as to what would be a good deal.

“Slowly it has become a zero-sum game where neither party can accept something the other side would deem a good deal.”

Earlier this year both sides had been hopeful of reaching an agreement to end their tariff tit for tat. As the South China Morning Post reported last week,

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, but were taken aback when US President Donald Trump suddenly demanded a more binding contact.

Shi said the gap between the two sides on technical aspects of the agreement widened as negotiations advanced, with the US presenting the Chinese with a list of hundreds of intellectual property infringements that it wanted to be addressed.

“The US demanded that China change a number of laws. It wasn’t one or two, it was enormous, maybe hundreds … Beijing just cannot make that many changes,” he said.

At the same time, it wanted to keep tariffs in place on Chinese goods to keep up the pressure on Beijing.

Shi also said that when China made “general promises”, the Americans regarded them as “fixed and concrete commitments”.

“In essence, the trade war is not about the trade surplus. It’s a US effort to change how the Communist Party runs the nation’s economic activities at home and abroad,” Shi said.

The trade war escalated recently when Trump raised tariffs on US$200 billion worth of Chinese goods from 10 per cent to 25 per cent, accusing Beijing of going back on commitments it had previously given.

On Sunday, Beijing hit back saying the US should bear sole responsibility for the stalled talks because it kept making demands that threatened China’s sovereignty.

The US, in turn, said its insistence on “detailed and enforceable commitments from the Chinese” would not undermine national sovereignty.

Trump has since threatened to impose tariffs on the US$300 billion or so of Chinese goods that escaped earlier levies if his Chinese counterpart, Xi Jinping, does not travel to the G20 summit in Osaka later this month.

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, although China has yet to confirm this.

On Tuesday, Chinese foreign ministry spokesman Geng Shuang did not confirm whether the two leaders would meet, saying only that information would be released once it was available to the ministry.

“China does not want to fight a trade war, but we are not afraid of fighting a trade war,” he said, adding that Beijing was open to talks based on the principle of equality.

“If the United States only wants to escalate trade frictions, we will resolutely respond and fight to the end.”

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Josh Luo said:

What about the quality of research institutions? I am asking about this because the U.S. still has an edge in human capital and research institutions that could out-innovate (out-offset) China in basic research relevant to future weapon and command systems.

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1. University of the Chinese Academy of Sciences - China
   
   
2. Tsinghua University - China
   
   
3. Shanghai Jiao Tong University - China
   
   
4. Southern University of Science and Technology - China
   
   
5. Wuhan University - China
   
   
6. University of Science and Technology of China - China
   
   
7. Indian Institutes of Technology - India
   
   
8. Nanjing University - China
   
   
9. South China University of Technology - China
   
   
10. Southeast China University - China