The words might be vitriolic and laced with Communist Party dogma, but there is a growing feeling that China cannot win a trade war with the United States.
At the weekend, Beijing threatened to impose retaliatory tariffs on US$60 billion of US imports after Washington announced plans last week to up the ante with additional 25% duties on Chinese goods worth $200 billion.
Foreign Minister Wang Yi stressed that the response by the world’s second-largest economy was “fully justified and necessary.”
“As to whether China’s economy is doing well or not, I think it is all too clear to the whole international community,” he said, adding that China contributed a huge amount to global economic growth.
Wang then took a swipe at President Donald Trump’s economic advisor, Larry Kudlow, who ridiculed the “weak” decision. “I don’t see why he would come to the conclusion that China’s economy is not doing well,” he added.
Typically, both comments illustrate how quickly this tit-for-tat trade conflict has escalated in the past few months.
Yet behind the rhetoric, a pattern is starting to emerge which highlights the problems Beijing is facing.
The economy has been showing signs of cooling since the end of March amid slowing factory activity and the squeezing of cheap credit as the battle against corporate and local government debt is ramped up.
Artificial intelligence
At the same time, President Xi Jinping’s administration is in the process of realigning from “high-speed growth” to “high-quality growth.” This, in turn, is part of the “Made in China 2025” program, which has its focus on cutting-edge manufacturing linked to artificial intelligence, or AI, technology.
Still, Trump’s policies have thrown a spanner in the works and triggered consternation.
“Washington has lost its mind on trade,” Global Times, which is run by the CCP’s official newspaper, the People’s Daily, pointed out in an editorial on Monday.
Maybe, but analysis and economists are convinced that this is a dispute that Beijing will end up losing.
A quarterly review of China by the Asia Policy Society Institute underlined the challenges for Xi’s government as it grapples with a myriad of internal and external issues.
“President Trump is signaling that he is willing to disrupt not just bilateral trade but also investment and people flows if China does not change course,” the global think tank, which specializes in the Asia-Pacific region, stated.
“The United States is not only seeking increased US exports but also fundamental, systemic changes in the Chinese economic system, including the curtailment of industrial subsidies and industrial policy more generally.
“[But] ironically, it is not US trade and investment policy pressures that are behind China’s present macroeconomic dynamics but policy choices made in Beijing years ago,” it added.
Panos Mourdoukoutasm, a professor in the department of economics at the LIU Post in New York, was more direct in his assessment.
He flagged up the nation’s shrinking “reserve army of labor,” which has pushed up manufacturing costs, along with what he described as the “middle-income trap.”
“China will lose the trade war with America. And that will benefit its citizens,” Mourdoukoutasm, who also teaches at Columbia University, said in an op-ed for Forbes. “China isn’t well prepared to fight a trade war with America. For a couple of reasons. One of them is that its economy is slowing, as it faces the ‘middle-income trap,’ and the Lewis turning point.
“The income trap is a situation where a country’s growth rate slows down as it reaches middle income. The Lewis point is a situation where the ‘reserve army’ of labor shrinks, pushing [up] wages and eroding the country’s competitive advantage in labor-intensive industries,” he continued.
“Chinese labor becomes expensive vis-à-vis India, Vietnam and Indonesia. And that places additional pressure on the country’s growth. Meanwhile, China has yet to develop a robust domestic consumer market that will accommodate its growing production capacity. That [is] why China will have to give in to American demands,” he added.
A similar view was expressed by Cheng Li, the director of the John L. Thornton China Center, and Diana Liang, a research assistant and communications coordinator, at the Brookings Institute.
While the economy is going through a transitional period, Beijing is still forging ahead with the “Made in China” plan, as well as expanding its global reach through the epic-in-scale Belt and Road Initiative.
‘Driven to compromise’
“Although a trade war would hurt both countries, the country with the trade surplus is usually hit harder and thus is more likely to be driven to compromise,” Li and Liang said in an opinion piece for the Washington-based think tank.
“This was true of Japan in the 1980s, for instance. China’s ability to inflict pain through tariffs alone is limited,” they added.
Pain has become a reoccurring theme in China’s media, as well as key CCP officials.
Zhao Changmao, the former deputy head of the Central Party School, which is the leading academy of the Communist Party of China, laid out the options that appear to be on the table.
Speaking to the Study Times, a weekly newspaper affiliated with the Party School of the Central Committee of the CCP, Zhao said:
“China only has two options: Give in to America’s bullying … or let the other side know that Chinese people are not easily pushed around. This trade war is different. It’s a strategic game concerning the country’s fate.
“[We] have no reason to compromise. [We have to] take the moral high ground, further open the economy and make more friends internationally. [We should also] take targeted measures to hurt the US, [but we] need … to be prepared to accept a heavy cost for fighting with the world’s number one country.”
At this rate, a summer of hot air could turn into a winter of discontent until Washington and Beijing finally get around to talking again.
David Mak
https://ustr.gov/sites/default/files/files/Press/Reports/China%202017%20WTO%20Report.pdf ""Today, almost two decades after it pledged to support the multilateral trading system of the WTO, the Chinese government pursues a wide array of continually evolving interventionist policies and practices aimed at limiting market access for imported goods and services and foreign manufacturers and services suppliers. … In the case of China, the analysis in this report shows where China appears to have adopted measures or taken actions in conflict with its WTO obligations. … confidential accounts from nonChinese enterprises indicated that Chinese government officials, acting without fear of legal challenge, at times required these enterprises to transfer technology as a condition for securing investments approvals. … Throughout 2013 and 2014, the United States and China intensified their discussions. At the December 2014 JCCT meeting, China clarified and underscored that it will treat IP owned or developed in other countries the same as domestically owned or developed IP. Once again, however, these commitments were not fulfilled. China continues to pursue myriad policies that require or favor the ownership or development of IP in China." etc etc etc.
KS Chin ,
I recommend you actually read the US Trade Representative’s Reports. You think the US just makes up stuff? Nope. https://ustr.gov/about-us/policy-offices/press-office/reports-and-publications. https://ustr.gov/sites/default/files/files/Press/Reports/China%202017%20WTO%20Report.pdf: "Today, almost two decades after it pledged to support the multilateral trading system of the WTO, the Chinese government pursues a wide array of continually evolving interventionist policies and practices aimed at limiting market access for imported goods and services and foreign manufacturers and services suppliers. … In the case of China, the analysis in this report shows where China appears to have adopted measures or taken actions in conflict with its WTO obligations. … confidential accounts from nonChinese enterprises indicated that Chinese government officials, acting without fear of legal challenge, at times required these enterprises to transfer technology as a condition for securing investments approvals. … Throughout 2013 and 2014, the United States and China intensified their discussions. At the December 2014 JCCT meeting, China clarified and underscored that it will treat IP owned or developed in other countries the same as domestically owned or developed IP. Once again, however, these commitments were not fulfilled. China continues to pursue myriad policies that require or favor the ownership or development of IP in China." etc etc etc.
Get educated before you run your trap.
THE CHINESE ECONOMY MAYBE A HOUSE OF CARDS BUT THE US. ECONOMY IS A BIGGER HOUSE OF CARDS .ALL HOMES CARS ARE FINANCED IN THE US. AND ARE OVER PRICED. IF CHINA SELLS ITS TREASURIES AND INTEREST RATES EXPAND ,IT WILL CAUSE THE US. ECONOMY TO CRASH AS IT S FINANCIAL MARKETS ARE EVER GREATLY OVER PRICED. UNFORTUNATELY THIS WILL CAUSE ECONOMIC DISASTER WORLD WIDE.BETTER THEY MAKE A DEAL .UNFORTUNATELY THEY HAVE AS A LEADER AN UNEDUCATED FOOL AND HIS ADVISERS ARE WARMONGERS. SO ITS BECOME DANGEROUS SITUATION.
The US has little to lose in the trade war. It has lost a lot a long time ago. It has had trade deficits with most export-oriented economies, most notably China, Japan and Germany. There isn’t much more that the US can lose. By launching a trade war, it gets (i) some revenue from the tariffs and (ii) a reduced trade deficit.
The big losers are the American consumers, as they will pay for the tariffs. US corporations will lose too, as the reduced trade will bite into their profits. Not being able to sell as much as before, the economies of China, Japan and Germany will also suffer. But this won’t be long. The losers this time around will get their man in the Whitehouse, and everything will be back to what it was before.
In a trade war nobody wins especially those who wage it
Shrinking China has vast reserves of cheap labor in next door Pakistan and India when Trump builds wall with Mexico
According to economics nobel laureate, Joseph Stiglitz, the chances are that US will lose the trade war because, Trump’s tariffs cannot go against the laws of macroeconomics. US expenditure is too high and savings are too low, added to that the USDollar as world reserve currency guarantees that the US has to increase imports to meet the demand for USD for international trade. This is the Triffin Effect. US will never give up the USD as reserve currency because it gives the privilege of US ripping off china and the world by issuing worthless fiat currency USD to " pay " for imports. the USD is not wirth the paper it is printed on.
Instead of using this privilege to benefit the world, the US uses the privilege to exploit and threaten the world, eg, financial sanctions.
Oh yeah, India is trying to sell soybeans to China for chrissakes.
Richard Truong That is what I meant althoguh I did not make it explicit.About 21 trillion in debt and a good part of it held by China you can guess who the bigger loser.But Trump, I don’t think, sees beyond his nose
That’s correct. But objectively speaking, I guess time is in not in the US favor because large part of individuals, corporates, government entities have debt piled up to their nose.
Jim Strom Please give this board FACTS.
Jim Strom Please give this board the facts on unfair Chinese practices. Were or Are they in Fine Prints?
The problem with this logic is that giving in to the US would be far WORSE for the PRC than losing the US as an export market. The US isn’t just demanding a reduction in trade deficits. If that was really the case, this trade war would have never started, for the PRC already indicated a willingness to make concessions by buying more US goods.
The bigger issue is that the US apparently wants to prevent the PRC from climbing the economic value chain by stopping its advancement in strategic MIC2025 industries, permanently stagnate the PRC’s future growth & development, & force it to go into a self-imposed decline as the PRC’s aging workforce shrinks in the near future.
In this scenario, China’s tradeoff is short-term pain (loss of US market) vs. long-term stagnation & decline (permanent loss of competitiveness). Both options are painful, but the rational choice for China is also painfully obvious: resist at all costs.
Jim Strom What are you smoking? Shift to these markets? These are a miniscule of China’s market? Vietnam is going to buy the soybeans? And by the way, I have yet to see that documented unfair Chinese trade practices that is not provided for by the WTO.
Jim Strom,
USA started to impose tariffs on Chinese products while Chinese and Americans were discussing ways of addressing issues and differences. You are a typical American, short memory, ignorant and stupid.
_China_ launched the trade war with asymmetric trade barriers and numerous well-documented violations of trade principles.
Fine. Then trade between the countries can wind down over time and the US can shift to trade with countries (India, Vietnam, etc.) that provide reciprocal market access, respect IP rights, etc. Good luck with China finding another market for $500 billion in exports. Your post completely overlooks the reason for the US action: well-document unfair Chinese trade practices, for which the US is not the only country to complain.
I think that neither USA nor China will win the trade war. Both will lose. Moreover, many other countries, including South Korea, Japan, Australia, etc. will lose too because their exports to China will decrease. By launching this trade war, USA has opened a Pandora’s box. Of all the countries that will be affected, China stands to lose the least because China has an under-tapped local market, a large resourceful population that is among the most intelligent in the World. On the other hand, the over-stretched American population in terms of personal debts and not endowed with much intelligence stands to lose the most.
It is the author’s, or Trump’s wishful thinking that China would give in the US bully.
First of all, let’s define what is "give-in". If you’re talking about compromise, then indeed China has been flexible from the beginning, offering concessions to increase imports significantly from the US. Trump has rejected the negotiated deals, so clearly he wants much more. From the Trupm administration’s rhetorics, they want China to abandon its Made in China 2025, essentially stop its development and focus on high-technologies, essentially asking China to give up her economic sovereighty. And what leverage does the US have to force China, an economic superpower in her own right, to do such a thing?
The short answer appears to be tariffs and access to the US market, after all, China exports over $500 billion goods to China a year. But let’s put these numbers in perspective. Contrary to what many western analysts characterise, China is NOT an "export-oriented" country. China is the world’s largest export nation, but export consititues only about 17% of her GDP, and out of it, about 20% of the export are to the US. In other words, export is a very small part of the $13 trillion Chinese economy and, equally important, China is a global trading powerhouse. Its market is global.
Finally, China is a huge market itself and her import grows even faster than export. The world’s largest electonic markets, semiconductor market, automobile market, civilian aircraft market, largest international tourist origninating country and highest spending toursts, and soon movie market, air travel market. China is the US’s third-lagest export market and the highest growing one, etc., etc..
The US is mistaken China as North Korea, Iran, or even Russia, thinking it can constain and strangle China economically. It’s wrong. Right now, the US economy is doing well because of the tax cut and economic cycle, but when the cycle rolls on and the short-term stimulus subsides (at the cost of higher defict and national debts), then effects of high tariifs will start to bite…
As the war goes forward the issues wil be rearticulated.It will be a losers’ war..The bigger loser will lose the war.
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