22 January 2019

Latest on US-China trade dispute

Jeffrey Sachs

Generals fight the last war, and Washington’s economic war on China is straight from America’s tactics against the Soviet Union and its skirmishes with Japan in the 1980s. Yet China is neither the Soviet Union nor Japan. The US’s aggressive trade actionstowards Beijing, unless suspended in the near future, will damage the world economy and America itself.

The overriding aim of US policymakers is American economic and military primacy. Though China remains far poorer than the US (roughly one-third the gross domestic product per capita at international prices), it has pulled ahead of the US in total GDPwhen measured at international prices and is converging or ahead on technologies such as 5G. A notable upcoming test will be China’s ability to compete with Boeing and Airbus in the market for civilian aircraft during the 2020s. My own bet is it will be able to compete.

In the future, no country will have economic primacy, neither the US nor China. China’s economy will be bigger than America’s by dint of a larger population, yet China will be no hegemon. According to the UN’s medium forecast, China’s population will decline by around 400m between now and 2100. Its population is currently 18 per cent of the world’s and 4.3 times that of America. In the UN forecast, China’s share of the world population in 2100 will be 9 per cent, and just 2.3 times that of America. By 2050, China’s median age will soar to 48 years, more senior citizen than world conqueror.

In short, the US policymakers’ China neurosis is vastly overblown. Moreover, the instruments of America’s economic warfare vis-à-vis China are old-fashioned and unlikely to succeed, though they are potent enough to cause damage to both countries and collateral damage as well.

The US’s core tactic is cold war-style “containment”, pushing its security alliance (Nato plus Japan, Australia, and others) to stop buying China’s high-tech products or selling it advanced technologies. The word has gone forth to stop buying Chinese telecoms equipment — not because of proven backdoors to China but because such backdoors might exist (or perhaps because the US government would have a harder time spying on its own citizens with Chinese equipment). Across the US security alliance, governments are now blocking China’s acquisition of technology firms. Recently, Washington even floated the notion that China might somehow spy on Americans with Chinese-built subway cars.

In the 1980s, as part of its attempt to halt Japan’s manufacturing ascendancy, the US sought to close its markets to exports through quotas and tariffs, while threatening a charge of “currency manipulation” if the yen were to depreciate. From the mid-1980s through the 1990s, the US succeeded in pushing the yen into a sustained overvaluation with threats of the dire trade consequences were Japan to let its currency weaken.

The US is playing the same cards with China: close the markets and mutter about currency manipulation. Since US president Donald Trump took office, the renminbi has appreciated slightly against the dollar despite the trade measures, an indication of Beijing’s reluctance to allow the currency to weaken.

There are, of course, hawks and doves in the US’s trade war. Hawks want to bring China to its knees, to make it a Soviet Union redux. Moderates, meanwhile, are after specific concessions, for example on intellectual property. China will probably grant these, but they will neither stop Chinese growth nor greatly benefit the US. Mr Trump himself is likely to settle for spectacle, a “great deal” (perhaps “the greatest ever”) with little content, in the hope for adulation from his base.

Some apparently believe that a successful deal will return millions of industrial jobs to the US. American manufacturing employment today stands at 12.8m (in a workforce of some 163m), far below the peak of 19.6m in November 1979. Automation, not China, accounts for most of the job losses. Future American jobs will be overwhelmingly in services, not on the assembly line, where robots will do the work.

China will not crumble as the Soviet Union did. Its technology and industrial bases are far too strong and its economic and diplomatic links around the world far too deep. Nor will it bow to US threats. Unlike Japan, China is not part of the American security umbrella, and not dependent on US goodwill. China’s products around the world sell because they are high quality, less costly, and often cutting edge.

Today’s trade brinkmanship has rising global costs. The world economy is gradually being dislocated by Mr Trump’s impetuousness. Business investments are increasingly stymied by uncertainty. The US president may do the remarkable disservice of turning synchronised global growth in 2018 into a synchronised slowdown this year and next. The renminbi will depreciate significantly if China is pushed too hard, causing further dislocations.

If ever there were a time for China to make some clear commitments on intellectual property and market access, and for Mr Trump to declare a great success and move on, it is now.

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