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China misunderstands Trump's trade war

Beijing should advance economic liberalization for its own benefit despite the dispute

| China
Beijing must prepare well before the crucial meeting between U.S. President Donald Trump and President Xi Jinping   © Reuters

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, modernized country.

Many of them believe this approach stems from U.S. 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.

The two presidents will meet during the upcoming Group of 20 summit in Argentina over this weekend. The international community is anxiously hoping for the possibility of a settlement between the two countries. For a meaningful settlement, though, China needs to first correct its misunderstanding of the U.S.'s motives.

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 comprehend.

The drive for jobs is compounded by two other fundamental purposes. First, to finally open the Chinese market, pull down barriers seen as unfair to foreign companies, and level the playing field for U.S. businesses. Second, to compensate for the perceived failure of the prolonged bid to engage with China through "friendly" policies.

For the U.S., the trade war is therefore not actually about balancing the trade. It would be simplistic to believe that Trump and his team, including trade adviser Peter Navarro, would think Sino-American trade imbalances can be eliminated in this way.

Over recent decades the U.S. government tolerated China's mercantilist approach because its elites believed bringing China into the global system would draw it closer to the U.S. 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 U.S. made clear in Barack Obama's last years of office it wanted either a "platinum" agreement or nothing. China found the conventional bargaining chips it used to win round the U.S. -- 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. U.S. 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 U.S. 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 U.S. 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 U.S.

Accordingly, China shows no signs of giving ground to U.S. 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 would be instead to focus on policies that can be positive for both the Chinese economy and its people. Continuing to liberalize the economy is the top priority. This is not about giving in to American demands; rather, it is about boosting efficiency and enhance people's welfare at home.

If tariffs are bargaining chips on the negotiation table, China should simply take steps gradually to get rid of them. If state- owned enterprises are inefficient, China should not resist reforming them simply because the U.S. 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 U.S. has also asked it to do so.

China has some reforms that are long overdue. One of the key obstacles is the resistance of vested interests. The trade war should be taken as a catalyst for reform if it is to have any real impact on China.

With Trump in office, there is little hope that there will be any change of direction on the U.S. side. His first one and half years in office have shown that Trump is not someone who just wants to cut deals. He wants real changes, be they bad or good.

In these circumstances, China's drive to further liberalize its economy will not only serve China's own purpose of creating a more efficient economy and generating a higher level of welfare for its citizens. It could also help Beijing to gain the moral high ground and defuse Trump's aggression.

Yang Yao is director at the China Center for Economic Research in Beijing. This article is extracted from a presentation to be given at the Asia in the World Economy Roundtable 2018, hosted at the Lee Kuan Yew School of Public Policy in Singapore on Nov. 29-30.

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