Discretion may be the better part of valour in a trade war with worldwide economic implications

The US-China trade war could be called a Comedy of Errors, to borrow a phrase from Shakespeare, except for the fact that it is isn’t funny, and it could turn into tragicomedy if, as some fear, the confrontation over trade should develop into something more serious such as security incidents.

What is grimly amusing is that US President Donald Trump, who launched the war, does not seem to understand where China is “coming from”, while China’s President Xi Jinping does not seem to understand that his retaliation against Trump’s opening salvo is going nowhere with Washington.

On the one hand, Trump has not grasped the fact that China is perfectly within its rights to claim at the World Trade Organisation that it is a “developing country,” that qualifies for protective tariffs. On the other hand, Xi has not grasped the fact that this claim is doing China more harm than good.

One solution being canvassed is for China to open the car import market to the US via a bilateral trade agreement, and to abolish its requirement that foreign investors set up ventures with Chinese partners. This would let Trump declare victory and Xi to get on with making China great again.

Remarkably, this idea from Xing Yuqing, a prominent Chinese academic whose writings are published quite widely in China, does not seem to have created any fear there of “loss of face” on China’s part, and it even appears to have garnered quite extensive support among Chinese government officials.

The question is whether the idea can permeate to the top by the time Trump holds talks with Xi during the G20 summit of advanced and emerging economies in Buenos Aires late next month. And whether China’s top trade negotiator Wang Shouwen and his US counterpart Robert Lighthizer will buy it.

Xing’s analysis appears to be well grounded in logic, which is something one should perhaps expect from an economics professor at Tokyo’s National Graduate Institute of Policy Studies and visiting research professor at Singapore’s National University, among others.

Trump’s demands on China have grown to cover not only tariff cuts but also better protection of intellectual property and freedom for US firms to set up operations in China without having to enter into ventures, not to mention curbs on unfair competition by Chinese state-owned enterprises.

At the same time, Trump has complained that the WTO is treating the US “unfairly,” while withdrawing it from the Trans-Pacific Partnership (TPP), Nafta and other multilateral agreements. Given all this, it is easy to imagine that such a broad agenda of complaints could take years to address.

At the same time, the US leader is an “action man” who likes to do deals and show results, especially when his Republican Party faces tough mid term-election prospects. If offered a deal focusing only on access for the US auto sector, he might be prepared to declare victory and go home.

China is right in arguing that as a “developing country” it is entitled under WTO rules to levy protective tariffs on vehicles and other imports from the US and elsewhere. China is right too in saying it is not obliged to offer “reciprocal” low tariffs to trading partners.

As Xing notes, the privilege of being termed a “developing country” is by self-declaration and there is no mechanism to graduate from it, such as attaining a minimum GDP per capita. When Trump’s chief economic adviser Larry Kudlow calls this “nonsense,” he should talk to the WTO and not to China.

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Even so, as Xing has again argued, Beijing could be well advised to forego this right in the interest of realpolitik. The revenues China gains from tariffs are small in relation to total revenues, and they also deprive Chinese consumers access to large and cheap US cars of the kind they like.

The key point is that automobiles make up a large part of the US$376 billion US trade deficit with China, which in turn is nearly half the total US external deficit. Allowing the trade surplus to shrink might be an acceptable price for China to pay in return for freedom to pursue its wider ambitions.

Allowing the US, among others, to set up wholly-owned subsidiaries in China without requiring venture partners could also bring rewards in terms of trade diplomacy, with relatively little risk. Logic often dictates that companies like to have a local partner when they enter little-known markets.

Trump’s demands that China should make new rules to curb its state-owned enterprises vis-à-vis foreign entities in China has little basis in logic. China’s argument that they are a pillar of the Chinese economy, and that China needs an industry policy, makes more sense.

Every country should be free to determine its own economic structure, whether based on state capitalism or market capitalism, and it is surely only when it comes to competition by firms from either system (or a hybrid) competing in third-country markets that common rules need to be set.

Will Trump and his more zealous aides such as Lighthizer back off from wider confrontation if China makes concessions on the auto front? That is something that only Xi and Wang can decide. And it could be that potential “loss of face” could become a deciding factor.

In Xing’s view, Beijing would be unwise to take the path of confrontation. If China had not retaliated against the first round of Trump’s tariffs, there would have been no second round, he argues.

Since the US is a major source of China’s trade surplus, “China will suffer more” than the US from a trade war.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs