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Trade

Why a US-China trade war is self-defeating in a connected world

Liu Jun says most goods and services rely on a vast network of trade relationships benefiting people worldwide, and technological breakthroughs will bring disruptions that require societies to work together to find solutions

PUBLISHED : Wednesday, 18 April, 2018, 6:48pm
UPDATED : Thursday, 19 April, 2018, 3:10pm

The trade dispute between China and the US is mind-boggling. It is anachronistic to witness such a warring exchange of words between the world’s two biggest economies.

Although globalisation might not be a buzzword any more after the backlash of populism and nationalism, the trend of being more global than local is still in motion, in spite of some hitches along the way. So how could a trade war take place in this era of a digital economy and the “internet of things”?

A trade war is definitely a misnomer. Here are some reasons why.

First, the world economy has become an intertwined system. The theories of comparative advantage and value chains were based on outdated experiences of the past millennium. Today, the value system has replaced the value chain and stretches to almost every corner of the globe, weaving together various industries, diverse factors of production and an enormous pool of human talent. People find it very challenging to identify the country of origin of a product or service, along with the capital and labour embedded within it.

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The resources and even risks from economic activities are allocated and dispersed worldwide, and people move all over the place. To be sure, a few things are still too localised to be exported overseas, but they are very few these days, given that even traditional foodstuffs such as sushi and tofu have made it abroad.

Almost every single tradeable product has both local and foreign, or national and international, elements. When a product is being manufactured in one country, some parts always come from other countries, or the manufacturer itself is a foreign or joint venture.

When a government levies heavy tariffs on certain goods, it is potentially a punishment for all the parties operating in a worldwide value system. Attacking any single part will no doubt affect the whole system through ripple and domino effects. Therefore, multilateral treaties are in fact a value-system-based arrangement and we should be encouraged to comply with them. 

Second, national security issues can only be addressed internationally – not by imposing man-made obstacles on trade and investment flows, but by taking common threats seriously, in unison. So far, there is no empirical evidence suggesting even a small significant correlation between trade and security threats. 

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Importing or exporting equipment or goods – even hi-tech products – surely benefits people of the countries engaged in the trade. If the well-being of the people is substantially improved by trading with one another, how will that agitate security threats towards their countries?

National security risks are contingent on poverty, not social well-being. If wealth is created through production and consumption, and prosperity is achieved through distribution and sharing, national security would no doubt be self-fulfilling and self-sustained.

Therefore, restricting or blocking certain imports – in particular technological elements – does not help security; and slapping huge tariffs on goods from other counties in the global value system would fail to benefit those who started the vicious cycle.

If the trade relationship improves people’s well-being in China and boosts domestic consumption in the United States, national security concerns should have no place in these debates. The increase of Chinese people’s personal wealth and the consumption boom that follows will benefit the world, and both parties would surely be more secure in the process, wouldn’t they?

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Third, technological development is a great disrupter. The theme of the new era is innovation and technological breakthrough. A sharing economy, geek economy, digital economy and the like are the new norm, and artificial intelligence, virtual reality, augmented reality, cloud computing and the internet of things are part of this new trend and will become the new normal. 

These new technologies render national borders irrelevant, bit by bit. Take cloud computing and storage for example; the cloud does not belong to any single sovereign state, no matter how powerful or powerless.

These new technologies render national borders irrelevant, bit by bit

Collective efforts in technology disruption should address issues such as cybersecurity, disinformation, machine learning and reasoning, the brain-machine interface, blockchain, and so on. 

These immense new tasks deserve a great deal of hard work from all human beings, not only designated nationals from the major economies. In the case of workers being replaced by AI or robotics, this is something we must all face, and we should all find solutions.

These are some of the reasons against any impulsive multilateral trade conflict. There are many more, and they all come to the same conclusion: war-war is out of the question, jaw-jaw is not so good, either. In fact, “coopetition” is the future of global trade and investment interactions.

We hold the key to the challenges in a new era.

Liu Jun is a member of the China Finance 40 Forum