US-China dispute goes beyond trade: it’s about technology and fair competition

Haibin Zhu says resolving imbalances between the US and China is easy; the real obstacles to preventing a costly trade conflict concern China’s goals for technology, its industrial policy and hesitance to embrace open markets at home

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A technician from Rui'an Hsoar Group debugs a robot in Rui'an City in China's Zhejiang province. China has set ambitious technological targets as part of its “Made in China 2025” campaign, but this has led to allegations of unfair competition at home, theft of intellectual property and strong-arming foreign companies in China into sharing knowledge with Chinese entities. Photo: Xinhua

Published: 4:00pm, 22 Jun 2018Updated: 10:30pm, 22 Jun 2018

In the event of a fully fledged US-China trade war, the outcome would go beyond trade. Things are escalating during the most critical period of China’s deleveraging and its efforts to lessen financial risks. A darkener external environment could potentially prompt China to slow these efforts and undermine reform progress.

The direct economic impact of a tariff war generally tends to be limited. A 25 per cent tariff on US$50 billion worth of Chinese imports amounts to a tiny share of China’s GDP. However, the impact would be larger if it affects business confidence and investment decisions.

The US tariff list mainly focuses on technology and electrical products, for which the value-added share in China is relatively low. Collateral damage to other economies in the global supply chain (especially north Asian economies) could be larger than for China and the United States in the near term.

There are two possible scenarios. The first is a last-minute deal where both sides step back and put tariffs on hold while negotiations continue.

The second is escalation. That is, tariffs on US$50 billion in imports from each side, followed by US investment restrictions on Chinese companies, additional tariffs from the US on Chinese imports and, possibly, China’s punitive action against US exporters or US companies in China.