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US-China trade war: Opinion
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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
CommentUnited States

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

US-China trade war: Opinion
Haibin Zhu
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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.
 
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The first scenario is still possible. If either side makes concessions before July 6, the tariffs could be cancelled or postponed. But the large gap between the two sides and lack of trust imply reaching a grand deal is unlikely in the near term. Even with agreements, implementation issues could easily bring conflict back.

The unpredictability of Donald Trump’s negotiation strategy is the biggest risk. US restrictions and China’s retaliation could provoke further action, leading to a spiral of US-China conflicts beyond trade.
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The direct impact on the macro economy could still be manageable. Even after accounting for the second-round effect on employment, investment and consumption, a 25 per cent tariff on all China’s exports to the US would cause GDP growth to slow by around 0.5 percentage points.

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More important is that further restrictions on Chinese investment and companies would have more far-reaching implications for China’s industrial upgrading and technology advancement.

The US seems to have underestimated the negative impact of China’s retaliatory actions on American companies in China. The Chinese side seems to have underestimated the bipartisan support for US policy changes towards China, potentially leading to misjudgments that China can withstand the negative consequences longer than the US.

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The swing in the negotiation process is largely driven by the different focus at different stages from the US side. The negotiation tends to move more smoothly when the focus is on reducing bilateral trade imbalances.
Negotiations on technology, industry policy and fair competition are more challenging. China may concede in certain areas, for example, opening up the services sector (including financial services), revising the Patent Law and strengthening intellectual property protection.
On June 15, the State Council announced a series of measures to support foreign investment in China. However, the gap remains huge as regards to “Made in China 2025”, the role of state-owned enterprises, and the like.

More importantly, unlike trade negotiations, negotiations on technology fronts not only involve the Chinese government’s commitment to promote openness and structural reforms, but depend more on policy implementation. There is generally a lack of trust regarding China’s implementation from the US side, making negotiations even more difficult.

From an economic perspective, a trade war would be a “lose-lose scenario” and negotiation is the preferred approach. We cannot rule out that the US hard-line announcement could be a bargaining strategy. There is still room for negotiation.

Haibin Zhu is chief China economist and head of China equity strategy at J.P. Morgan

This article appeared in the South China Morning Post print edition as: US-China tariff war would have an impact beyond trade
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