Six sensible steps China and the EU can take while they wait out the US trade war

Before a trade war begins to kick up too much collateral damage, let’s pause and review. America’s Pied Piper president has so far monopolised the debate over the nature of the problem. Donald Trump and his team have defined the problem, prescribed the desired “America first” outcome, and have successfully cajoled the world’s trading powers to dance to a tune of the Pied Piper’s choosing.

Harvard economist Dani Rodrik, writing in the Post, was right to counsel both China and the European Union to be restrained, and resist the temptation to retaliate. If there is going to be a global row over trade, then both the EU and China would do well to resist the Pied Piper call to define the problems in profoundly flawed Trumpian terms. They should take the time to redefine the problem, and seek solutions that better suit the majority of the world’s economies.

The redefinition involves agreement on a number of steps:

• Beijing needs to recognise that the mounting complaints of European and US companies alike need to be properly acknowledged, and need a credible response. Given the general scepticism that the free trade rhetoric of Xi Jinping does not match the reality of trying to do business in China, real and concrete steps need to be taken to give substance to the claims that China is an economy that is opening to the world, and living up to liberalising commitments made in 2001 when it joined the World Trade Organisation.
• The United States’ assault on bilateral trade imbalances is economically illiterate and intellectually bogus. It should simply be ignored and resisted. As former World Bank economist Kaushik Basu wrote last week, complaining about a bilateral trade deficit with a specific country makes as little sense as complaining about your family’s bilateral trade deficit with your grocer, hairdresser or dentist. Any country’s challenge is to balance the deficits with the surpluses and – like any household – to make sure you can live within your means in the long term.

Watch: Trade war: China to retaliate after US proposes fresh tariffs on US$200 billion in goods

As trade war hits, China’s focus should be on steadying growth

• Focusing on border tariff barriers and manufactured goods is to fight last century’s problem while failing to recognise the problems that face international businesses today. Successive multilateral trade liberalising rounds over the past 50 years have brought down tariff barriers on manufactured products to very low levels. Most of those economies leading the way have profited greatly from lower consumer prices and larger volumes of trade. Today’s barriers to open trade are mainly in services, and in “behind the border” obstacles like licences, regulations, product standards and access to government procurement contracts. It is here that liberalising efforts need to be focused, as the US and EU business chambers in Beijing have persuasively argued in their lobbying for meaningful liberalisation in China.
• It may be impossible for Beijing to deflect Trump’s trade team from their obsession with tariffs. In which case, China should let the US go ahead imposing tariffs, in the comfortable knowledge that the main victims will be: US consumers who pay higher prices; the US, Hong Kong and Taiwan companies that account for at least 60 per cent of China’s exports; and, US-based manufacturers who see their competitiveness ruined by higher input costs.

China and Trump’s tariffs: stop, or I’ll shoot myself too

• Apart from resisting the temptation to retaliate, Beijing should begin multilateral discussions with an “alliance of the willing” focused on the behind-the-border liberalisation that will both answer foreign companies’ complaints and boost China’s own domestic competitiveness and productivity.

• Such a multilateral initiative (for example led jointly by the EU, the newly formed Trans-Pacific Partnership and the Pacific Alliance economies in South America, and including China) would not only breathe fresh life into the moribund WTO, but would tackle 21st-century barriers to trade and investment. It would also breathe some credibility into China’s tendentious claims to be a champion of multilateralism and free trade.

Such a six-fold response would preempt the danger of mutually destructive escalation, set a much more credible trade reform agenda and would potentially galvanise the disappointing WTO. It would leave Trump’s trade team becalmed, like that plastic trash circling around the South Pacific.

China must seize trade war opportunity to further open its economy

Many would argue that Beijing is unprepared for a serious trade liberalisation initiative. They may be right, but my hunch is that the timing might be just right. For most of China’s 1.4 billion people, the evidence of the benefits of multilateral engagement with the world economy, and of steady liberalisation, are clear to see.

There will be “red line” areas that continue to frustrate international business. The core objectives of “Made in China 2025” will not be up for debate (nor should they be, given that over 80 of the world’s leading economies, including Germany and the US, have well-honed industrial policies of their own).

Nor will Beijing reverse strategies aimed at attracting more high-value-added work into the mainland, and to reduce reliance on foreign companies for critical technologies. These are long-term strategies that companies in the developed economies of the West need to come to terms with.

What happens to 'Made in China 2025' as trade war fears grow

But there is lots of scope for liberalisation that can open up huge opportunities for international businesses, address most foreign companies’ complaints and provide a substantial agenda for a new WTO trade round. If a prize for China were to be the offer of recognition as a market economy – promised in the 2001 WTO accession agreement but so far not delivered – my sense is Beijing would be sorely tempted.

And you thought China is the only country Trump has gone to war with?

Giving foreign companies the opportunity to bid for China’s government procurement contracts – estimated at about US$400 billion a year – would be an easy start. So would greater transparency on industrial subsidies, and a timetable for dismantling large numbers of state-owned enterprises. Tighter intellectual property protection is already manageable.

After all, most international companies do not complain that China is closed but, rather, that it is opening frustratingly slowly. They complain of lots of liberalising talk, but underwhelming action. If China truly wants to lead the world in economic liberalisation, here is surely the chance. Leave the Pied Piper to play alone, to harm his own economy as he wishes. Restraint has its merits.

David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view