Behind the US-China trade war lies a competition for dominance and a rising tide of protectionism
Lawrence J. Lau says the competition between the world’s two largest economies doesn’t have to be a zero-sum game, while isolationist sentiment, particularly in the US, can be stemmed with a redistributive tax system
The competition between China and the United States has been ongoing, if implicitly. It did not begin with US President Donald Trump and will not go away even after he leaves office. It has come to the fore because China’s gross domestic product shot up from only 20 per cent of the US’ GDP in 2000 to about two-thirds in 2017, and may catch up sometime in the 2030s if current trends continue.
However, the arena of competition must be chosen carefully. In terms of GDP per capita, the US is still way ahead, with almost US$60,000 compared to China’s US$9,137 in 2017. It will take the Chinese the rest of the 21st century to close the gap, if at all.
In terms of the total number of nuclear warheads, the US is leading by at least an order of magnitude. This is not a competition that China should wish to win. On the other hand, a race to find an effective cure for cancer would be a worthwhile project for both countries and, in fact, the world.
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The solution to cybertheft should be a vigorous prosecution of perpetrators on both sides, with the cooperation of both governments. I believe that instances of state-sanctioned commercial cybertheft are rare. However, one cannot rule out freelancers financed by private individuals and firms.
The rise of populist, isolationist and protectionist sentiments in the US and elsewhere also has significant impacts on international trade and investment. Although Trump did not engender these sentiments, he has been able to exploit them very effectively, casting China as the villain.
The root cause is the uneven distribution of the benefits of globalisation. While globalisation has benefited many countries, including China and the US, its gains have not been shared universally in either country – and losers have emerged. In principle, there are sufficient overall gains to be shared, but the free market alone cannot compensate the losers. Thus, there are angry people who have been left behind for decades.
It is natural and instinctive for an individual to have isolationist and protectionist feelings, to occasionally entertain notions of “us vs them”, and to believe that “more for them means less for us”. The losers in globalisation believe that a return to protectionism may help them. Unfortunately, it will take a while before people realise that protectionism is a lose-lose situation. The eventual solution has to be some form of redistribution within each country – taxing the winners to compensate the losers so that everyone wins.
Trump also believes that every deal is zero-sum – one country’s gain must be another country’s loss – and that the US can do much better by negotiating bilateral trade deals with each country, taking full advantage of the size and power of the US. He would like to shift the existing distribution of gains from trade by switching from the multilateral to the bilateral setting.
How will things end up? China and the rest of the world, except possibly the US, will probably continue to uphold the current multilateral trading system under the World Trade Organisation. After all, they have all benefited and will continue to benefit from it. However, China-US relations must be carefully managed going forward.
Lawrence J. Lau is the Ralph and Claire Landau Professor of Economics at the Chinese University of Hong Kong