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

PUBLISHED : Friday, 17 August, 2018, 5:01am
UPDATED : Friday, 17 August, 2018, 6:12am

The trade war between China and the US is actually not about trade. It is driven by two important long-term developments simultaneously in play in China-US relations. The first has to do with the potential competition between China and the US for economic and technological dominance in the world. The second has to do with the rise of populist, isolationist and protectionist sentiments in the world in general and in the US in particular. 

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.

Comparison, and hence implicit competition, between the two largest economies in the world today is unavoidable. However, competition need not be destructive. For example, the competition to create the world’s fastest supercomputer has already resulted in both countries producing better, speedier computers.

The champion this year is the IBM Summit, an American machine that beat the Sunway TaihuLight, a Chinese computer which topped the Top500 list of supercomputers in 2016 and 2017, and which uses entirely Chinese-made chips. This is not unlike the Sputnik moment in 1957, which spurred the US to accelerated development of science and technology. The trade war, which has the potential to disrupt the supply of advanced semiconductors from the US, is likely to reinforce Chinese determination to become self-sufficient in them.

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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.

The technological competition, which is associated with “Made in China 2025”, has bred grievances on the part of the US about intellectual property rights protection, forced technology transfer and cybertheft. Intellectual property protection in China has actually been improving steadily since special intellectual property courts were set up in Beijing, Shanghai and Guangzhou in 2014. As the Chinese begin to innovate, they themselves will demand the strengthening of intellectual property rights protection in China.

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Forced technology transfer has to do with Chinese requirements for foreign direct investors in certain industries to become equal joint-venture partners with Chinese enterprises. This issue has now become mostly moot, as foreign direct investors are allowed to have 100 per cent ownership in many industries.

For example, in the automotive industry, Tesla has established a wholly-owned subsidiary in Shanghai. However, General Motors has indicated it does not intend to buy out its Chinese joint-venture partner even though it is now possible to do so. These latest liberalisation measures, as well as the revised, much shorter “negative list” of restrictions on foreign direct investment, should go a long way towards eliminating the issue of forced technology transfer.

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.

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Trade in technology, including cross-border investment, will probably remain problematic as long as national security and technological competition have to be taken into consideration. Just as the US government discourages the use of Huawei products for national security reasons, the Chinese government may also eventually decide that it is risky to rely on US hi-tech products.

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.

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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.

One of his grievances is that the US has not benefited enough from China-US economic relations. China has been able to lift 600 million of its citizens out of poverty, initially through the vast expansion of export-oriented jobs. American consumers have also benefited from two decades of low prices. Had US imports from China stayed at 1994 levels, the US Consumer Price Index would have been 27 per cent higher in 2017, or around 1 per cent higher annually. However, it is difficult to assess which country has benefited more.

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