Costs of a US-China break-up are too high for either to bear

The escalation of an economic skirmish into a trade war is front and centre on many people’s minds in China and the US.

We should not forget the four decades of constructive engagement between the two countries, engagement which resulted in collaboration to combat global health pandemics like severe acute respiratory syndrome (Sars) and Ebola, among other issues. Nonetheless, a trade war has the potential to erode such collaboration at all levels, from government institutions to people-to-people exchanges.

The “shock and awe” of US trade tariffs has produced little progress in the last few rounds of negotiations, nor have the tariffs reduced the bilateral trade deficit. Chinese exports rose nearly 15 per cent in September compared with the same month a year earlier, according to government data published on October 12.

This beat analysts' forecasts and was stronger than figures from August. The acceleration suggests China is weathering the first waves of the tariffs fairly well, even though it is widely acknowledged that the months ahead will be much harder for both China and the US, taking into account the latest tariffs.

US options are narrowing down to two: capitulation or further escalation. Any unilateral moves will only serve to strengthen China’s hand. We are seeing this especially in public opinion towards the US, and President Donald Trump in particular.

Why Trump’s cold war to contain Beijing is destined to fail

There is a pressing need for the average American to understand globalisation and China’s role in it. As one government official put it, the “losers” in globalisation know who they are when their factories and businesses close; however, the “winners” do not necessarily connect affordable prices for cars, televisions and appliances with globalisation.

The fact is that, in the past 50 years, five of every six lost jobs were a result of technological advance, not globalisation.

As with all trade wars, there will be grave consequences if and when all measures are fully implemented.

As it is, an increasing number of US companies, both large multinational corporations and smaller ones, are diversifying manufacturing outside China. Since then, market confidence has fallen. On Tuesday, the stock market fell to a fresh four-year low. 

China’s falling stock market mirrors its failing economic policy

The US has not been unscathed either. On October 10, the Dow Jones Industrial Average index tumbled 832 points. The S&P 500 closed down 2.1 per cent, notching its sixth-straight session of losses. It's the longest slump for the broad index since just prior to President Donald Trump's election more than two years ago. 

As the world’s two largest economies threaten to implement more protectionist policies, this trade tension will continue to hinder the global trading system. A study from the World Bank found that US-China tariff escalation could potentially reduce global exports by up to 3 per cent and global income by up to 1.7 per cent.

Moreover, an unintended consequence of the Washington-led trade battle is that Chinese companies are developing higher-quality products to compete against American goods. Through the use of robotics, artificial intelligence, as well as offshoring production to cheaper countries in Southeast Asia, China is improving the manufacture of high-end goods. Thus, US tariffs are pushing China to be more competitive in the long term.

Trade war or not, China’s innovations continue to power ahead

It is true that Beijing and Washington have fundamental differences, but these should not overshadow efforts to find common ground on core mutual strategic interests.

China is still largely a developing country, on the basis of its modest per capita gross domestic product, and has not fully embraced all aspects of a typical market economy. In fact, on its present course, that may not happen soon, if at all. However, it is wrong to assume that US engagement with China was meant for China to conform to its Western model of democracy, economic development and overall ideology.

Both should take a step back and reassess the bigger picture of US-China relations.

It is also strange that an administration that complains so loudly about the US carrying a disproportionately large part of the burden in areas such as defence is basically taking on China alone and not trying to involve its EU and G7 allies. Borrowing from an African proverb, “If you want to go fast, go alone. If you want to go far, go together.”

Earl Carr is a managing director at Momentum Advisors and an adjunct professor at New York University’s Centre for Global Affairs. Dr Li Qingsi is a professor, and director of the Centre for American Studies, at Renmin University in Beijing. Jason Ho, of the University of Toronto Rotman Commerce, Canada, also contributed to this article