US and China need to go beyond a trade deal to share the burden of reshaping a new world order
- A headline-grabbing deal at the G20 meeting between Trump and Xi is unlikely. China-US differences are systemic and structural, but with flexibility and compromise, the world’s two superpowers could work together to reshape the liberal international order
However, the trade dispute is not amenable to a quick or easy solution because the underlying issues are structural and systemic in nature. Even if a headline-grabbing agreement is reached, it is likely to be largely cosmetic and is unlikely to defuse ongoing tensions.
China now rivals the US in economic size: its share of global nominal gross domestic product was 16 per cent versus 24 per cent for the US last year, but, adjusted for the purchasing power of currencies, China is now the largest economy in the world at 19 per cent versus 15 per cent for the US.
Trump’s doctrine of “America first” and “Make America Great Again”, and his tough line on trade, reflect this changed reality: the US is no longer willing and able to play the role of a benign hegemon, underwriting the liberal international order and opening its market to other countries, without receiving reciprocal access in return.
The second is the growing perception in the US that China’s system of single-party political control and state-led capitalism means it plays by a different set of rules, rules that put the US at a systematic disadvantage.
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These concerns speak to fundamental differences in the political, economic and legal fabric of the two countries.
They are not your run-of-the-mill tariff or non-tariff barriers, the lowering or removal of which can readily be negotiated and announced as part of a trade deal.
On the other hand, President Trump appears to be the rare policymaker who sees higher tariffs as a solution, not a problem.
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Third, China runs a large trade surplus with the US. Intuitively, China cares more about losing its exports than the US cares about losing its imports.
Falling Chinese exports hit Chinese producers and workers, while the corresponding fall in US imports hits US consumers. In China, the impact is more concentrated; in the US it is more diffuse.
But there are two qualifications. One, the effect of the tariffs may be largely offset by a corresponding rise in the value of the dollar, if the real exchange rate remains substantially unchanged.
Two, the economy-to-market-to-politics feedback mechanism is much more direct and potent in the US than in China.
It’s clear any US-China trade deal will not be quick, or easy
China and the US need to go beyond a trade deal, and focus on reconciling the differences in their economic and political systems.
As the world’s two economic and geopolitical superpowers, they need to find ways to underwrite and reshape as necessary the liberal international order, and share the burden of doing so. Flexibility and mutual compromise are called for.
Paul Sheard is M-RCBG Senior Fellow at Harvard Kennedy School. He has held chief economist positions at leading financial institutions in Tokyo and New York