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Chinese President Xi Jinping and US President Donald Trump taking part in a welcome ceremony at the Great Hall of the People in Beijing, in 2017. Photo: Reuters
Opinion
The View
by Paul Sheard
The View
by Paul Sheard

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
Hopes are high that US President Donald Trump and Chinese President Xi Jinping’s meeting at the upcoming G20 Summit in Japan can lay the groundwork for a US-China trade deal and end the tit-for-tat tariffs.

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.

Two factors underlie the tough stance the Trump administration has taken towards China, both of them structural. One is the rebalancing of economic and geopolitical power associated with the rise of China.

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.

When the main effect of China’s rapid growth, assisted by its World Trade Organisation entry, was that American consumers benefited from a flood of cheaper products, it was one thing; when the Made in China 2025 plan raises the spectre of China achieving leadership in a range of hi-tech sectors, it is quite another.

Beijing’s ‘Made in China 2025’ plan isn’t dead, it’s out of control

The Trump administration has taken particular aim at what it sees as China’s unfair intellectual property practices, with the Office of the United States Trade Representative raising four bones of contention in its lengthy Section 301 report in March last year. For its part, China dismisses these charges as “utterly unfounded”.

These concerns speak to fundamental differences in the political, economic and legal fabric of the two countries.

China’s intellectual property practices and Made in China 2025 aspirations, the ubiquitous role of state-owned enterprises in the economy, and one-party constitutional supremacy tending to render the concept of judicial independence moot, are systemic in nature.

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.

If the underlying nature of the dispute defies easy solution, how might things play out? By imposing tariffs and threatening more, the Trump administration may have backed itself into a corner, if what it is demanding of China is nigh impossible for it to deliver.

On the other hand, President Trump appears to be the rare policymaker who sees higher tariffs as a solution, not a problem.

How legal differences tripped up US-China trade talks

The US appears to be in a stronger bargaining position for three reasons. First, the US economy is at full employment and growing strongly. The build-up of debt in China’s economy makes it much more vulnerable to a policy-induced shock.
Second, the US is already a highly developed economy, whereas China is still developing. China will be wary of doing anything that could cause its nearly four-decade-long process of economic development to be thrown off course.

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.

That in turn could lead the Trump administration to accuse China of devaluing its currency, when in fact it is really just a case of foreign exchange markets responding to changing economic policies.

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

If a prolonged trade war were to trigger a sharp drop in the US stock market, leading to a weaker economic outlook, the Trump administration might be less inclined to stay the course as the 2020 presidential elections loom.

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

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