Trade row with US could push China to ‘consider new round of systemic reform’

But Chinese government adviser says making big changes could be difficult, and it must avoid getting ‘into a group fight’ with other developed countries

PUBLISHED : Wednesday, 09 May, 2018, 9:32pm
UPDATED : Wednesday, 09 May, 2018, 11:58pm

With the threat of a trade war hanging over China and the United States, Beijing could be pushed to review its industrial and economic policies and consider a new round of reform and opening up, according to a Chinese government adviser involved in previous trade talks between the two sides.

Lu Feng, an economics professor at Peking University who took part in the precursor to the comprehensive economic dialogue with Washington that has been stalled since April last year, made the remarks ahead of a top Chinese official’s trip to the US for more trade talks aimed at easing tensions between the world’s two biggest economies.

US-China trade war: talking is the way to a solution, says JPMorgan chief Jamie Dimon

China took a tough stance during talks with the visiting US delegation in Beijing last week, saying it would not compromise or give up on its plan for an industrial upgrade into advanced technologies, which it considers to be in the nation’s core interests, and that it would not agree to US President Donald Trump’s demand to lower the trade deficit by US$200 billion by 2020.

With Vice-Premier Liu He expected to visit Washington next week to continue the negotiations, Lu, who is also an adviser to the finance ministry, said it was time China reconsidered its economic strategy.

“The current China-US trade conflict has given us a chance to reflect on how we should move forward with our economic development,” Lu said after speaking at a forum in Beijing on Tuesday.

“China may need to consider a new round of systemic reform like the one in the 1980s as a way to address concerns from the US and other developed countries about our economic policies,” he said, referring to late leader Deng Xiaoping’s move to open up the market to foreign investment.

“In fact there are also different opinions in China about our industrial upgrade plan. While many people think we should strengthen government support, there are also some who think China should allow free competition in the market and protect intellectual property.”

A US-China trade deal can end ‘Chimerica’ on a positive note

Lu said there were similar debates before China’s entry to the World Trade Organisation in 2001 over whether it should continue on the path of marketisation of its economy, but those pushing for the nation to open up prevailed and the economy had since become stronger and more resilient because of external pressure.

“But in a sense it could be more difficult to reform now,” he said, adding that it would be difficult for China to back down because of its economic success and nationalist sentiment.

There have been calls from state media and academics for Chinese to support domestic products and for the country to develop its own chip technology after the US banned American firms from selling parts and providing services to telecoms gear maker ZTE.

“For example, some in China think that the US ban on ZTE is a strategy to contain China, which would all the more prove that we need stronger support for the industrial upgrade policy,” Lu said.

He also said China needed to prevent the US from aligning itself with developed regions and countries such as the European Union and Japan.

“We need to prevent the situation where we have a fraught relationship with every other developed country … and [then we] enter into a group fight,” Lu said. “Trump may be getting into trade conflicts with a lot of countries now, but China is his most important target. It’s very possible that he will slowly and gradually narrow down his focus … and target China.”

No deal but Chinese state media strikes positive tone over China-US trade talks

Lu added that China needed to prepare for further actions from the US, including even tougher restrictions on investments in US technology – part of Washington’s Section 301 investigation into alleged Chinese theft of US intellectual property and forced technology transfers – such as a ban on Chinese firms hiring talent from Silicon Valley.

China could also be labelled a currency manipulator by the US, Lu said, and it could impose bans on other big tech firms such as Huawei and Alibaba, or even Chinese banks.