Cooperation should set the course for China-US ties

By Xu Chen Source:Global Times Published: 2018/4/2 21:48:39

Illustration: Xia Qing/GT


US President Donald Trump has signed a memorandum to impose tariffs on up to $60 billion in Chinese products and restrict mergers and acquisitions by Chinese companies. This move has triggered strong reactions among global financial markets.

The Trump administration has taken a hawkish trade stance toward China, blaming China for the trade deficit.

The US and China are important trade partners for each other. According to a report by the National Committee on US-China Relation released last April, Chinese companies employ more than 140,000 Americans.

The essence of bilateral economic relations is mutual benefit. So it is important to understand the trade deficit.

The US trade deficit has its own internal logic. The US has had a trade deficit against the world since 1976. The fundamental reason is its economic structure, which is driven by domestic demand. In other words, US aggregate demand outweighs aggregate supply.

For the past 20 years, the US has been a high consumption, low savings country. Low savings and high consumption created a gap that domestic products can not fill, so the trade imbalance is caused by active demand for the imported goods on the US end.

The trade deficit is the necessary pain that US has to bear in exchange for the US dollar's position as a global reserve currency. Being a reserve currency has brought the US a huge bonus. Every time it runs into an economic crisis, the US has the power to make its dollar flow back to the US, easing its pressure. Demand from other countries will inevitably push up the value of the currency.

US-China trade is cooperation between two countries with different factor endowments. The US trade deficit is an optimization achieved by the market base resource allocation, since both countries have comparative advantages.

China is part of the global value chain, which is an international production division dominated by the Western world, and that results in a trade surplus. This imbalance stems from the two countries' economic structures and US companies' move to maintain their comparative advantages.

The US companies allocated their manufacturing to China, utilizing the country's cheap labor, flexible environmental regulations and improving supply chains and logistics infrastructure. More than 50 percent of the trade deficit is created by US-branded products, the China Chamber of Commerce for Import and Export of Machinery and Electronic Products has said.

The US has an $800 billion annual trade deficit against the world. Targeting China alone won't solve the problem. On the contrary, it will severely hurt US companies and consumers.

Imposing more tariffs on Chinese products will have the same effect as raising taxes on US consumers. According to a paper by the National Bureau of Economic Research, US imports of manufactured goods from China reduced the US price index for manufactured goods by an estimated 7.6 percent between 2000 and 2006, owing to China's entry into the WTO. Consumers, especially those in middle- and low-income households, benefited the most.

Higher raw material prices will affect US major industries such as beverage can producers and automobile makers. Higher steel prices will also affect the production and transportation of shale oil and gas, because the resources used to build pipelines heavily rely on imported steel.

Domestic industries that are protected by high tariffs will lack competitiveness. To control the cost of raw materials, US will have to either seek quality and cheap suppliers in the international market or attract more foreign investment to develop its own production technology.

Trade restrictions will also lead to higher financing costs for the US. Countries that have a trade surplus against the US have to either bear currency appreciation and soaring interest rate, or invest their US dollars back to the US to maintain their value.

China holds the largest amount of US debt, and direct investment from China has exceeded $100 billion, which created 200,000 jobs.

The US government has more important things to do than fight with other countries for highly polluting, low value-added industries. It had better focus on helping US companies to maintain and enhance their comparative advantages and encourage the trade surpluses to flow back to the US in the form of investment.

Win-win cooperation will bring more opportunities for US-China economic and trade relations. China is advancing supply-side reform and its economic transformation and upgrading, while the US is experiencing a stable recovery. At this moment, more communication and cooperation is vital. There are five ways in which the US and China can push together.

First, speed up negotiation on a bilateral investment treaty. Second, expand the use of the yuan in the US market. Third, foster bilateral cooperation in infrastructure. Fourth, implement more market opening in both directions. Fifth, extend bilateral cooperation at the provincial and state levels.

The development of China-US economic and trade relations in the new era should be based on mutual respect and win-win cooperation. Both countries need more cooperation than competition. A healthy and stable bilateral relationship will benefit the two peoples.

The author is chairman at the China General Chamber of Commerce and CEO at Bank of China USA.


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