Trade agreement is best outcome for China, US

By Shen Jianguang Source:Global Times Published: 2018/5/21 22:03:40

Illustration: Luo Xuan/GT

There won't be a Sino-US trade war. This was the core achievement of Vice Premier Liu He's negotiations with the US. According to the statement made on Saturday, the two sides agreed to reduce the US trade deficit with China. China will increase the imports of US goods and services, including agricultural products and energy exports, and will attach more importance to patent protection and two-way investment.

Reaching this agreement has not been easy. But for China, it avoided the worst-case scenario, which is mutual trade sanctions with the US. It has also won time for the Chinese economy to achieve further steady growth.

At present, in terms of scale, the trade sanctions imposed by China and the US are only at the level of trade friction. It cannot be considered a trade war yet. China's counterattack has been modest, and it is still best to try to avoid a trade war.

The conclusion of the Sino-US agreement is based on neutrality, and should not be construed as a unilateral compromise by China. This agreement is actually in line with China's own reform needs.

In the meantime, increasing imports of energy and agricultural products also meets China's strategic needs.

Of course, some people have praised US President Donald Trump's acumen, as if he forced China to increase its commitment to importing and accelerating reforms, all while winning support from voters at little political cost. But for China, the agreement does not involve excessive concessions.
Trump has not focused solely on China. He withdrew from the Trans-Pacific Partnership as soon as he came to power, disregarding allies and domestic dissenting views, and also withdrew from the Paris climate agreement and the Iran nuclear deal. Running against the tide of globalization, the US also increased tariffs on steel and aluminum, causing anger among its European allies.

In the long run, this will be a huge blow to US credibility, creating gaps with European allies and even promoting the rebalancing of international resources.

Based on this, after the risks of a Sino-US trade war are dispersed, the global risk of a trade war between the US and Europe will develop, which will provide an ideal time window for China's own development.

Now is not the right time for China to have a full showdown with the US. Although China has developed rapidly in recent years, it still lags behind the US in terms of per capita and absolute GDP, as well as in terms of innovation, education capabilities and military strength.

Moreover, China is currently facing major challenges in preventing financial risks and accelerating supply-side reforms. With the threat of the Thucydides' Trap, economic and trade pressure could bring Sino-US relations into a kind of "Cold War" mode. External shocks could change China's economic growth path of reform and opening-up. Therefore, confrontation with the US would not be the best policy for China.

The Sino-US consensus did not mention issues like Made in China 2025 or subsidies for State-owned enterprises, meaning that although the trade war can be avoided in the short term, longer and more extensive conflicts may remain. The ZTE incident has been a warning, and the Sino-US game will be different in the medium and long term.

In the short term, trade friction has been the main disagreement. In the medium term, the rise of Chinese manufacturing and the reduction of the gap in the high-tech sector between the US and China will make the US more vigilant. From a long-term point of view, the US may launch further sanctions against China.

From this perspective, we must seize the opportunity to postpone the showdown with the US, accelerate the implementation of the all-round reform objectives put forward by the 19th National Congress of the Communist Party of China (CPC), improve economic strength and speed up the rise of China.

The author is managing director and chief economist with Mizuho Securities Asia.

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