China’s response to US pressure not limited to trade

Source:Global Times Published: 2019/5/16 20:30:35

Illustration: Luo Xuan/GT

While the US-China trade talks continue, it seems that the deep differences between the two sides make it difficult to reach a deal in the short term. In response to the increased US tariffs on $200 billion worth of Chinese goods, China announced it would impose tariffs of between 5 percent and 25 percent on $60 billion worth of US goods starting June 1. 

It has become increasingly clear that the US wants to exert extreme pressure on China with its own advantages in the economy, finance, science and technology, and its goal is not simply to resolve bilateral trade imbalances, but to contain China as its long-term strategic rival. 

The China-US trade conflict is part of the strategic competition between the two countries and a change in the long-term strategic environment that China must face. There is no chance of a "once and for all" solution to the situation. Against the background of the new US trade barriers and global competition, China needs to consider systematic countermeasures to US pressure from the perspective of overall economic and social development.

In the economic and trade field, China will have to fight back against US unilateralism while remaining open to other countries. Under normal circumstances, enhancing industrial upgrading and economic competitiveness requires improved efficiency, sharing of technology or building supply chains for an agglomeration effect. But these are not normal conditions, and China could consider lowering tariffs for some economies or even open its market with zero tariffs. The US should be the only exception. In this way, a new situation may be created in which other countries introduce technology to China, which could continue to make use of its market size to attract other trade partners until the US is forced to abandon its tariffs. The "zero tariff and zero barrier" approach could also be extended from trade to investment, for instance a "zero barrier" policy for doing business under the WTO framework.

China needs to continue expanding its domestic market and making use of market attractiveness. As a big country, China has sufficient market space. And in the era of overproduction and excessive capital, market space represents competitive strength. For the construction of the domestic market, it is mainly about employment and consumption, which require not only fiscal policy but also monetary policy to promote infrastructure investment, improve people's livelihood and raise residents' income level. The top priority at present should be reducing total social costs in a number of aspects like taxation, real estate, and institutional barriers. Only by stabilizing the social cost, which should match consumption growth, can we really increase demand and expand market space.

China needs to continue opening up its financial market. If the trade row continues to escalate, the real damage won't be due to tariffs, but the outflow of overseas capital, which will lead to the devaluation of the currency. Even if all the problems in the trade field are solved, financial problems will be the next big issue between China and the US. Financial problems are combinations of internal and external factors. Failure to deal with them could cause big fluctuations in the economy. Many people are skeptical about China's continued financial openness, but it is important for China to adhere to financial openness and improve regulations when facing external pressure. Attracting inflows of international financial capital with steady financial openness will, to a certain extent, offset the reduction of capital inflows in the economic and trade field and the loss caused by the capital outflow from the real economy. The inflow of international financial capital will partially make up for the capital loss caused by the trade war. Moreover, capital inflows brought by the opening of the financial market will also be conducive to maintaining the stability of the yuan exchange rate.

China needs to unswervingly continue with its reforms. The real problem of the Chinese economy doesn't lie in the trade war at all, but in the Chinese economy itself. Whether or not there is a trade war, these internal problems will emerge and generate a big impact. The current economic model caused by policy mistakes and the slow progress in China's market-oriented reforms have become obstacles to the sustainable development of the Chinese economy. Optimizing resource allocation and establishing a healthy market mechanism through further reforms are key to resolving China's economic structural problems. The Chinese economy still has great potential as reforms continue. And reform dividends need to be released to gain momentum for sustainable growth.

The changes to the US-China trade environment and US-China relationship are long-term and strategic. Thus, China's response should not be limited to international trade itself but should be seeking broader market space through reform and opening-up. Only in this way can China deal with pressure from the US.

The article was compiled based on a report by Beijing-based private strategic think tank Anbound.

Posted in: INSIDER'S EYE

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