China needs to prepare for long-term rivalry with the US even if trade deal is reached

By Shen Jianguang Source:Global Times Published: 2019/1/9 18:18:40

Illustration: Luo Xuan/GT

Looking ahead to 2019, it will remain the focus of the public's concern as to whether the trade tensions between the US and China will ease.

Despite US President Donald Trump's aggressive trade policy moves, a trade fight is clearly not in the US' interests. In view of the US economic trends, financial market volatility and the reactions of the US business community, Trump really needs to reach a deal with China to avoid the further negative impacts of any escalation in the trade dispute.

In terms of the US economic fundamentals, the US economy may have already reached a peak, with a strong annual growth rate of 3.5 percent in the third quarter of 2018. Yet, with the lessening effect of tax reforms and the increasing negative impact of the trade war, there will be less room for US fiscal policy, thus putting the US economy under pressure.

Moreover, the rising inflation rate has also forced the US Federal Reserve to tighten its monetary policy by raising interest rates.

From the perspective of US companies, the trade rows have started to affect their cost. For instance, Caterpillar, the world's largest heavy machinery maker, recently said that the increased steel tariffs and freight charges cost it an additional $40 million in the third quarter of 2018.

As for China, an escalation of trade disputes may have profound impacts on its economy. In the short term, the depreciation of the Chinese yuan and the increase in export tax rebate may help alleviate the pressure. 

However, in the long run, since it is hard to find another export market comparable with the US, the trade disputes will have far-reaching effects on investment prospects, entrepreneurs' confidence and industrial supply chains. 

The longer the trade war continues, the greater the risks will be.

More importantly, we should not underestimate the impact of US-China trade disputes on the industrial supply chain, which is actually very difficult to accurately calculate. 

For example, due to the uncertainties surrounding the US-China trade war, more and more multinational companies are hesitant about investing in China and are making gradual adjustment to their global production plans. On the other hand, China's complete industrial chain and huge market make it hard for US companies to give up this market.

If the China-US economic and trade relations, known as the stabilizer of bilateral ties, turn sour, conflicts between the two countries in terms of geopolitics and ideology will intensify quickly. For this reason, the two sides have certain common grounds in seeking a suspension of their trade disputes and are likely to reach a deal. Thus, in 2019, the China-US economic and trade relations may be better than that of 2018.

However, even if the trade tensions could be eased in the short term, the disputes between China and the US are not just limited to trade issues. Increasing disagreements in terms of cybersecurity, geopolitics and technological competition indicate that the China-US rivalry has spread from trade issues to the science and technology field and through to the economic systems. 

The recent Huawei incident, the earlier ZTE incident, and the statements targeting the "Made in China 2025" initiative along with China's subsidies for State-owned enterprises (SOEs) are all such examples.

In the short term, due to the win-win nature of trade, there is still room for negotiation in the trade disputes. Nevertheless, in the medium term, the US has become aggressive toward the rise of China's manufacturing sector and the narrowing of the gap in high-tech areas. In the long run, amid the concerns over the Thucydides' Trap, an overall US containment of China is not entirely impossible.

In this sense, China will likely face more conflicts with the US at different levels, and it is essential to be prepared for a protracted war. Nevertheless, there is no need to be overly pessimistic about the external pressures. The best response to these challenges is to focus on ourselves and do our own things well.

To address internal and external difficulties in 2019, deep and practical reforms need to be carried out to achieve competitive neutrality in the domestic market, while externally, we should strive for the easing of China-US trade tensions.

The author is chief economist with Jingdong Finance.


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