China needs to prepare for a protracted trade war by learning from WTO negotiations

By Zhang Yansheng Source:Global Times Published: 2019/5/28 22:03:40

Illustration: Luo Xuan/GT

With its political, economic and financial hegemony, the US has initiated the trade war to change the international order and the global governance system. 

Some of the foreign-invested companies operating in China, which currently account for 40.7 percent of Chinese exports to the US, are expected to move out of the country under pressure from the trade war, affecting employment in some labor-intensive industries in coastal areas. In science and technology, the US will likely introduce stricter export controls in 14 high-tech sectors and impose long-arm jurisdiction over international cooperation involving China's high-tech industries. Meanwhile, China's foreign investment, foreign trade, foreign exchange and stock market will probably see fluctuations due to the uncertainties.

Then, where does our confidence in the Chinese economy come from? The Chinese economy is characterized by potential, resilience, and room for maneuvering. In the past four decades, Chinese companies grew from weak to strong and from small to large, pulling through the Asian financial crisis in the 1990s and the global financial crisis in the 2000s. Today we still need to be prepared to fight a protracted war. By enhancing national strength and industrial competitiveness, we need to turn the trade frictions into the driving force for opening-up and high-quality development.

As to how to develop our own economy, there are some core issues that must be addressed.

First of all, the export-oriented growth model must be reshuffled. In the past, China provided low-cost labor, land and other resources with low environmental protection standards. This must be transformed into an innovation-driven, high-end development model that allows the country to move up the global value chain.

It is necessary to offer guidance to labor-intensive, foreign-invested companies operating in coastal and inland areas. In the past, cost-sensitive foreign-invested companies invested heavily in China's coastal provinces and cities due to low costs and environmental protection standards. After finishing processing and assembly in China, they sold the finished products in the global markets. Despite the sharp rise in overall costs in recent years, many of these foreign-invested companies still maintained their China operations. Since the 25-percent tariffs imposed by the US mean that they may lose the US market, a feasible solution is to create conditions to keep these processes in China while encouraging them to move to western and central regions. How we do this is the key.

Furthermore, it is also crucial to stabilize expectations, employment and foreign investment. China has long been the largest recipient of foreign direct investment among emerging markets and developing countries. If some cost-sensitive foreign-invested companies leave China due to the trade war, who will be the future investors? They must be from market-driven and efficiency-driven industries attracted by China's huge domestic market and human resources. Efforts should be made to stabilize the expectations of foreign capital, private enterprises and state-owned enterprises; to encourage the rollout of an employment priority strategy; and to create a good investment, business, and innovation environment to attract investment from global high-tech industries.

Last but not least, national strength and industrial competitiveness are the most important conditions for science and technology, finance and agriculture. We should work to develop basic research, application research, experimental development research, and key common technologies. As for financial openness and marketization, we must prevent a financial crisis from happening and avoid capital from flowing from the real economy to the virtual economy. In terms of agriculture, we should start with the transformation of agricultural management and innovation incentives for agricultural science and technology.

To fight this protracted war, I also have two suggestions.

First, we need to learn from the experience of negotiating China's accession to the WTO. Sometimes the process is more important than the results. Without the long-term negotiations, we would not have such deep understanding of the international rules represented by GATT/WTO, which enabled us to make full use of the "accession" in facilitating China's overall progress.

Second, the protracted war allows us to fully learn about the US, ourselves, as well as the world's past, present and future. The US is a hegemonic country with rich experience, but the country is on the decline. From a historical and cultural perspective, the US is a young country characterized by hastiness and aggression. It forces other countries to make concessions and big promises by using its hegemony. Conversely, China is a country with a long history that tends to do things step by step. China has its own internal development logic, and other countries must respect China's principles and behaviors.

The author is chief research fellow with the China Center for International Economic Exchanges.


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