A Chinese economist explains what we get wrong about the trade war

The United States has significantly increased trade tariffs on $200bn of Chinese goods, with President Donald Trump adding that he is in no hurry to sign a trade deal.

The US will now impose a 25% duty on almost 6,000 Chinese products, significantly higher than the existing 10%. China has already responded by saying it “deeply regrets” the move and will retaliate.

The news comes as high-level trade talks are being held between the two super-powers to reach an agreement on trade. Between them, the nations account for 40% of global GDP.

The ongoing trade war between the world's two largest economies has increased fears that further escalation will harm the global economy.

“There is no greater threat to world growth,” French Finance Minister Bruno Le Maire has warned.

Beyond the negotiations and the sparring, what are the economic ties between the two countries? And what does the feud look like from China's perspective?

At the World Economic Forum’s Annual Meeting in January 2019, I spoke to Keyu Jin, a professor at the London School of Economics who is from Beijing and specialises in the Chinese economy. Below is an edited transcript.

What are America’s complaints against China?

There are multiple areas of concern. One is how much China is exporting versus how much it is importing from the US, whether China is really displacing jobs in manufacturing in the US, and whether there are forced technology transfers for American firms that work in China, and of course, intellectual property protection.

There are many areas that the US has attacked China on in terms of trade, but in my opinion these short-term issues are really a reflection of the deeper-rooted competition and rivalry that has become the defining characteristic of these two countries.

What is the trade surplus and why is it problematic?

President Trump has focussed recently on the trade surplus that China runs against the US. When a country runs a trade surplus it is simply exporting more than it is importing.

Now it's true that in the last 20 years, China has turned itself into a manufacturing and industrial powerhouse and has grown significantly based on exporting its products. American consumers benefit from cheaper imports from China, whether of toys, clothes, sneakers or furniture. The main concern is that, if China is producing everything, it’s also taking away jobs from the US and other advanced economies. However, there is a deep misconception about how much trade has contributed to the decline in manufacturing in the US. The main cause of job losses is technology, it is not trading with China.

The other concern is that if China doesn’t import much more from the rest of the world, how will the world be able to sell into the big domestic market and make a lot of money? The demand that the US and many other governments are making is for China to import much more, to buy their stuff.

What I think people have failed to recognise is that for the first time in decades, China recorded a current account deficit against the rest of the world in the first half of 2018. As a whole, China is starting to import much more from the rest of the world. However, bilateral trade with the US has shown a recent increase in the surplus, meaning that despite the recent tensions and tariff hikes on Chinese products, China is still exporting more.

What's the friction over intellectual property?

Only 30 years ago in China, people had never even heard of lawyers, and today it has implemented one of the most sophisticated systems of intellectual property (IP) recognition. But one must recognise it takes time to build a legal framework and enforcement mechanisms. For a long period of time, as China was transforming from an economic backwater to an economic powerhouse, it relied a lot on importing technology from abroad, on copying and imitating – this is standard practice for developing countries. But now it’s not a poor country, it’s a very powerful economy. If it continues its practices of not protecting against IP theft, the rest of the world and the US more vocally will have a lot to complain about.

There’s a common misconception that China has very little innovative capability, and that’s simply not true. In the technology sector, in online payments and Artificial Intelligence, as well as in fundamental science and technology, China is showing huge capacities for innovation.

If China is really going to transition from a manufacturing powerhouse to an innovation powerhouse it will have to protect its Intellectual Property. This is why US demands on China to reform the IP sector and stop the forced technology transfer from US companies will actually serve China well, as it’s what China needs anyway: domestic firms will need this protection too.

What exactly is a “forced transfer”?

It means that, in order for an American company to sell into China or form a joint venture with a Chinese local partner, it will have to give up its core technology. That’s the common perception and that has been one of the focal points of the recent tensions, but the reality is a little more complicated.

Recent surveys show that of American companies working within China, not many have felt the pressure demanded from the Chinese side; some have stated that the Chinese companies simply wanted to buy the technology.

China has created a constitutional law banning forced technology transfers from foreign companies, and we see that as a major step forward.

What is China’s take on the dispute as a whole?

For China, the most important objective is to avoid an outright collision with the US. This is the reason we’ve seen many concessions by China on many of the terms of trade. China has agreed to better protect IP, import more goods from the US, and forbid forced transfers.

China will answer to about 40% of the items demanded, 40% are up for negotiation, and the rest is a no-go. China wants to achieve its economic aspirations on its own terms. It will not subordinate to all US demands on how it plans to develop its economy and invest in the rest of the world. But there is still a large ground for economic convergence where China can do better in terms of following better trade practices.

In China, the recent hostility has stoked up nationalism and that is a very dangerous trend. Whereas before, young people really looked to the West, and in particular the US, to study, work and exchange knowledge, what has recently happened has alienated them. We’re seeing a political aftermath with a rise in nationalism and greater hostility to the US, which is very unfortunate.

I believe truculent US policies will not serve their purpose. Aggressive trade demands are pushing China to become stronger, by relying much more on its domestic economy, its own technology and innovation. The unintended consequence of the trade war is to make China stronger. Sometimes, trade negotiations lost are better than trade negotiations won.

How is the trade war already playing out? Who is hurting most?

So far, the direct consequences of the trade war have not been fully realised. It takes time for firms to make adjustments, so these things take time to show up in the data.

What characterises trade in today’s world is the economics of the global supply chain. An Apple iPhone contains many components, from Japan and Korea, as well as innovative features from the US, with Chinese workers simply putting together them together. When an iPhone gets exported to the US, there’s very little "value added" coming from China. Apple is the main entity to gain, even though traditional trade statistics don’t record it as such.

When a trade war strikes, China significantly reduces imports of soybeans and agricultural products, and could potentially cancel contracts with aircraft makers. Apple has recently seen reductions in its profitability, and that is linked to trade tensions.

The global supply trade involves many countries and many parties, not just the US or China. When there are disruptions to trade, there are huge disruptions to the supply chain. It is difficult to say which side, the US or China, will be hurt more.

Both sides will be hurt, of course, and the rest of the world will also fall victim. The indirect impact of the trade war is much more significant, as we’ve seen international markets responding to greater uncertainty.

How optimistic are you that the trade war will be resolved?

China will make certain concessions in trade and it would like to have a deal worked out to resolve the short-term trade disputes. But the tension between the US and China will be a long-term one. It will be about Chinese technology, it will be about Chinese aspirations and about China inventing a new development model that is somewhat different from the democratic economic model that we understand so well and think has prevailed in the world. Despite these longer-term issues, China would like to see short-term reconciliation that would benefit China and the US, as well as the rest of the world

A different angle is that China also wants to buy more time, through bickering and haggling over trade, to strengthen its own economy. As long as the discussions are just about trade, rather than more intractable issues, the Chinese government is not afraid. It stabilises the relationship and helps to avoid a discussion beyond what China is able and willing to do.