US-China trade war could undermine the international system

Pessimism about US-China relations is growing in Beijing, and the gap between the economic approaches of the world’s two biggest economies is widening, writes Jason Young.

OPINION: Visiting Beijing during the week of the China-Africa Summit in early September provided a fitting backdrop for a discussion of China and the global economy.

The diplomatic largesse of China’s relations with Africa drew wide coverage in the daily news, while coverage of the trade dispute with the United States remained minimal.

The scholars and officials we talked to did not shy away from commenting on either issue, or from presenting their assessment of China’s current economic priorities.

They reaffirmed China’s commitment to the World Trade Organization (WTO), to remaining open to trade and investment, and to lessening dependence on developed markets through policies such as the Belt and Road Initiative.

It quickly became apparent that there was a widening gap in the economic approaches of the governments of the world’s two largest economies, and that there was a general mood of pessimism about US-China relations.

This pessimism was amplified by an assessment in Beijing that China can’t find a way forward with the current US administration. We heard there is no way of knowing what the Trump administration actually wants from China or what changes would resolve the dispute.

We heard that China would hope for the best but prepare for the worst.

“The so-called US-China trade war is really a dispute over what models of political economy are deemed fair and legitimate economic policy-making in today’s highly-integrated global economy.”
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But at least some of the US concerns outlined in Section 301 [of the US Trade Act] and other documents appeared open for negotiation. In particular, Chinese scholars openly discussed the balance of trade with the US, intellectual property enforcement, forced technology transfer and conditions for foreign businesses in China.

At the same time, there was resistance to reform in areas that are seen, rightly or wrongly, as central to China’s approach to economic development.

Moreover, China’s ongoing economic reform was presented in terms quite different to what many Western economists had foreseen for the Chinese economy. It was clear the state would continue to maintain guidance through the setting of substantive planning goals and through state ownership or management of the productive forces. China would maintain a central role for the state/party in setting and implementing industrial policy and in overall management of the economy.

State-owned enterprise reform would seek to make enterprises more efficient and responsive to market conditions,  but not reduce state ownership of the commanding heights of the economy – or reverse the role of the state in directing and financing emergent industries.

We heard that industrial policy, such as the Made in China 2025 strategy, would remain a central part of China’s overall development strategy. The Belt and Road Initiative would remain a form of state-led but commercially delivered regional economic cooperation between China and other regional economies.

For China, this approach stems from an assessment that all of today’s advanced economies, including the Asian tigers, employed industrial policy to promote domestic growth and build national champions to break into highly competitive international markets.

For the US, this model is viewed as unfair practice and a challenge that, rightly or wrongly, the US administration appears to have concluded cannot be resolved through the existing rules based international system.

The dispute is regrettably playing out bilaterally as a spat between great powers, irrespective of the international system.

This threatens the primacy of the Bretton Woods system of monetary management that the US helped build, and that both China and the US benefit greatly from. It creates massive uncertainty for economies all over the world.

In short, the so-called US-China trade war is really a dispute over what models of political economy are deemed fair and legitimate economic policy-making in today’s highly-integrated global economy.

The outcome could further clarify the rules on how varieties of political economy trade and do business with each other.

But if not managed well, there is a danger it could undermine the international system and push the global economy toward competing economic blocs.

Jason Young was one of the participants in an Asia New Zealand Foundation Track II visit to China in early September. He is one of the speakers at the China and Global Trade breakfast event in Wellington on 2 October.

– Asia Media Centre