Trump is miscalculation of commercial warfare – Nikkei Asian Review

Just as a trade agreement between the United States and China seemed to be in sight, the dealers found themselves back in the square.

The immediate reason for the disturbance was China's insistence on a substantially revised draft agreement, which, according to US President Donald Trump's administration, waives in accordance with previously agreed terms.

But the reason for China's changes in the draft – the reason behind its reluctance to meet US demands ̵[ads1]1; lies in a fundamental miscalculation of the Trump administration. 19659002] Simply put, the US has overplayed its hand. The agreement that China rewrote would have obliged the Chinese side to legislate for some of the changes the United States applied for, and it was negotiated during an aggressive US campaign against Chinese telecommunications giant Huawei Technologies.

This campaign has included adding the company to the US blacklist of commerce, thus cutting out the supply of critical technologies and pushing US allies to isolate the company as well.

While such measures will undoubtedly damage Huawei, the company can ultimately offset its losses by forging bonds with other fast-growing Chinese tech companies. However, for the rest of the world, Trump's administration attacks on Huawei – and over China in general – will have far-reaching consequences.

China is too deeply integrated into global supply chains just to go away. Releasing the world's leading manufacturer and industrial producer – with its consumer market of 1.4 billion people – will severely disrupt global value chains and create a shadow throughout the world economy.

The trump administration's miscalculations may have resulted partly from rushing in the hope of picking a "victory" ahead of next year's presidential election. But the US also seems convinced that it is facing a China with a particularly weak hand, due to the risk of hard landing for the economy. That is not the case.

While China imports relatively little from the US, it may have more weapons than its opponent to distribute in this war. In addition to repayment directly, through tariffs on agricultural and commercial aircraft, it can tighten capital controls, dump its unrivaled US government debt, or depreciate the currency. (The wave of competitive devaluations triggered by the latter option will destabilize US dollars as well as the international financial institutions.)

So far, however, China has shown considerable restraint. For example, despite the yuan's latest depreciation against the US dollar, People's Bank of China has expressed its intention to maintain exchange rate stability. Although deeper tensions with the US over trade and technology force it to take some short-term debt repayments, China will probably maintain this constraint in the foreseeable future.

The reason is simple: This moderate approach serves China's own long-standing approach. long-term interests, both direct (by supporting continued economic growth and development, preserving social stability and protecting state integrity) and indirectly (by avoiding further costly disruptions in global markets). Ironically, it will also force China's commitment to the very structural reforms claimed by the United States.

The trade war has highlighted the risk of maintaining an open economy. But instead of slamming the door shut in the rest of the world, China is trying to protect the stability of the global economy.

China's leaders do not believe that the trend of capitalist-led globalization – where China has been both a leading recipient and, increasingly, a major contributor – will be reversed at any time soon. Because the United States is still, according to China's view, the world's leading defender of the free markets that China is moving, the deviations from the free market orthodoxy and abuse of state power can shake America's own economic foundations and threaten its institutions. [19659002] To be sure, China and the United States are likely to be more and more alienated. China will develop its own core technology to end its dependency in the United States and build the strategic sectors that will drive its economic development.

Knowing the role of the capital market role, China will open a Science and Technology Innovation Board on the Shanghai Stock Exchange in June.

© Reuters

But such technological advances on China's side will in any case require the country to carry out structural reforms. In particular, it should protect intellectual property rights and establish more efficient capital markets to encourage basic scientific research, technological innovation and entrepreneurship. Know the role of capital market roles in promoting technological innovation, China will open a Science and Technology Innovation Board on the Shanghai Stock Exchange in June.

This should not mean that China will close the door to trade negotiations. On the contrary, the trade relationship between the United States and China has its structural imbalances, which China is willing to address.

But instead of the Trump administration pushing it to increase imports unilaterally – an approach that is both naive and ruthless – China insists on solving the problem in stages. The world will support this method, especially in the United States, relaxing restrictions on exports to China and inviting Chinese investment in the United States.

For many, China and the United States seem to fall into the "Thucydides Trap", a self-fulfilled prophecy, where a hegemon, fearing a challenger, is waging a global dominance war. But even if the economic competition between the two countries continues, this result is far from inevitable.

Lack of mutual political confidence has not prevented the United States and China from engaging in mutually beneficial commercial cooperation over the past 40 years, nor has it hampered the recent rise of cultural, educational and other exchanges. At a time when the two countries face many common challenges – including climate change, nuclear threats, terrorism, poverty and financial market stability – one can only hope that the US administration once again shows the vision and wisdom needed to renew such cooperation with China .

Zhang Jun is the Dean of the Economics School at Fudan University and director of the China Center for Economic Studies, a Shanghai-based think tank.

Copyright: Project Syndicate, 2019.

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