The US–China phoney trade war

| May 29, 2018

For now, a trade war between the world’s two largest economies and two largest traders may have been avoided.

American tariffs on Chinese imports are ‘on hold’, according to US Secretary of the Treasury Steven Mnuchin, after a high level delegation from China led by Vice Premier Liu He visited Washington last week.

It’s not yet clear at all what the impact of the deal done between China and the United States will be in the longer term. The announcements so far are about intentions, not about the details of how they are to be achieved and President Trump’s declared that he’s still not satisfied with where things are at.

While a full blown trade war has been forestalled for now, there’s still a question about what the agreement to keep talking will yield and how what unfolds will affect the global trading system.

China has promised to cut back its trade deficit with America. As misguided as that policy objective is for the United States, President Trump and his team appear unswervingly committed to it. What the scale and time frame of the agreed measures will be has not yet been announced. The manner in which both sides address the bilateral trade balance will be the critical test.

If the agreement to increase purchases of energy and agricultural commodities is part of a program of reform that will see global opening of Chinese markets, that will be good for the China–US relationship and good for the global trading system.

But if the expansion of imports from US suppliers of these goods simply diverts trade from other suppliers, such as Australia, Latin America and Africa, which are lower-cost producers, that would come at a significant economic cost to China and the world and would damage the global multilateral trading system.

The right approach is the strategy that President Xi Jinping outlined both in his 19th Party Congress report and more recently at the Boao Forum. It stresses that the most effective contribution that China can make to global markets is through the continuing reform and opening up of China’s consumer markets to international competition, not just from the United States, but globally.

The nature of the agreements on intellectual property trade and foreign investment are still to be revealed. There’s now a chorus of complaint from the US policy community that these are the core problem areas in the US relationship with China and the areas on which the United States needs to get tough.

Using tariffs on US imports of Chinese goods to try to stop China’s alleged theft of intellectual property rights and unfair technology-transfer practices under Section 301 makes little sense. Blocking Chinese investment into the United States using policy tools from the last century in a world of high-tech, knowledge-based economies is a loser’s game.

As Andrew Kennedy explains in this week’s Asia Forum lead essay, ‘Trump would like the world to believe the US government has finally taken the offensive against China. But it has not’.

The United States will not be able to stop China from innovating. China’s innovation is not largely driven by the state, as the US lament would suggest. The huge growth of R&D investment in China is significantly the creature of its private firms.

At best the United States can try to slow China’s technology upgrading down, but at great expense to the US economy. As Kennedy points out, ‘China is now poised to overtake the United States as the world’s top R&D spender within the next decade’.

The recent Trump backflip on embargos against Chinese phone maker ZTE is a telling tale. At stake in the United States was all the US business that depended on selling parts and services to ZTE. At stake in China was ZTE’s existential commercial future, linked so tightly as it is to American supply chains.

This is clearly not a story entirely about commercial warfare but one significantly based on commercial collaboration and trade. A deal appears to have been done around these beneficial commercial realities, and possibly unknown political side-payments.

China is playing offence, according to Kennedy, while the United States is focused on playing defence in innovation, but the problem is that this is no basketball match. Trump is pursuing a losing strategy, he says, and the ‘United States cannot simply try to protect technologies it has already invented; it must work harder… to extend its status as the world’s technological leader’.

We’ve seen all this before with Japan threatening the United States as a technological leader and ‘stealing’ intellectual property. In fact much of what Japan did historically, as with China today, is legitimate technology transfer that is being bought. Some of it is doubtless acquired through imitation or re-engineering and also less than proper means, but that too is a familiar story as countries develop.

China is the largest purchaser by far of US technology under licence today, with its imports of American technology last year valued at US$ 24 billion or around 30 per cent of total US intellectual property sales abroad.

Appeals to history and reason are increasingly difficult as establishment commentators in the United States have swung behind Trump’s America First policies directed at China. China’s rise was always going to be difficult for other countries, especially the United States, to manage. With President Trump, it has become a perhaps unmanageable task.

The first round of battle seems to have ended in an imperfect truce. But there will need to be long-term resolve if the global trading system is to be protected — from a trade war that still looms despite the truce, or from deals that undermine it with large negative spillovers to other countries.

Visit for daily content on political and economic developments in the region.