High-level talks between China and the US and a joint statement notwithstanding, US President Donald Trump is planning to impose 25 percent tariffs on US$50 billion worth of Chinese goods. In response, China announced 25 percent tariffs on US$50 billion worth of US goods.
What now appears to be a full-scale trade war poses a serious threat to the Chinese economy, particularly if Trump follows through on a suggestion he could impose an additional US$200 billion in duties if Beijing retaliates.
It is unclear how China will respond if Trump exacerbates these punitive actions. Confrontation between the two countries would not only damage the Chinese economy, but the global economic order too. So in the short term, China must be patient.
Chinese policymakers need to realize that the rise in protectionism is underwritten by the fact that economies around the world are encountering various structural problems.
The Trump administration’s attacks stem from a short-term economic mission to reduce the trade deficit, but also a long-term strategic goal of containing China’s development. China should similarly prepare short-term and long-term tactics.
In the short term, this means a clear and comprehensive assessment of China’s strengths and weaknesses that stretch beyond economics and trade into other areas. Besides direct retaliation with reciprocal tariffs, China needs to clearly calculate the costs and benfits of the confrontation spilling into other areas. Indirect actions in other fields may deter further escalation of the trade war.
In the medium term, China should unwaveringly push forth its ongoing structural reform and further open its markets. As the trade war will inevitably bring damage to the Chinese economy, policymakers must have the patience and courage to withstand the damage instead of resorting to conservative measures. This will not only help reduce trade friction but also help China restore the balance of its economy to boost economic growth and withstand the deteriorating trade relationship.
In the long term, China needs to come to terms with the fact that international competition is essentially a fight for skills, capital and technology. The Trump administration’s tax cuts and its trade war share the same goal: attracting capital and technology to keep wealth and skills within the US. It is these assets that underpin US strength. But China’s rise too has relied on nurturing a new generation of entrepreneurs and attracting capital and skills through liberalization.
After decades of development, China’s current policy framework has hit a bottleneck. With competition for capital and skills set to increase, China needs to focus on further liberalizing its market to create a fair and transparent business environment.
China’s rise has become a global focus. The bigger the Chinese economy, the more friction it will experience with other nations. In the future, trade friction looks to become the new normal for
China, and the nation needs to plan for this.
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