US-China economic war just beginning

Visiting US President Donald Trump with Chinese President Xi Jinping at a welcoming ceremony at the Great Hall of the People in Beijing last November. According to the writer, China is buying time to hold off some or all of America’s threatened US$150 billion (S$197 billion) in retaliatory tariffs while Mr Trump is trying to maximise his leverage for negotiations that have yet to properly begin. PHOTO: REUTERS

John Lee, For The Straits Times

Fearing that a trade war between the United States and China might bring the global economy down with it, many around the world heaved a collective sigh of relief when Chinese President Xi Jinping announced that China will usher in a new wave of openness.

That openness includes allowing American businesses better access to China’s financial and manufacturing sectors, and the lowering of tariffs on cars which have been manufactured in the US. As a response, President Donald Trump in a tweet thanked Beijing for the “kind words” and offered the hope that both countries “will make great progress together”.

For those fearing a US-China trade war, that prospect is far from over. This is just an early diplomatic victory for Mr Trump but not yet a meaningful or lasting one. China is buying time to hold off some or all of America’s threatened US$150 billion (S$197 billion) in retaliatory tariffs, while Mr Trump is trying to maximise his leverage for negotiations that have yet to properly begin.

Where we end up is as uncertain now as it was a few days ago, before Mr Xi offered his appeasing gesture.

What should we be taking away from the comments by the leaders of the two largest economies in the world over the past couple of days?

First, the commonly pushed narrative that China holds the advantage, should the economic exchange with the US become ugly, is questionable and most likely wrong.

Consider some findings in a report by The Conference Board, an economic think-tank based in New York, which suggest a trade war would have a significantly worse impact on China than the US.

The argument is based on data which shows that the value added to the US economy through exports to China amounted to around 0.7 per cent of gross domestic product (GDP), while the value added to the Chinese economy for exports to the US amounts to around 3 per cent of China’s GDP.

While precise figures for who wins and loses and by how much are impossible to calculate, we do know that the US is a net exporter of technology and know-how to

China while the latter’s industrial policy remains to play catch-up with the West, even if it has made impressive advances on this front.

It is also worth noting that one of China’s major economic challenges is to export excess capacity. Mr Xi’s signature Belt and Road policy is largely designed to create external markets to absorb excess capacity for capital building projects.

Still the nation with the largest consumer market in the world by some distance, China needs American consumers more than US consumers need the Chinese economy, even if Americans have become used to cheap Chinese products.

Indeed, figures produced by Credit Suisse suggest that while net private wealth in China increased 75 per cent or around US$12.5 trillion from 2010 to mid-2017, net private wealth in the US increased by US$37 trillion over the same period. Chinese manufacturing is already suffering from immense overcapacity problems and can ill afford curtailed access to the US market.

American companies with sales to and operations in China such as Boeing and Apple would fare disproportionately badly from an escalating trade war. But assumptions about China having relative leverage over the US are flawed even if Mr Trump overstated the case when he tweeted: “Trade wars are good, and easy to win.”

Second, Mr Xi’s promise to open key sectors of the Chinese economy is a reiteration of previous vows which have not been made good.

The Chinese leader has been promising “economic openness” since he came to power in 2013. This included previous promises to ease restrictions on foreign joint ventures in the auto industry to allow foreign firms to take majority stakes. Mr Trump is complaining because foreign auto firms are limited to a 50 per cent stake in joint ventures and cannot establish their wholly owned factories in China if they want to bypass the 25 per cent tariff on foreign-made cars.

Similarly, China’s state-owned dominated banking and financial sector continues to be heavily protected despite a ruling in 2012 by the World Trade Organisation that China open its market to foreign retail banks and credit card companies such as Visa and Mastercard.

Behind-the-border regulatory and other obstacles mean that American and other firms in these sectors have made little headway in the Chinese domestic economy.

More generally, one takeaway from the National People’s Congress held last month is that Mr Xi is interested in economic reform only if it serves the end of the party and state, which remains to ensure economic growth meets the prescribed targets – currently set at 6.5 per cent.

Promises by Premier Li Keqiang to reduce red tape and streamline economic activity are not about market liberalisation or genuinely encouraging domestic and foreign   private enterprise to flourish. They are about removing obstacles for Beijing’s preferred firms – mainly state-owned enterprises (SOEs) – to go forth and thrive.

Even local private firms are under increased pressure to pool their capital and know-how in partnership with SOEs rather than to compete with the latter – with the ultimate objective being to ensure all forms of economic activity serve the party and state rather than private interests.

The automobile, banking and financial sectors are identified explicitly as strategic sectors for China. It seems unlikely that Mr Xi would allow giant US firms to gain entrenched and independent footholds in the Chinese market.

Moreover, as intellectual property (IP) transfers are occurring increasingly through cyber means and not just through illegitimate technology and know-how transfers by Chinese firms with American and other foreign firm joint ventures, Mr Trump’s concerns about IP theft remain largely unaddressed and Mr Xi has not offered any tangible measures which would reassure the White House.

We are seeing only a temporary truce in the US-China economic relationship. Mr Trump has shown he is not one to take the pressure off during a negotiation – until after he has achieved the outcome he wanted.

We should breathe only a little easier and, even then, only for a short time. The phoney war has just started and there may be much more shooting about to start.

Dr John Lee is a senior fellow at the Hudson Institute. From 2016 to 2018, he was the senior national security adviser to the Australian Foreign Minister.