Should-Read: In which Martin Wolf begs for China to act like the adult in the house: Martin Wolf: How China can avoid a trade war with the US

Should-Read: In which Martin Wolf begs for China to act like the adult in the house: Martin Wolf: How China can avoid a trade war with the US: “The objectives of these US actions are unclear… to halt alleged misbehaviour… or, as the labelling of China as a “strategic competitor” suggests, is it to halt China’s technological progress altogether—an aim that is unachievable and certainly non-negotiable…

Mr Trump also emphasised the need for China to slash its US bilateral trade surplus by $100bn. Indeed, his rhetoric implies that trade should balance with each partner. This aim is, once again, neither achievable nor negotiable.

The optimistic view is that these are opening moves in a negotiation that will end in a deal. A more pessimistic perspective is that this is a stage in an endless process of fraught negotiations between the two superpowers far into the future. A still more pessimistic view is that trade discussions will break down in a cycle of retaliation, perhaps as part of broader hostilities….

China’s rise has made the US fear the loss of its primacy. China’s communist autocracy is ideologically at odds with US democracy. What economists call “the China shock” has been real and significant, although trade with China has not been the main reason for the adverse changes experienced by US industrial workers. The US has also failed to provide the safety net or active support needed by affected workers and communities. Experience shows that the complaints will never end. A decade or so ago, complaints were about China’s current account surpluses, undervalued exchange rate and huge accumulations of reserves. All these have now been transformed: the current account surplus itself has fallen to just 1.4 per cent of gross domestic product. Now complaints have shifted towards bilateral imbalances, forced transfers of technology, excess capacity and China’s foreign direct investment. China is successful, big and different. Complaints change, but not the complaining.

How might China manage these frictions, exacerbated by the character of Mr Trump, yet rooted in deep anxieties? First, retaliate with targeted, precise and limited countermeasures. Like all bullies, Mr Trump respects strength. Indeed, he respects China’s Xi Jinping. Second, defuse legitimate complaints or ones whose redress is in China’s interests…. Third, make some concessions. China could import liquefied natural gas from the US. This would reduce the bilateral surplus, while merely reallocating gas supplies across the world…. Fourth, multilateralise these discussions….

We are in a new era of strategic competition. The question is whether this will be managed or lead to a breakdown in relations. Mr Trump’s trade policy is a highly destabilising part of this story. China should take the longer view of it, for its own sake and that of the world…

March 28, 2018


Brad DeLong
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