The US seems convinced that it is up against a China with a particularly weak hand, owing to the risk of a hard landing for its economy. But while China imports relatively little from the US, it may have even more weapons than its opponent

The US seems convinced that it is up against a China with a particularly weak hand, owing to the risk of a hard landing for its economy. But while China imports relatively little from the US, it may have even more weapons than its opponent

Just when a trade agreement between the United States and China appeared to be in sight, negotiators found themselves back at square one.

The immediate reason for the disruption was China’s insistence on a substantially rewritten draft agreement, which, according to US President Donald Trump’s administration, reneges on previously agreed terms.

But the root cause of China’s changes to the draft – the reason behind its reluctance to meet US demands – lies in a fundamental miscalculation by the Trump administration.

Simply put, the US has been overplaying its hand. The agreement that China rewrote would have obliged the Chinese side to legislate some of the changes sought by the US, and it was negotiated amid an aggressive US campaign against the Chinese telecommunications giant Huawei. That campaign has included adding the company to America’s trade blacklist, thereby cutting off its supply of critical technologies, and pushing allies to isolate the company as well.

While such actions will undoubtedly hurt Huawei, the company can eventually offset its losses by forging ties with other fast-growing Chinese tech companies. For the rest of the world, however, the Trump’s administration’s attacks on Huawei – and on China more generally – will have far-reaching consequences.

China is too deeply embedded in global supply chains simply to go away. Alienating the world’s leading manufacturer and industrial producer – with its consumer market of 1.4 billion people – will severely disrupt global value chains and cast a shadow over the entire world economy.

The Trump administration’s miscalculations may have resulted partly from acting in haste, in the hope of notching a “win” ahead of next year’s presidential election. But the US also seems convinced that it is up against a China with a particularly weak hand, owing to the risk of a hard landing for its economy. That is not the case.

While China imports relatively little from the US, it may have more weapons than its opponent to deploy in this trade war. Beyond retaliating directly, through tariffs on agricultural products and commercial aircraft, it could tighten capital controls, dump its unparalleled holdings of US Treasury debt, or allow its currency to depreciate. (The wave of competitive devaluations triggered by the latter option would destabilize the US dollar, as well as the international monetary institutions.)

So far, however, China has shown considerable restraint. For example, despite the renminbi’s recent depreciation against the US dollar, the People’s Bank of China has expressed its intention to maintain exchange-rate stability. Even if deepening tensions with the US over trade and technology force it to take some short-term retaliatory actions, China is likely to maintain this restraint for the foreseeable future.

The reason is simple: this moderate approach serves China’s own long-term interests, both directly (by supporting continued economic growth and development, preserving social stability, and protecting state integrity) and indirectly (by avoiding further costly disruptions to global markets). Ironically, it also will compel China’s commitment to the very structural reforms that the US claims to be seeking.

The trade war has highlighted the risks inherent in maintaining an open economy. But, rather than slam the door shut on the rest of the world, China is attempting to protect the global economy’s stability.

China’s leaders do not believe that the trend of capitalist-led globalization – in which China has been both a leading beneficiary and, increasingly, a major contributor – will be reversed any time soon. Because the US remains, in China’s view, the world’s preeminent defender of the free markets toward which China is moving, its deviations from free-market orthodoxy and abuses of state power could shake America’s own economic foundations and threaten its institutions.

To be sure, China and the US will most likely become increasingly estranged. China will develop its own core technologies, in order to end its dependence on the US, and build up the strategic sectors that will propel its economic development.

But such technological progress on China’s part will, in any case, require the country to implement structural reforms. In particular, it will have to protect intellectual property rights and establish more efficient capital markets, in order to encourage basic scientific research, technological innovation, and entrepreneurship. Recognizing the role of capital markets in promoting technological innovation, China will open a Science and Technology Innovation Board at the Shanghai Stock Exchange later this month.

This is not to say that China will close the door on trade negotiations. On the contrary, the US-China trade relationship does have its structural imbalances, which China is willing to address.

But, rather than allow the Trump administration to push it to increase imports unilaterally – an approach that is both naive and reckless – China is insisting on resolving the problem in stages. The world should support this method, with the US, in particular, relaxing restrictions on exports to China and welcoming Chinese investment in the US.

To many, China and the US appear to be falling into the “Thucydides Trap,” a self-fulfilling prophecy in which a hegemon, fearing a challenger, brings about a war for global dominance. But, even as the economic contest between the two countries continues, this outcome is far from inevitable.

A lack of mutual political trust has not prevented the US and China from engaging in mutually beneficial commercial collaboration over the last 40 years, nor has it hampered the recent surge in 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 Dean of the School of Economics at Fudan University and Director of the China Center for Economic Studies, a Shanghai-based think-tank.  Copyright 2019 Project Syndicate, here with permission.

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But the US imported US$557.9 billion of good from China in 2018

In a US$13 tln economy *(nominal), that is just 4% of their economic activity. I can't imaging the US will source this stuff domestically; they will buy it from 'others'. And much of that will be via the same companies that supply it now. Just with paperwork that says it was "Made in Vietnam / Philippines / Bangladesh / [insert alternative here].

Any comment regarding the economic and trade effect of locking up all the ethnic minorities in Xinjiang and using them as forced Labour ?

Slave labour has always been rather profitable. China's use of slave labour is no doubt the same.

They are locking up muslims. Not heard anything about forced labour but certainly very seriously mistreating them. Apparently this crime is barely noticed by the chinese today but eventually they will have to come to terms with their actions. It seems to have taken the USA 150 years to be embarassed by its slavery.

Slavery is still rife in the world today. It's to the credit of all nations who have had the good grace to be ashamed of it in their past and to work against it.

Thucydides Trap is always the result of competition for resources.

In this case, the competition has never been by so many, the remaining resource so few, the time-pressure so constrained. There ain't enough planet for both of them, a conclusion you can come at from all angles (except economics, of course - they assume an infinite plane). The bigger question s fitting growth-requiring, existing fiat debt into the picture, and wondering which will happen first - collapse or war.

It's one or the other.

You always provide such a rosy view of the world PDK.

We aim for consistency. T'aint that difficult :)

"always the result of competition for resources" ? Not my interpretation of Rome v Cathage or WW1 Britain / France v Germany / Ottomans or the Napoleonic wars or the War of the Spanish Succession. OK resources always play some part since there never is a war without plunder. But if the UK and Germany were to fight over resources it would have been when they were carving up the world into empires not 40 years later in 1914.

The Thucydides trap is the result of two bullies having to eventually find out who is boss despite the fact it is in their best interest to stay friends and work together as a more effective pair of twin bullies. Applies to kids playground or high diplomacy.

Absolutely disagree. You can carry on depleting what you've got, but if you're to grow you always need more. WW1 was indeed a fight for who would get the territorial rights to plunder. Sam with all of them. We miss the point when we attribute interpersonal clashes for these hesd-to-heads. Trump is Hitler in this regard - voted-in by promising a disenfranchised cohort better times. Meaning more resources per head. USA is already the planets biggest per-head consumer, and is going backwards - sliding into the entropy trap. Trump is a symptom, not a cause.

'Trump is Hitler' seems a bit hyperbolic . Wouldn't it be more fair to say they both rose to power in similar ways, but isn't it a bug of the system ?
By extension is our 'Hitler' in power now?

Yeah, it's a Catch-22.

worth the listen - Diamond uses the word 'evil'. Worth noting, coming from him.

I greatly admire Jarad Diamond. I admit many wars are about resources - you could say most and I'd accept the assertion that future wars will mainly be fights over limited resources. I disagree with your sweeping assertion about the subset of wars that can be said to be Thucydides Trap [i.e. refers to when a rising power causes fear in an established power which escalates toward war] were ALL about resources. WW1 is still being debated but as Niall Ferguson pointed out it could not have been a capitalist plot because the bond and stock markets show no evidence of predicting it.
You are damaging a good argument about our reaching the limit of finite resources by over applying it to the past. Just because 99% of large animals have been wiped out by modern 'civilisation' doesn't mean it was always that way. Rome's attitude to Carthage's resources was to sow the fertile fields with salt.

Rome's attitude to resources (including energy, which was slave labour to them) was to bring them back to the centre. They ran into an EROEI problem. And collapsed. Read Tainter's 'Collapse of complex societies'.

When you get it's about resources and realise it's all about energy, read 'Seven Pillars of Wisdom' (Lawrence), 'Daughter of the Desert' (Gertrude Bell) , and Adventure in oil (BP, via Longhurst). Add on Fisher and Churchill - trace it on from William Knox-D'Arcy.

And the last 200 years are about the culture with the bigger energy-supply (cannons, ships) taking the land and resources from others. Cecil Rhodes and his Cape to Cairo railway was for? Any difference from Belt and Road? Or the Greater Co-prosperity-sphere? Or Lebensraum fur herrenvolk?

We later concentrate on the leadership personalities, and weave the story as a p2p conflict. Nine times out of ten it wasn't. Archaeology along the Danube reports only farm tools in earlier stratas - weapons came with crowding; meaning therer were resource issues even then. Funny old world, the way we choose not to learn.

This is just the Chinese government spin. Any facts mentioned are just a coincidence. The Chinese economy, like their armed forces, are just a silly corrupt joke, according to my Chinese friends. They say that Xi and Trump will have a meeting, and everything will be sorted to both sides satisfaction, and life will go on. We just have to wait until Xi gets sick of bailing out banks and large companies, and the meeting will be called.

Mr Trump is doing a lot of damage to the US as he blunders about: Article from the Express: Recession WARNING: US manufacturing PLUNGES to lowest level since financial crisis fallout

THE US economy saw manufacturing levels drop to their lowest rate since the fallout from the financial crisis in the latest sign the American economy is losing momentum

If you understood what a PMI Index is you would realise that manufacturing activity in the US is still GROWING, albeit at a slower rate. Meanwhile, other countries like Germany are seeing manufacturing contracting (PMI below 50 at 44.3), the Eurozone contracting with a PMI of 47.7, Japan contracting with a PMI of 49.8 , China PMI at 49.4, and South Korea at 48.4. So the US is the only one still growing manufacturing activity compared with the rest of the world. Not quite the CRISIS those with Trump Derangement Syndrome make it out to be. In fact, without the trade war, who is to say that the US would be in the same negative boat as the rest of them?

Yes, added my pinch of salt to the article. The Chinese have got their propaganda down pat with their web of expats & associates (including professors) spreading the Gospel according to Xi. The reality is their lower tier city house prices are sliding fast & I'm picking it'll catch on further up the food chain this year & next. It's a capitalist system being run by the communist hard heads, which to be fair to them, we've not seen before. However, a recent history of bully'ism, which is communism, doesn't bode well for the incumbents. Can they keep it afloat by printing yuan 24/7? Maybe. Maybe not. Debt is debt whoever has it. And people don't like not being paid, doesn't matter who they are. I see China as a bubble of epic proportions with a Tsunami-like finish (chapter) one way or another. But there's always another book.

Approx. 50 million people in the USA (the majority who did not vote for him) know for a fact that trump has no idea how the big picture works when it comes to most things including trade. He is running the country into the ground to get a result for the nation like his 6 major bankruptcies did in his pathetic business world..except this time the public will pay for it, not private investors.
There seems to be little said about the fact that he has hugely increased the national debt in the shortest time span since WWII, and everyone with half a brain knows you don't do this when the economy is running good, which it was before he took power. You save the economic incentives for when things turn south, not to artificially inflate things when times are good so he stand on the podium. This is how he ran his companies into the ground...and he genuinely believes this is a legitimate way of doing business, why, because he lacks integrity. It has all been bought about by stealing from other people. In his world he has no intention of repaying debt, only this time around the American public will be footing the bill.

The US 'economy' wasn't 'running good' before Trump - it was the disenfranchised who voted him in. And the Clinton camp probably have no more integrity - anyone who dismantled the Glass-Steagall Act was cynically shafting the cohort who put Trump over the line.

And remember the US debt is part of an attempt to conjure-up percentage-growth figures, so of course it will be 'never bigger.

And the US is creating more debt than GDP - you can fool yourself......then you can fool yourself......then you can blsme Trump.

I dont really understand most of your response. I never said US is creating more debt than GDP. Currently the national debt to GDP is 4.4% up from 2.9% at the end of the Obama Administration. That IS a huge increase in percentage in such a short time.
It is factual and common knowledge (except to trump) that the economy of the USA was growing for 9 straight years before trump got in, as a percentage of GDP.
Trump said he was going to eliminate the national debt in his election campaign.The 'percentage' of national debt to GDP is now the highest of any president,ever, by a wide margin.
Glass-Steagall was partially repealed in the 106th United States Congress made up of the senate and house of representatives, both of which were Republican majority, signed into law by Clinton in a bipartisan bill.
Trump does not understand what he is doing.