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Following through on its commitment for 'reform and opening up' requires China to find ways to manage escalating tensions with the US and avoid a costly – and potentially devastating – reconfiguration of the global economy

Following through on its commitment for 'reform and opening up' requires China to find ways to manage escalating tensions with the US and avoid a costly – and potentially devastating – reconfiguration of the global economy

US President Donald Trump and Chinese President Xi Jinping may have agreed at the G20 summit in Osaka to resume trade negotiations, but the path to ending the trade war remains far from clear. After all, the two leaders reached a similar agreement at the previous G20 summit – in Buenos Aires last December – and those talks ultimately failed, not least because Trump mistook China’s conciliatory attitude for weakness.

Whether Trump makes the same mistake this time remains to be seen. In any case, it is worth considering how the trade war might unfold over the coming months and years – and what China can do to protect itself.

Import tariffs may, for the foreseeable future, remain steady – neither escalating further nor being rolled back. The agreement in Osaka kept Trump from following through on his threat to impose additional tariffs on $300 billion worth of Chinese exports. But it did nothing to reverse past measures, such as the 15-percentage-point tariff hike, to 25%, on $200 billion worth of exports that the Trump administration implemented after the last round of talks broke down in May.

While these tariffs have not yet had serious consequences for China’s economy, their effects are likely to deepen over time. But China will be more likely to persuade the United States to remove them – or, at least, not to raise them further – if it refrains from retaliating with tariffs of its own. Instead, China should focus on reducing its bilateral trade surplus with the US on its own terms. It is increasingly clear that Trump’s tariffs have done more damage to America’s businesses and consumers than to China.

Already, opposition to Trump’s trade war is intensifying within the US. For example, the US Chamber of Commerce – one of America’s most powerful business lobbies – has called for the reversal of all tariffs imposed over the last two years. With the 2020 presidential campaign already underway, the last thing Trump needs is to stoke opposition within his own political base, let alone risk tipping the global economy into recession.

The effects of the trade war have already spread to cross-border investment. In recent years, rising Chinese production costs have driven many foreign firms – and, increasingly, even Chinese companies – to relocate their operations to lower-cost countries like Vietnam and Thailand. The trade war is accelerating this process. According to Vietnam’s government, inward foreign direct investment increased by nearly 70% year-on-year in the first five months of 2019, the largest such increase since 2015. Meanwhile, growth in US investment in China is slowing.

The Trump administration wants US companies to leave China. It is up to China to persuade them to stay. That means improving the local investment environment, including by responding to foreign companies’ legitimate complaints – say, by enhancing intellectual-property protections – and, more broadly, strengthening adherence to World Trade Organization rules.

But the pressure on China does not end there. The US is also eager to exclude the country’s high-tech companies from global value chains. Trump recently announced that he would allow US companies to continue to sell to the Chinese tech giant Huawei, after a months-long campaign against the company. But it remains highly unlikely that his administration – which reversed a similarly aggressive policy toward the smartphone company ZTE last year – will abandon its efforts to strangle China’s high-tech industries.

China has three options. First, it could accede to US pressure to disengage from global value chains. Second, it could remain committed to integration, hoping that, thanks to existing interconnections, sanctions on Chinese high-tech companies will also hurt their US counterparts (such as Qualcomm) enough that the Trump administration backs down. The third option is to focus on supporting domestic high-tech companies’ efforts to strengthen their own positions within global value chains and develop contingency plans.

China must also prepare for the possibility that the trade war will escalate into a currency war. If the renminbi comes under devaluation pressure and the People’s Bank of China does not intervene to stabilize its value against the US dollar – as it should not – the US may label China as a currency manipulator. And, unfortunately for China, there is little it could do about it.

China’s prospects for coping with financial sanctions – which the Trump administration is likely to use more often – are similarly bleak. Last month, a US judge found three large Chinese banks in contempt of court for refusing to produce evidence for an investigation into North Korean sanctions violations. The ruling ignores the fact that, according to Chinese law, any request for banking records should be handled in accordance with the US-China mutual legal assistance agreement.

The chances of resolving such disputes appear slim. Chinese financial institutions thus need to prepare for more troubles, including the risk of being blacklisted – that is, deprived of the right to use the US dollar and important services, such as the Society for Worldwide Interbank Financial Telecommunication (SWIFT) financial messaging service and the Clearing House Interbank Payments System (CHIPS). It is a punishment few firms can survive.

Already, one Chinese bank is included on the Correspondent Account or Payable-Through Account Sanctions (CAPTA) list, meaning that it cannot open correspondent or payable-through accounts in the US. China must be prepared for worse to come.

China’s government has few options here, but it can step up legislative efforts to protect Chinese banks’ interests, while encouraging Chinese financial institutions to treat compliance with US financial regulations with the utmost care. It should also continue working to internationalize the renminbi, though there is still a long way to go on this front.

China remains committed to its 40-year-old process of reform and opening up. Today, that process must focus on redoubling efforts to strengthen property rights, adhering to competitive neutrality, and defending multilateralism. But following through on this commitment will require China to find ways to manage escalating tensions with the US and avoid a costly – and potentially devastating – reconfiguration of the global economy.

Yu Yongding, a former president of the China Society of World Economics and director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, served on the Monetary Policy Committee of the People’s Bank of China from 2004 to 2006. Copyright: Project Syndicate, 2019, and published here with permission.

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Economics only. Don't mention society, human rights, democratic institutions, reduction in kleptocratic CCP power, humungous over-leverage, pollution, re-education centres, oppression of ethnicity in other countries now being absorbed by Han Chinese (Tibet etc), Hong Kong extradition, bullying other countries who are "disrespectful." Ignoring WhO rules on currency fixing and non-transparency of IP theft. That will do for now.
Oh, and well done on recent acquisition in dairy industry here.

The interesting thing about China is that the country could change if folks stop buying products made in China. It would bring the government to its knees in months. Trump has figured that out. It's a reversal of the Nixon / Kissinger policy which has been so incredibly unsuccessful in effecting change on the mainland.

Trade war is only a disguise.

It is about world No.1 damping down world No.2, maintaining its global hegemony. The US had successfully done it to USSR, Germany, Japan, and the EU.

Now, the US is doing the same to China.

Will it succeed? Tui board.

"China remains committed to its 40-year-old process of reform and opening up."

What ? Perhaps it would be more accurate to say China continues on the process of persecuting and controlling its own people while the princeling heirs to the current dynasty enjoy the fruit bowl.

I really object to the narrative of these pro CCP pieces we are seeing on Interest. Can can put a stop to these please David ?

Very happy to read about China l might add, I just don't want to read articles with whitewash over the social issues and the geopolitics of matters like the military build up in the South China Sea etc.

I like these articles - they may not be the full picture but they balance the non-Chinese commentators. The commentary I can most live without is the sycophantic remarks made by Labour and National party lackeys when they are on the prowl for more freebies and party donations.
A sample "" 'Abuses of human rights are a concern wherever they occur,' says National’s Foreign Affairs spokesperson Todd McClay, 'however, the existence and purpose of vocational training centres is a domestic matter for the Chinese Government.' "" - that was about treatment of muslims in Xinjiang.

Here is a little clip of them helping themselves to the fruit bowl.

If one wants to understand how the Chinese perceive things, then this is the type article that needs to be read. Given the roles Yu Yingdong has held, we can be sure that he is influential within Chinese policy. One does not have to agree with what he writes, but we can be sure that the American policy makers amongst others are analysing what he has to say, and so should we. The issues around SWIFT are particularly important. It is those same issues that the US is using with its Iranian power play.
Keith W

Glitzy's right. This is China in action in our own back yard. It does no favours to air such one-sided rubbish. Who's the biggest bully? The one that offers the people choice or the one that doesn't?

Yes Glitzy is right. (quote below) I too am sick of the CCP propaganda. Interest needs to censor this type of rubbish.

Quote from Glitzy: "I really object to the narrative of these pro CCP pieces we are seeing on Interest. Can can put a stop to these please David ?
Very happy to read about China l might add, I just don't want to read articles with whitewash over the social issues and the geopolitics of matters like the military build up in the South China Sea etc."

Such a rubbish.

Since when telling an inconvenient truth about CCP has become a pro CCP propaganda?

Around all so called western democratic countries, you cannot find even one party with more 50% of people's support. Do you know how much % of people support CCP and feel satisfied with the direction of China under its leadership? 89% in 2014 according Pew Research Center.

I totally accept that CCP made mistakes but I equally praise the unprecedented achievements of CCP during the past 40 years over the entire human history.

Xingmowang; I certainly would miss your comments. Usually I consider them rubbish but every so often we get a true insight that makes it all worth while.

I'm a little surprised that CCP national brain-washing (OK media control) has been resisted by 11% of the chinese population. Maybe you are including Xinjiang muslims and Tibetans as part of your 'Chinese' population. Anyway that guy next door in North Korea has 99.8% satisfaction so he is doing better than Predident (for life) Xi. Or maybe we need to wait for a grandson of Xi.

In the last 40 years CCP has managed to drag China from total destitution (thanks to Mao's 'great leap') to about half the per capita prosperity of Taiwan. If you start where they started and apply compound interest it as been a remarkable achievement but those decades of 10% growth do have at least one match: New Zealand under the rule of Queen Victoria. When she died NZ was top country by GDP per capita and the wealth was reasonably shared. China is on track but still has a way to go.

XingmoWang, Could you elaborate about the CCP mistakes ? You mean like The long March, the cultural revolution, the Death of about 17mm people c/o Mao ? The annex of Tibet, the concentration camps in Xinjiang, the military build up in the South China Sea perhaps ? What about the massacred in Tianamen Square and the illegal rendition of folks in Hong Kong ? Let's finish this off with intellectual property rights theft, failing to deliver the autonomy in Hong Kong and cheque book dilplomacy in Africa and the Maldives.

I'm glad you brought them up as certainly need a little more publicity ~ they aren't being taught in Chinese schools are they ?

It was a while ago and it is wrong to pass the blame for past events to current politicians (for example Ceasar's unprovoked invasion of Britain) but accuracy has Mao's great leap backward causing about 45 million deaths mostly by starvation and disease - 17 million is a dubiously low figure. Where debate still occurs is whether he meant to kill them or it was all a simple bureaucratic mistake with everyone scared to tell him what was actually happening in the rural areas. If the later I wonder who has been telling President Xi about the protests in Hong-Kong and the likelihood that Theresa May was capable of orchestrating them.

When it comes to China's international politics it's important to have a listen to Clive Hamilton, an Australian professor of Public Ethics and author "Silent Invasion"
Mentioned here:

Do watch this interview:
Is the Global Tide Turning Against China? | Clive Hamilton

It is quite amusing that the British denied the people of Hong Kong democratic privileges for almost the entire time it was under British rule claiming that the Chinese residents had no respect "for the main principles upon which social order rests."

In 1992, very close to handover time they suddenly changed their tune claiming that "People in Hong Kong are perfectly capable of taking a greater share in managing their own affairs in a way that is responsible, mature, restrained, sensible"

Martin Jacques called it British hypocrisy.

Very fitting.

The trade war between the US and China is nothing less than a 2nd Cold War. Moreover, Trump is in a 3 way poker game with Putin and Xi. If Trump is wondering who the sucker is, it’s him.

To live long-term at US consumption levels, the population of China is about the global maximum. Trump, Putin and Xi are well aware of this, even if the MSM are incapable of grasping it. My guessing is that the US has to go to war before it is outgunned, and will engineer one near-term. We've run out of time.

China will NEVER lose face Never, I have this this before, Trump will find out the Hard way

Very good article from the BBC on this subject: The 'danger' of a US-China trade war

There is a huge piece of land next to Canada, the old Mother Land might dig up some old maps and claim it as theirs. In that scenario, the trade war will be finished!

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Days to the General Election: 36
See Party Policies here. Party Lists here.