The trade deficit is but a pretext meant to contain China

The COVID-19 pandemic, like other pandemics, will come and go, but ramifications of US-China tensions will outlive the pandemic. The US trade deficit with China is generally blamed for the friction; President Trump certainly interprets it as a loss on the US side. However, the reason that the US buys from China is not because it cannot produce these products, but because China can produce them at much lower costs. That is how the comparative advantage-driven international trade works. Since WWII, the United States, as a capital-rich, high-income country, has been importing labour-intensive products, primarily from Japan and other East Asian economies represented by the NIEs, known as the Four Asian Tigers (Hong Kong, South Korea, Singapore, and Taiwan). It has a long-standing trade deficit with those economies. East Asia is traditionally the main source of US trade deficits. The total share of trade surplus of East Asian economies in the US total trade deficit rose from 80% to a maximum of 100% in the 1980s. However, there has been a declining share of US-East Asia trade imbalances in the US total trade deficit during the period when the US-China trade imbalances were rising.⁴ When China kicked off its reform and opening-up program in the 1980s, due to rising labour costs, the labour-intensive industries in those economies lost their comparative advantage and were relocated to China. So, the US trade deficit is not caused by China but is of its own making. The expanding US trade deficit is an inevitable result of its over-consumption compounded with insufficient domestic savings. The only reason for the US to be able to sustain such a large and rising trade deficit for several decades is the status of the US dollar as a major global reserve currency.⁵

Trump’s penalty tariffs on China’s imports that took effect in 2017 actually backfired. In 2018, the US trade deficit with China climbed to 11.7% higher than it was in 2017.⁶ Apparently, raising trade barriers did not help reduce the US trade deficit.

Furthermore, the United States is taking restrictive measures against Chinese companies in the name of intellectual property (IP) protection. IP violations may have happened; however, the legal infrastructure is ready to provide remedies. China has been a signatory to the World Intellectual Property Organization (WIPO) since 1980 and has IP-related laws and courts. According to an International Review commentary on China Radio International, foreign companies have won over 80% of infringement lawsuits filed against Chinese companies in China.⁷ This figure may well discredit President Trump’s accusation of China’s state-backed IP theft. The US also accused the Chinese government of forcing American companies to transfer IP and/or technology. However, American companies invest in China either for its huge market or by making it a production base to sell their products to the international market. In either case, they have to use the best technologies to stay competitive. So, using the best technologies in China is a voluntary choice to maximize their profits, rather than an option forced on them by the Chinese government.

Fundamentally, the accusations and restrictions by the US government against China are but a pretext to contain China. This is actually nothing new with the United States, the single superpower in the world. When Japan’s economy approached two thirds of the size of that of the United States in the 1980s, the latter took similar containment tactics, resulting in the Plaza Accord in 1985, to maintain its hegemony.

China embarked on a gradual and dual-track reform approach in the 1980s, which led to stable and rapid development. Back in 1978, China was one of the poorest countries in the world. In 2010, it overtook Japan as the world’s second-largest economy in nominal terms, and in 2014, it replaced the United States as the world’s largest economy by PPP.

Staying calm and pursuing smart, forward-looking policies is the best way to ensure China’s economy will overtake that of the US by 2030

So, how should China respond? Staying calm and pursuing smart, forward-looking policies is the best way to tap into the 8% annual growth potential before 2030. If China manages to grow by 5–6% per year by 2030, China will reach two milestones: First, by 2025, its per capita GDP will have exceeded US$12,535, thus graduating to a high-income country. Currently only 16% of the world population lives in high-income countries. The figure will jump to 34% when China joins the ranks.

Second, by 2030, China will replace the United States as the world’s largest economy in nominal terms. Should there be another global financial crisis, like the one in 2008, or another pandemic, China’s growth rate may be lower than the 5–6% target. In that case, it may take China longer to reach the first milestone. However, should there be a global shock, the US economy may grow much more slowly than China’s, as the previous statistics suggest. Then, China may reach the second milestone before 2030.⁸

When the two milestones are reached, if China stays open, it will not easily be contained by the United States. China has already become the world’s largest single market in PPP terms in 2014 and contributed around 30% annually to global growth since the financial crisis in 2008. China will continue to be the driver of global growth in the coming years. Every country has to make the best use of both domestic and global markets for its own sake. Unlike the United States, other countries do not seek or intend to maintain hegemony. As the world’s largest and fastest-growing market, China will be a natural partner for them.

The tensions between the US and China may stay until China’s per capita GDP reaches half of the US level. With a population four times that of the US, by then China’s economic size will be twice that of America.

Moreover, by then the population (about 420 million) of advanced coastal areas in China (like Beijing, Tianjin, Shanghai, Shandong, Jiangsu, Zhejiang, Fujian, and Guangdong) will be comparable to the US; so will its industrial and technological levels. That is to say, the US will lose its technological upper hand to contain China’s development.

In addition, the per capita GDP of central and western China with a population of 1 billion will be about one third of the US’s and its economic aggregate will be of the same size as the US’s. Thanks to the latecomer advantage, this part of China will grow faster than the US. By then, the US will have to accept the fact that it is overtaken by China. It will appreciate working with China and exploiting the Chinese market for the sake of its own growth. The two economies have no reason not to live in peace for common development.

To attain such a target, China needs to capitalize on the 8% growth potential and maintain 5–6% growth by 2030; on 6% growth potential to achieve 4–5% growth between 2030 and 2040; on 5% potential to achieve 3–4% between 2040 and 2050. Then China’s second centenary goal can be accomplished in 2049, the 100^th anniversary of the founding of the PRC.

In summary, the year 2020 marks the cut-off year of the first centenary goal. In 2020, China is being tested by the COVID-19 pandemic and US-China tensions. Looking ahead, amid the profound changes unseen in a century and the major shift in the economic status of China and the US, China will inevitably confront natural and geopolitical challenges. However, as long as China stays calm, pursues smart, forward-looking policies with continuous reform and opening up, taps into its potential, and maintains stability, a growing China will be beneficial not only to itself but to the rest of the world. The Chinese Dream of the great rejuvenation of the Chinese nation will come true.