Apr 10, 2018 08:52 PM

Opinion: China Must Maintain Focus on Opening-Up Even as Trade Spat Simmers

Before drawing up strategies to address the ongoing trade conflict (and potential trade war) initiated by the U.S., we must first explore the underlying motivations.

There are several points apparent on the onset. Firstly, waging a trade war against China will do nothing to fix America’s trade deficit, unemployment rate or stagnant wages. However, politically it promises short- and long-term gains for the U.S. and the Trump administration.

In the short run it will no doubt appease the president’s voter base for the upcoming midterm elections. More importantly, however, it concerns China and America’s long-running bid for trade supremacy. Trump’s trade war can be seen as a continuation of American trade policy in the Asia-Pacific; namely, its focus on restricting Chinese domination. At the core is China’s growing challenge to America’s own technology sector, which has been directly targeted in Trump’s announced tariffs.

Finally, the Chinese response so far has been purely defensive, remaining open to negotiations and peaceful resolution.

Since a confrontation between the two countries seems inevitable in the long run, the question that needs to be answered is: How should China proceed in the long run?

Whether or not the U.S. chooses to escalate trade tensions, China’s response must take into account both external threats and internal problems. By maintaining the momentum of reform and opening-up, China’s internal development is paramount to its success on the future global stage.

China has two great competitive advantages that must be utilized for international success. The country boasts the world’s largest, most-complete industrial supply chain system, which is further complemented by its similarly immense market waiting to be capitalized. These two prerequisites allow for the development of a competitive tech industry, which thrives on eager markets and sophisticated supply chains. China’s growing edge on international markets can be attributed to this.

The path laid out in the Communist Party’s 18th and 19th National Party Congresses aims to develop China’s advantages and maintain an open, competitive global market.

The two aforementioned advantages must be developed hand-in-hand with comprehensive intellectual property laws and protection. The more advanced an industry becomes, the more complicated and extended the supply chains become, which requires closer coordination and cooperation. Better enforcement of contracts will guarantee cooperation between businesses. And better protection of intellectual property rights will ensure that innovators profit from their creations.

Further, China must overcome market fragmentation and local protectionism, unifying its regional markets into an integral whole with greater spaces for fair competitions. It will reform state-owned enterprises and give better market access to privately owned businesses.

Lastly, China must stand firm as a propagator of free market global trade. Part of this means relinquishing state sponsorship of stagnant sectors with established interests. Another part is following World Trade Organization guidelines and promoting multilateralism and free trade wherever possible, joining all possible globalization forces against U.S. protectionism.

In terms of the ongoing trade conflict, China must be prepared to entrench itself in trade retaliation while simultaneously being open to negotiations. Despite the media’s insistence of China’s unyielding stance in global trade, it’s also reasonable to emphasize China’s determination to further open up its market and its readiness to resolve conflicts at the negotiation table. Moreover, a major trade conflict can also be an opportunity to sit with Americans at the table and discuss important issues related to mutual investment and trade agreements. If successful, the agreements can become an epic case of diplomacy.

Another thing to consider is the larger picture. China must prevent America from forming alliances with key countries that together can threaten the Chinese position.

First is a European, Japanese, and American alliance, which recently nearly formed the Trans-Pacific Partnership agreement, the Transatlantic Trade and Investment Partnership, and the Japan-EU Economic Partnership Agreement. Nearly 50% of Chinese exports go to Europe, Japan and the U.S., and they are currently irreplaceable as importers of Chinese goods.

The second is a Russo-American alliance, which seems likely based on Trump’s attitude toward Russia in the face of China’s rapid rise. This alliance could tip the balance in favor of America on the global stage.

Finally, China must prevent Trump from changing the subject from a trade dispute to sensitive political disputes. If discussions veer toward issues like Taiwan, sea territory disputes, Tibet or even Hong Kong, China could find it even more complicated to manage the situation.

In conclusion, China and the U.S. will inevitably clash over trade and global influence. However for this particular trade dispute, a full-scale trade war seems unlikely if both sides commit to continued negotiations. Both sides know how much cost a full-blown confrontation will mean, and not everyone is willing to pay that price.

As long as the two sides respond properly, they will be able to solve the crisis through negotiations. However this does not guarantee the end of future conflicts since international business and political competition is never a game of warm-hearted greetings. We should always stay on guard.

Liu Qing is a professor with the University of International Business and Economics, specializing in international trade and investment research.

Translated by Caixin intern Michael Xin.

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