CHINA-US: TRADE WAR

Writing in the FT of May 6, Keyu Jin, daughter of the Director General of AIIB Jin Liqun and an Associate Professor at LSE, argued that , paradoxically, it may be better for China to lose a trade conflict with the US than to win it as China would be the winner in the long run. She said reformers within China are likely to seize on it as an opportunity to hasten domestic reforms which will strengthen the country. Keyu Jin said "China has been grappling for years with a vicious cycle of over-production, low consumption and export dependence. Its oft-declared plan to shift to consumption and services has been more aspiration than reality. The hold-up has much to do with interest groups and local governments trying to protect heavy industries that generate revenue and jobs. Because the state has such a hold on power and the domestic market is large, there is little internal pressure to change. Government institutions wrangle over power, resulting in vital reforms being blocked."


She said US President Trump may now provide the missing catalyst for China’s next round of reforms, by challenging the nation with an external threat much as Premier Zhu Rongji used China’s 2001 entrance into the World Trade Organization to justify modernising state-owned enterprises at that time. The efficiency gains achieved with freer trade arguably spurred years of fast growth in China. She said it is in China’s interest to respond to US pressure. Its consumers will benefit twice. First lower tariffs on cars, wine and cheese will increase their purchasing options. Second, Chinese consumers also bear the cost of subsidising local steel production, while the benefits go to carmakers and solar panel producers. Current rules requiring overseas companies to set up joint ventures with Chinese firms and transfer technology, she said, only attract second- and third-tier companies with inferior technologies. China is long past the stage where it needs to protect its industries. Its companies innovate on their own and are resilient to competition. Opening up to top overseas competitors would have a positive impact on the broader economy: foreign investment in high-skill industries would flow in. She added that while liberalising financial markets is already on the agenda, China must still reform its financial sector. She cited the Chinese telecommunications company ZTE as an example of how China, which was once excessively dependent on advanced US technology and at the mercy of others, now has companies that are motivated to advance their own research and development and are on track to become formidable rivals to their American competitors in the foreseeable future. She concluded that China may suffer some losses in a trade war but it could be a blessing in disguise.






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