20 July 2019
In the trade war with the United States, China should consider making concessions in order to buy time to beef up its manufacturing capability and boost its bargaining power. Photo: Reuters
In the trade war with the United States, China should consider making concessions in order to buy time to beef up its manufacturing capability and boost its bargaining power. Photo: Reuters

China should consider making concessions in trade war with US

Raising the stakes in the trade war with China, the administration of US President Donald Trump unveiled plans to impose tariffs on an additional US$200 billion worth of Chinese goods.

If we look for the deep-rooted reason behind the escalating trade conflict, it would be the fact that China has undeniably risen to become a global manufacturing power that no other country can compete with. The tariff stems from Washington’s initiative to revise the game rules, from its desire to narrow the gap with China and other countries in order to compete in the global trade game. 

China’s manufacturing boom dates back to the 1970s. At the time China was concentrating on low-end manufacturing thanks to its abundant labor force. Chinese workers are hardworking, smart and obedient. The nation also has a mature industrial chain from upstream to midstream and downstream sectors. It has a great legal framework and business environment among emerging economies. And its domestic market is massive, owing to its huge population.

Beijing intends to extend its dominance in lower-end manufacturing to high-end industries, such as semiconductors, 5G, new energy, and others, under its ambitious “Made in China 2025″ plan.

If it succeeds, western nations will rely on China not only for electronics, steel, furniture and garments, but also for new technologies. This threat is what triggered the trade war.

The latest 10 percent tariff on US$200 billion of Chinese goods, on top of the 25 percent levy on US$34 billion of Chinese goods announced earlier, might lead to a modest decline in Chinese exports. But it doesn’t mean that China would immediately lose the game to other emerging industrial nations such as Vietnam, Thailand, Bangladesh and India.

What is most worrying for Beijing is the possibility of the trade war spinning out of control. If, for example, China and the US slap 100 percent tariffs on each other’s goods, China might hurt more given its huge trade surplus. Moreover, if the US joins hands with Europe and Japan to counter China’s rise, it would be a serious challenge.

In this case, China’s best response is to yield and accept the 10 percent tariff on US$200 billion of Chinese goods. It should be viewed as a painful lesson for China to buy more time to grow its economy.

Interestingly, on March 8, the state mouthpiece People’s Daily said in a commentary: “If you don’t compromise, nobody can beat you.” Since then, however, the newspaper has changed its rhetoric. In an article published on July 8, it asserted that “making concessions is not a sign of being weak sometimes; it’s self-protection.” This might indicate a delicate shift in the stance of China’s policymakers.

Certainly, Beijing needs to make a strong stance in front of Chinese citizens. As the state-owned media said: “We can fight back imposing tariffs against US’s soybeans, cars, and airplanes.” On the other hand, it can also portray itself as a victim and file complaints with the World Trade Organization.

Beijing can also try to strengthen its economic ties with the Europe and Japan, thereby building a wedge between the US and its allies. Also, by stalling, the nation could buy time to beef up its manufacturing capability, and boost its bargaining power in the global trade game over time. 

The full article appeared in the Hong Kong Economic Journal on July 12

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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