May 15th 2018

America’s Collision Course With China

 

SINGAPORE – The world’s most important bilateral relationship – between the United States and China – is also one of its most inscrutable. Bedeviled by paradoxes, misperceptions, and mistrust, it is a relationship that has become a source of considerable uncertainty and, potentially, severe instability. Nowhere is this more apparent than in the brewing bilateral trade war.

The key assertion driving the current dispute, initiated by US President Donald Trump’s administration, is that America’s trade deficit is too big – and it’s all China’s fault. US Treasury Secretary Steve Mnuchin has gone so far as to demand that China unilaterally cut its trade surplus vis-à-vis the US by $200 billion by 2020.

But most sensible economists agree that America’s trade deficits are the result of domestic structural economic factors, especially low household savings, persistent government deficits, and the US dollar’s role as the world’s main reserve currency. According to Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics, if the US wants to reduce its trade deficit, it should start by reducing its massive fiscal deficit.

Yet it is not even clear that America’s trade deficit urgently needs to be cut. While the external deficit is certainly large, the US can live beyond its means in a way other economies cannot. Thanks to the dollar’s reserve-currency status, the US can absorb most of the rest of the world’s savings, which finance its saving shortfall. Moreover, as Trump’s own Council of Economic Advisers noted in February, the US enjoys a services surplus with the world, including with China.

But it is not just the Trump administration that shuns rational economic argument. Trump’s approach to trade with China enjoys more mainstream support in the US than most of his policies, because most Americans – including many who otherwise oppose Trump – are convinced that China is not playing fair. The political commentator Fareed Zakaria, for example, has stated that “on one big, fundamental point” Trump is right: “China is a trade cheat.”

What all this China-bashing leaves out is that cheap Chinese imports have drastically improved the quality of life of American workers, whose median income has stagnated for 40 years. According to the consultancy Oxford Economics, buying Chinese imports saves American families around $850 annually. Given that 63% of American households do not have even $500 saved for emergencies, this is not an insignificant amount.

Of course, open trade with the US and the rest of the world has enabled China to achieve the fastest poverty reduction in human history. But that does not mean that China is reaping most of the economic benefits. For example, the Chinese manufacturer Foxconn earns just $7.40 for every $800 iPhone that is sold; most of the value goes to Americans.

Chinese policymakers now put their faith in what was arguably the West’s most important export: modern economic theory. Yet they remain subject to damaging decisions made by a US plagued by misperception. The question is whether China will bow to US pressure.

China’s leadership is, ultimately, pragmatic. If a few symbolic concessions (like the voluntary export restraints to which Japan agreed in the 1980s) could prevent a collision, China may make them. But, when it comes to bigger – and economically unjustified – demands, China is likely to hold the line.

Here, the most obvious example is Mnuchin’s demand that China abandon its “Made in China 2025” plan. China has already been subjected to American export controls on high-tech equipment (including the recently imposed seven-year ban on the sale of software or components by US companies to ZTE Corporation). It is not about to give up its quest for high-tech development, a critical element of a clear long-term strategy for moving its economy up the global value chain.

In short, however rational China tries to be, a trade war remains a real possibility – one that will hurt both Americans and Chinese. And this outcome is made all the more likely by a deepening disquiet in the bilateral relationship.

A three-month sabbatical at two leading US universities has underscored for me the extent to which attitudes toward China have soured in recent years. If Chinese policymakers were aware of the intensity of this shift – and I have informed a senior figure among them – they would realize that their calm and rational policies toward the US during the past 20 years may well not work in the next 20.

It would take an entire book to explain why America’s opinion of China has turned so negative. But some reasons are obvious. Within the next decade, China will overtake the US economically, despite not being a democracy. Several thoughtful Americans have told me that they could live with a larger China, if it was democratic.

Here, again, there is some irrationality at play: a democratic China would be far more susceptible to populist and nationalist pressures, and thus would probably be a pricklier partner for the US. Yet the US remains blinded by ideology, and thus is unable to see the benefits of a China guided by economic rationality.

In the future, historians will lament that America’s long-term policy toward China was not similarly a result of calm calculation. Instead, they are likely to focus on how America’s political polarization and simplistic ideology – shared by many who should know better –drove it into a highly damaging and utterly pointless conflict.


Kishore Mahbubani, a professor at the National University of Singapore, is the author of Has the West Lost It?

Copyright: Project Syndicate, 2018.
www.project-syndicate.org

 


This article is brought to you by Project Syndicate that is a not for profit organization.

Project Syndicate brings original, engaging, and thought-provoking commentaries by esteemed leaders and thinkers from around the world to readers everywhere. By offering incisive perspectives on our changing world from those who are shaping its economics, politics, science, and culture, Project Syndicate has created an unrivalled venue for informed public debate. Please see: www.project-syndicate.org.

Should you want to support Project Syndicate you can do it by using the PayPal icon below. Your donation is paid to Project Syndicate in full after PayPal has deducted its transaction fee. Facts & Arts neither receives information about your donation nor a commission.

 

 

Browse articles by author

More Current Affairs

Dec 11th 2018
WASHINGTON, DC – Though he rarely admits even the slightest discontent with the job he schemed for in unprecedented ways and somewhat accidentally fell into (thanks to the vagaries of the Electoral College), Donald Trump’s presidency hasn’t been what Americans would call a bowl of cherries. Yet no other week of his presidency so far has been filled with such problems and so many dark omens for him.
Dec 10th 2018
This Human Rights Day (December 10) marks the 70th anniversary of the United Nations General Assembly’s adoption of the Universal Declaration of Human Rights. Sadly, events over the past few years show that the world is failing to uphold the commitments enshrined in that document, particularly when it comes to protecting children. For example, in separatist-controlled parts of Eastern Ukraine, where more than 200,000 children are receiving their education in militarized areas, bullets have struck kindergarten windows. In April, the Afghan air force, backed by US-led NATO coalition advisers, reportedly killed 36 students, teachers, and parents, and wounded 71 others, at a graduation ceremony. And in August, the Saudi-led coalition that has been waging war against Houthi rebels in Yemen dropped a bomb on a school bus, killing 40 boys between the ages of six and 11.
Dec 7th 2018
Figures like Boris Johnson, with his Churchillian pretensions, or Jacob Rees-Mogg, who resembles a minor character in a P.G. Wodehouse novel, are anachronisms. In earlier times, they might have run an empire. Now they are mere politicians in a middle-ranking state. Brexit for the likes of Johnson or Rees-Mogg is more like a deluded grab for power, undertaken in the name of the common people, supposedly in revolt against the elites of which these politicians are themselves conspicuous members. Their nostalgia for grander forms of rule has already done great damage to the country they claim to love. This is all the more reason, now that the potential catastrophe of Brexit is so plain to see, why those common people should have a second chance to vote for a way to avoid it.
Dec 4th 2018
The argument against a second referendum is that it would be deeply divisive, especially if it leads to a reversal of the first referendum. But this rather misses the point. The hardline Brexiteers will reject any compromise with the EU. As ideological purists, they will not be satisfied until the UK is fully out of the EU, even if it means jumping off a cliff. Happily, the British public is unlikely to accept that option. So, whatever happens, the Brexit debate will rumble on. In the meantime, we Britons should apologize to our friends around the world. Our national spectacle of self-harm must be growing tiresome.
Dec 1st 2018
.......since last summer, Putin’s approval ratings have again dropped precipitously, to 66% in October and November. Beyond “making Russia great again” on the international stage, Putin was supposed to improve Russians’ standard of living. Instead, after four years of falling real incomes, the government announced deeply unpopular pension reforms, which included an increase in the retirement age.
Nov 30th 2018
The Senate slapped the Trump administration around on Wednesday, voting 63-37 to bring to the floor a proposal to end US involvement in the Saudi-led war on Yemen. I should declare my own interest by saying that I was one of 50-some Middle East experts and policy-makers who signed a letter to the senators urging them to take this step........The vote was the most significant bipartisan measure to come out of the senate in ages, and fell just short of a veto-proof two-thirds majority.
Nov 23rd 2018
Vibrant capitalist economies have always depended on a carefully calibrated balance between government policy and private competition. Franklin Delano Roosevelt’s New Deal of the 1930s significantly extended the previously minimal role of the US federal government. But, rather than holding back growth and destroying private enterprise, it was followed by 30 years of spectacular capitalist development, spreading prosperity as never before and dramatically expanding the ranks of the American middle class. Ayn Rand’s free-market utopia, so beloved by climate-change deniers, is as detached from real-world complexities, and as likely to produce social and environmental disaster, as simplistic Marxist faith in the inevitable efficiency and incorruptibility of the state.
Nov 22nd 2018
Trump’s statement on his policy toward Saudi Arabia in the wake of the murder in Istanbul of dissident Washington Post journalist Jamal Khashoggi brought a profound shame on the United States that will, as FDR put it, live in infamy. Trump began by saying he was putting America first, but that was the last thing he was doing. He was putting his own personal predilections and policies, and perhaps profit, above the interests of the United States. Here are the ways he put America last:
Nov 21st 2018
.......the Trump administration’s disruptive behavior has left the French and German governments furious. But, beyond fueling anger, Trump’s attacks on other countries’ sovereignty are adding momentum to a new push for European political unification...........Trump’s actions are actually something of a godsend, because they have forced Europeans to accept that they must stand together in defense of their sovereignty and prosperity. A union of almost 450 million people (after Brexit) cannot allow a country two-thirds its size to treat it like a group of vassal states.
Nov 20th 2018
The world’s central bankers have begun to discuss the idea of central bank digital currencies (CBDCs), and now even the International Monetary Fund and its managing director, Christine Lagarde, are talking openly about the pros and cons of the idea. This conversation is past due. Cash is being used less and less, and has nearly disappeared in countries such as Sweden and China. At the same time, digital payment systems – PayPal, Venmo, and others in the West; Alipay and WeChat in China; M-Pesa in Kenya; Paytm in India – offer attractive alternatives to services once provided by traditional commercial banks.
Nov 19th 2018
They came in the middle of the night. At about 2.30am on May 11, Amal Fathy, her husband Mohamed Lotfy, and their three-year-old child were awakened by Egyptian security personnel. For hours, a special forces detachment of seven armed men in uniform and two plainclothes officers raided their home..........Amal, a former actress and fashion model, had posted a Facebook Live commentary expressing her anger about being sexual harassed two days earlier. In the 12-minute video,....
Nov 16th 2018
For while Iran has been receptive to Chinese investment in the past, it has equally sought European investment to balance this out and to prevent China from playing too dominant a role in the country. The sanctions have now made China’s dominance all the more likely. ..........possibly the most significant implication is how sanctions have led to widespread de-dollarisation, whereby the dominant global status of the dollar has been challenged. Since sanctioned states are no longer attached to the established system, it is easier for them to adopt an alternative way of operating. An example is the Petro Yuan – whereby China’s oil imports have been priced in yuan rather than in dollars – which has been adopted by oil-rich states targeted by sanctions, most notably Russia and Venezuela. The sanctions on Iran will only exacerbate this process.
Nov 12th 2018
It is clearly time for New Deal II. Instead of promising more tax breaks for the richest citizens, a more equitable fiscal policy could pay for necessary bridges and other public goods and services that would improve everyone’s life. Affordable health care for all citizens is a mark of a civilized society. The US is still a long way from that goal. The same is true of high-quality public education. It is grotesque that so many people who stand to benefit from such “socialist” policies are still persuaded to vote against them because they are supposedly “un-American.”
Nov 2nd 2018
The cold-blooded killing of the journalist Khashoggi, however gruesome, pales compared to the brutality and gross human rights violations Saudi Arabia is committing in Yemen. The Saudis are deliberately preventing food and medicine from reaching areas where children are dying from starvation or disease. Their indiscriminate bombings are killing thousands of innocent men, women, and children, leaving whole communities in ruin. The saddest part of this unfolding tragedy is that the US and other Western powers are supplying the Saudis with the weapons they need to massacre the Yemenites, who are trapped in this proxy war between Saudi Arabia and Iran (which neither can win), and the Yemenites will continue to pay with their blood.............Out of a total population of 28 million people, 22 million are in need of humanitarian aid. Nearly 5.2 million children are starving to death, and nearly one million are believed to be infected with cholera. Over 8 million people are facing famine, and 2 million are displaced and deprived of basic needs.
Oct 29th 2018
The nightmare election possibility for the Democrats is continued Republican control of both chambers. In that case, Trump will feel vindicated and more liberated than ever. He might then fire a raft of officials, treat immigrants still more harshly, and try to shut down Mueller’s investigation of his campaign’s possible collusion with the Kremlin and Trump’s probable obstruction of justice. The conventional wisdom may prevail, with the Democrats winning the House but not the Senate. But the polls have been fluctuating. And since Trump’s stunning election victory in 2016, most observers have become more cautious about predicting outcomes.
Oct 23rd 2018
As the Brexit negotiations peter out this week in Brussels, fevered Brexit fanatics – from Boris Johnson, David Davis and Jacob Rees Mogg in the Telegraph, to many others on Twitter – are ranting and raving about the most sensible thing Theresa May has done in two and a half years of Brexit negotiations by suggesting extending the transition period in an attempt at genuine compromise. This would be a good opportunity to remind ourselves of some salient facts. These Conservative MPs are speaking on behalf of the hardest of Brexiteers, a collection of somewhere between 60-80 of the Tory MPs. That’s somewhere between 60 and 80 MPs out of a total of 317 Conservative MPs in the House of Commons. And while having 317 MPs means the Conservatives are the largest party at the last election, they did not win enough of the votes to form a majority. Therefore, for all their bluster and bloviating, let’s just state clearly what the members of this small group are: they are a minority faction, holding a minority view, in a minority government.
Oct 23rd 2018

A billboard at a construction site, with a photo of an Ottoman-style mosque with four minarets and the flag of Turkey, was erected recently in the center of Pristina, the capital of Kosovo.

Oct 17th 2018
Yemen is a country of some 29 million persons, but over a third of them are at risk of starvation if Saudi and UAE bombing campaigns continue.
Oct 14th 2018
Now the Trump administration is eroding the dollar’s global role. Having unilaterally reimposed sanctions on Iran, it is threatening to penalize companies doing business with the Islamic Republic by denying them access to US banks. The threat is serious because US banks are the main source of dollars used in cross-border transactions. According to the Society for Worldwide Interbank Financial Telecommunication (SWIFT), dollars are used in nearly half of all cross-border payments, a share far greater than the weight of the US in the world economy. In response to the Trump administration’s stance, Germany, France, and Britain, together with Russia and China, have announced plans to circumvent the dollar, US banks, and US government scrutiny. “Plans” may be a bit strong, given that few details have been provided. But the three countries have described in general terms the creation of a stand-alone financial entity, owned and organized by the governments in question, to facilitate transactions between Iran and foreign companies.
Oct 5th 2018
There are a lot of oddballs in US President Donald Trump’s entourage, but few are as odd – or as sinister – as 33-year-old Stephen Miller, Trump’s senior policy adviser. Miller resembles a type on the far right that is more common in Europe than the US: young, slick, sharp-suited, even a trifle dandyish. He is a skilled rabble-rouser, whose inflammatory rhetoric against immigrants and refugees – “We’re going to build that wall high and we’re going to build it tall !”– drives the crowds at Trump rallies into a frenzy. One of his crowd-pleasing notions is that migrants will infect Americans with terrible diseases.