A NUMBER of readers have written to dispute Gideon Rachman’s theory of Easternization, and to reject talk of a shift of economic and political power from West to East.
Some think that this is all a matter of opinion. It’s not; it’s a matter of facts.
A Filipino in denial of China’s rise and America’s decline is many times more ridiculous than an American who insists on defying the writing on the wall.
I want to add today another must-reading on the power shift and the Chinese-American relationship: an informative analysis by the Economist in its issue of March 30, 2017.
The article is, “Averting a Chinese-American trade war” (Economist, March 30, 2017). It reviews and analyzes the flow of trade and investment between the two countries over the years.
The bilateral economic relationship is flourishing contrary to the biggest fears of Donald Trump and his advisers. It’s Trumpism that is stirring up trouble, not the ambitions of China.
Serious economists and executives are sanguine that Trump’s meeting this week with President Xi Jinping will be cordial and productive.
Look up the report of the Economist and be assured. http://www.economist.com/news/briefing/21719772-worlds-most-important-bilateral-economic-relationship-flourishingand-deep
Relations from start to present
The Economist opens its report by telescoping Sino-American relations from the start to the present:
“In 1784 the Empress of China set sail from New York, on the first American trade mission to China. Carrying ginseng, lead and woolen cloth, the merchants aboard dreamed of cracking open the vast Asian market. But the real profit, they found, came on their return, when they brought Chinese teas and porcelain to America. As other ships followed in its wake, the pattern became clear. Americans wanted more from China than Chinese wanted from America, and the difference was made up with a steady outflow of silver from America into China. The Empress had launched not just commercial ties between the two great countries but also an American deficit in its trade with China….
“When Xi Jinping meets Donald Trump in Florida early in April, the deficit will top the agenda. In his run to the White House, Mr. Trump promised a combative stance against China on trade. Some expect America to slap punitive tariffs on Chinese goods, triggering an all-out trade war. Others think a grand bargain that defuses tensions is possible.
“…America and China are bound together by cross-border flows of goods, cash, people and ideas that are bigger than ever. These ties have greatly benefited the two countries’ prosperity. A rupture would be severely damaging for both.”
Closing the trade imbalance
Before China joined the World Trade Organization (WTO) in 2001, China accounted for less than a quarter of America’s total trade deficit; over the past five years, it has made up two-thirds of the deficit.
Peter Navarro, the head of Trump’s new National Trade Council, sees the deficit as a drag on the US economy. Close it, he argues, and America’s GDP will be bigger. And he sees a way to do so: take on China over its unfair trade practices, from currency meddling to export subsidies.
Navarro’s views, says the Economist, rely on crude arithmetic that defies the most basic economic logic. In fact, big deficits often accompany fast growth. And it is misleading to focus on bilateral imbalances in an age of global supply chains.
Left to its own devices, the trade relationship between China and America should become more balanced in time. As China’s middle class grows, its consumers are buying more from abroad. Chinese demand for US agricultural products, especially soya beans, has boomed. China is already buying more services from America then vice versa.
Costs of trade war
If Trump carries out his most extreme threat—a 45 percent across-the-board tariff on Chinese goods—, trade flows between the two giants would shrivel. Collateral damage to the global economy would be immense. The very survival of the rules-based international trading system would be in peril.
China would, in a conventional analysis, suffer more in a trade war. About a fifth of its exports go to America, equating to nearly 4 percent of Chinese GDP. Less than a tenth of US exports go to China, worth less than 1 percent of American GDP.
But a fight would also hit America hard. No other country could easily replace China in making many of the products, from toys to textiles, that fill American shops. Consumers would face sharply higher prices.
This is why Trump has trod softly in confronting China.
Investment vital to relations
If Trump lashes out at China, he will learn that investment is as vital as trade to the relationship.
Over the past decade, China has invested more than $1 trillion in Treasuries. At its peak, America owed more money to China than to anywhere else. Pundits fret that, were China to dump its bonds, American interest rates would shoot up and the dollar plummet.
Mutually assured destruction
The physical investment ties between China and America and the mutual vulnerabilities are even more glaring. According to official data, roughly 1 percent of the stock of American direct investment abroad is in China…The true stock of American foreign direct investment (FDI) in China built up from 1990 to 2015 was $228 billion, three times the official figure.
Trump’s band of economic nationalists want money invested in America, not more profits made abroad….This policy risks doing more harm than good (preventing Apple or GM from going big in China would hurt them financially). The more relevant point is that the bigger investment flows these days are from China into America.
Chinese investment into America used to be tiny. No longer. It leapt from about $16 billion in 2015 to some $46 billion in 2016, compared with $13 billion invested by American firms in China. Chinese investments are already thought to support roughly 90,000 American jobs across several dozen states.
Investment not divorced from power
These investment trends give America and China every reason to stay on each other’s good side. But investment cannot be divorced from power, and that poses complications.
Most obvious are national-security concerns. Both China and America have become more active in restricting each other’s technology and blocking deals that they fear might compromise their security.
But commercial competition casts an even bigger shadow. China and America are increasingly butting heads. “Made in China 2025,” an industrial plan unveiled in 2015, is indicative of how China is gunning for industries that America and other foreign countries have dominated. China aims to become a leader in 10 strategic sectors, ranging from next-generation IT to agricultural machinery.
Critics in America warn that China’s state-driven model for advancing in these industries will cause damage around the world. Their worry is that China will deploy much the same industrial policy that it has used in sectors from wind power to high-speed rail.
A committee recommended to the US Congress last year a ban on all investment in America by China’s state-owned enterprises (SOEs)—a measure as likely to lead to a full-blown trade war as Trump’s 45 percent tariff wall. A recent review of the semiconductor industry called for a stiffer response to China’s market distortions.
Need for diplomacy
Competition between China and America can also yield benefits. The two countries are already spurring each other to innovate.
As cross-border business operations become more widespread, the Chinese-American economic relationship will settle down. Competition will be welcomed as healthy, not feared as destructive. It would help if the governments could agree on a long-stalled bilateral investment treaty; and if they could reach an understanding on trade before their disagreements threaten the WTO itself.
The diplomacy needed to navigate these problems is still in short supply. The question then is whether the Xi-Trump meeting today and tomorrow will pave the way for such diplomacy.