China Should Consider Booting the US From the WTO
Mei Xinyu
/SOURCE : Yicai
China Should Consider Booting the US From the WTO

(Yicai Global) March 28 -- In an attempt to stem China's "economic aggression," US President Donald Trump signed a memorandum imposing crushing trade sanctions on China, including restrictions on Chinese direct investment and possible tariffs worth USD60 billion on Chinese imports. The tariffs have also been slapped under Section 301 of the US Trade Act of 1974 that deals with intellectual property policies and practices.

Speaking at the White House on Thursday, Trump said the tariffs were part of an effort to restore fairness in the global market, noting that China imposes a 25 percent tariff on US cars while the US duty on Chinese cars was only 2 percent. "They charge us, we charge the same thing," he said. By imposing such punitive tariffs on Chinese imports, Trump has shifted public attention from the US' domestic problems to the trade dispute with China to garner more public support at home.

However, a trade war may not necessarily be a bad thing for China, because despite being the main target of anti-dumping and anti-subsidy protectionist measures over the past decades, China has become the world's largest manufacturer and exporter, and the second-largest economy. A trade war declared by the US is also unlikely to stop China from becoming a stronger economic power.

A review of the changed strengths of China and the US over the past decades can help people judge the outcome of a trade war between the two largest economies. When the US first launched a Section 301 investigation into Chinese exports in 1991, its current-price gross domestic product was $6.17 trillion, 15 times China's $415.6 billion, while the US' GDP in 2017 was $19.74 trillion, about 1.52 times China's nearly $13 trillion, International Monetary Fund data show.

Further, as the rate of contribution of domestic demand, especially domestic consumption, to China's economic growth has considerably increased in recent years, a China with a healthier and stronger economic foundation is more able to win a trade war that it is forced upon it by another country. Last year, consumption contributed 59 percent to China's GDP growth, while capital formation's contribution was 32 percent and that of net export of goods and services only 9 percent.

So what kind of countermeasures China should take if the Trump administration declares a trade war?

First, China's response should follow the principle of precision strikes. Since the trade war is not between China and the American people, but between China and Trump and his protectionist-minded administration, China should first take measures to deal a blow to the industries in the US states that helped Trump win the 2016 presidential election and those states whose political leaders are still backing him in this year's mid-term election.

Second, China's countermeasures should not be limited to the goods trade, but should extend to the financial sector, including underselling the US' Treasury bonds and undermining the US stock market. Since Trump has trumpeted the stock market's strong performance as proof of the success of his economic policy to impress US voters over the past year, China should take strong measures to make Trump feel the burn in this area.

One trade dispute after another has pushed the US stock market toward a dangerous defile. The 2 percent or higher consumer price index in the US since the end of 2016 is one important reason why the US Federal Reserve has been expeditiously tightening its monetary policy, and further rigorous tightening may result in the bursting of stock market bubbles. The imposition of large-scale punitive import tariffs will further stoke inflationary pressures in the US, leading to swifter rate hikes by the Fed, which will raise the chances of the US stock market suffering a hard landing.

Third, China should not confine itself to countermeasures that pursue solutions under the disputes settlement mechanism of the World Trade Organization. Instead, it should take bolder steps, such as considering a legal move to possibly oust the US from the world body for instigating trade disputes time and again by violating WTO rules. A stern warning, if not downright expulsion, from the WTO might force the US to exercise self-restraint.

Finally, fourth, China's actions should extend beyond the economic field to political and other areas, where the US needs China's support and cooperation.

A trade war will hurt not only China but also the US, and this must be forcibly brought home to Washington. However, US restrictions on Chinese investment and visas to Chinese nationals will ease the capital outflow and brain-drain from China. Still, China should be well prepared for a protracted trade war.

The author is a researcher at the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce.

[Yicai Global is committed to providing an open forum to air a diverse range of views. The opinions expressed herein are the author's alone. Yicai Global has redacted this article to conform to our style and usage guidelines, but neither validates its factual nor endorses its editorial content.]


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Keywords: Trade War , TRUMP , WTO