China-US Trade War Would Make Matters Worse
Yicai Global
/SOURCE : Yicai
China-US Trade War Would Make Matters Worse

(Yicai Global) Mar 14 -- US President Donald Trump has repeatedly made hostile comments toward China both before and since he took office, which raised concerns about the trade relationship between the world's two leading economies. Yicai Global held New York Spring Forum last month and invited ambassador Charlene Barshefsky, who served as United States Trade Representative from 1997 to 2001, to discuss the future trade relationship between China and the US.

We present the discussion for our readers as below:

Yicai Global New York Forum

Time: 2/22/17

Location: China Institute New York

Speaker: Charlene Barshefsky, Former United States Trade Representative; Yasheng Huang, Professor MIT Sloan School of Management

Moderator: Yuqing Feng, Head of U.S. Bureau, Yicai Global

Commentator Feng Yuqing, Yicai Global: We are also in a historical moment of our time. It seems the global trade system that worked so well in the past several decades is facing serious challenges. The Great Britain left the EU and the people in the United States choose a very different path by electing President Trump.

So today we are very fortunate to have our two distinguished speakers to share their thoughts with us on these very important topics. Let me introduce ambassador Charlene Barshefsky. Ambassador work as a -- for United States as trade representative from 1997 to 2001. She was also the Chief negotiator of China's WTO agreement. Welcome.

Charlene Barshefsky, former US trade representative: Thank you.

Commentator Feng Yuqing, Yicai Global: And also, let me introduce Professor Yasheng Huang. Professor Huang is associate dean of MIT Sloan School of Management. He has done very influential research and work in China and in the United States. Currently, his team is doing a big data project. It's about China's food security. It was funded by Walmart Foundation, right? And also, Professor Huang wrote a lot of articles in this election about Trump. Thank you

So, President Trump injects high risk into the trade relations with China. We've seen a lot of worrying signs. He threatened to impose a 45 percent tariff Chinese goods, and he named Peter Navarro, the outspoken China critic and the author of Death by China, as White House's head of national trade council. So people are worried about -- so, ambassador what do you think the direction of US-China relations?

Charlene Barshefsky, former US trade representative: Well thank you, and let me just say that it's a great pleasure to be here with you this evening and thank you for having me. I think the direction of US-China relations is uncertain, in the sense that the relationship has become difficult, more fraught than in years past, in part, a reflection of populist anti-trade sentiment that pervades parts of the United States as well as other countries, in part, a function of anti-immigrant sentiment that pervades parts of the United States and many other countries, but in part also because of the view, expressed by the Trump administration, that trade has become extremely unbalanced between the US and China and that China has benefited from an open global trading system, but has not, itself, engaged in the kind of openness with respect to its domestic economy as one would have hoped.

So, I think the situation is a rather tense one. I don't think it's productive, or time, to talk about trade wars or things of that sort, which seemed to be all the vogue, but I do think that it will be important for China to recognize that the United States has a number of very legitimate and strong concerns and that China act to address them in a very serious way.

Commentator Feng Yuqing, Yicai Global: Sure. We'll go back to that a little bit later. So professor Huang, do you think -- what do you think the possibility of a trade war between the US and China?

Huang Yasheng, professor at the MIT Sloan School of Management: Well, the honest answer is we don't know. He doesn't have an economics team in place. To the extent that he does, those people who advise him -- who are close to him have a fundamentally different view about how trade and capital mobility contribute to the welfare of the United States and welfare of China. The way that I see it is that, you know, he put out this idea that his administration is for America --America first. It's very important to be reminded of the fact no previous administration in this country would say America second or third.

Commentator Feng Yuqing, Yicai Global: Yes.

Huang Yasheng, professor at the MIT Sloan School of Management: To me that's just not a very meaningful formulation of a country's policy. For China, obviously, for the Chinese policy makers, China comes first. For America, America comes first. The fundamental issues is how do you think are the appropriate ways to maximize national interest and here we have a huge gap between what I call the kind of Adam Smith Ricardian consensus about trade and investment, which rests on the notion that trade and investment maximize welfare of all the countries, right? Essentially it's a positive sum view of trade and capital flows, and now we have an administration which has a very zero sum view of trade and capital mobility and that -- I'm not a big fan of that view.

Commentator Feng Yuqing, Yicai Global: But then the consequence can be very disastrous. This morning I heard on the Bloomberg, Stephen Roach said, "You talk about trade war. We don't see anything like that yet. It would be very disastrous."

Huang Yasheng, professor at the MIT Sloan School of Management: It's disastrous for both countries.

Commentator Feng Yuqing, Yicai Global: Yes.

Huang Yasheng, professor at the MIT Sloan School of Management: So that's the key thing. If you really believe in the idea America should come first, you shouldn't engage in trade war. Not with China. Not with other countries. I agree with the ambassador, there are a lot of legitimate issues -- IP issues and investment restrictions and trade rules, labor laws. Those are issues that you resolve by negotiation, by engagement, rather than by a trade war. The way that I see the United States and China is that it's not like two companies competing with each other. It's really two parties in the same supply chain.

Commentator Feng Yuqing, Yicai Global: Yes.

Huang Yasheng, professor at the MIT Sloan School of Management: US is, occupies, sort of maybe, upstream end of the supply chain. China occupies the downstream side of the supply stream. To actually inflict tariffs on Chinese goods, you're actually hurting the US industry. You're hurting the US exporters, which are exporting to China. And by the way, let me just provide the following statistic: the biggest item that US exports to China is soy bean. It's overwhelmingly coming from red agriculture states in the United States. The second biggest and third biggest are small car engines and industrial equipment. It turns out that the biggest producers of those products are South Carolina and Alabama, right? And those are -- those are not the states that…

Commentator Feng Yuqing, Yicai Global: Those are the working class, vote Trump right?

Huang Yasheng, professor at the MIT Sloan School of Management: Correct. Yes.

Charlene Barshefsky, former US trade representative: Could I add? Yeah, if I can just say, I agree fully. I think there's a fundamentally different view of the notions of trade and investment, as well as the math involving trade and investment that sort of pro-traders and anti-traders discuss. I think the difficulty though is that when you look at polling data and you talk about free trade, the public is not too happy. Fair trade, people respond more positively to, and I think what we have to be careful about is that -- is for the administration not to define fair trade as only trade that results, for example, in mandatory deficit reduction or only trade that results in a zero-sum mentality on either side. China also has a zero-sum mentality. The rhetoric is different. Its cleverer -- more clever, but it's a zero-sum mentality, and this is extremely dangerous for both countries.

Commentator Feng Yuqing, Yicai Global: I totally agree. If history can be any lesson, then in 1930s, the trade war made the Great Depression even worse.

So, ambassador, you mentioned that some difficult issues with Chinese trade policy, that's true. Because right now, a lot of global companies are complaining the way Beijing treat them. They are not happy. They said -- they complain that China actually is going more protectionist as its economy slows. And the sentiment in the United States is different. In the past, most trade experts and business leaders, they support to engage China, to more positive to China. But right now, a lot of these leaders, these business leaders, experts, I know Olive Shaw, he's the director in Asia Society, even he said, we should be tough on China because it's not fair trade. So, how do you interpret this?

Charlene Barshefsky, former US trade representative: Well, I think the basic criticisms are actually right. If you look at the top ten business concerns with respect to China, seven involve Chinese government policy. So, for example, the growth of state enterprise, state enterprises and control of the -- by the state sector, substantial subsidization of industries and the creation of whole sectors of the economy -- solar or wind as an example -- through the use of subsidies and other preferential policies, continued concerns about intellectual property, you know, national champion companies. I could go through the list. This is the business community perception.

The danger is that the business community always provided an important touchstone for policymakers and always acted to moderate the more extreme views with respect to China. But when the business community becomes more negative as they are, more negative, you feed a dangerous spiral. And so, I think for this reason, it's important that China really think about two things: number one, to be sure in the slower growth economy, reforms begin to sputter -- it is internal economic reform and opening, but the fact is, internal economic reform and opening has stopped. And it's actually, essentially haltered for a long period of time now. It's very important for that engine to start up again in a productive way. Not just reform, but further opening, and that's one area.

The second, I think is for China to begin to address, let me not say begin to, for Chine to address the problems that are palpable, they're very obvious, with respect to the treatment of either businesses exporting to China or businesses operating in China. And the list of what needs to be attended to is well known to the Chinese leadership. It's been the subject of discussion ad nauseam with the United States government. And what you see is see is an administration now reflecting the view that there has been virtually no progress for all of the dialogue that's taken place and that something has to change for the relationship to actually become mutually beneficial in a more reciprocal way.

Commentator Feng Yuqing, Yicai Global: But, do you think by playing a tough ball, you know, is like President Trump can let China open more of its economy? Does Trump administration has any leverage to do so?

Charlene Barshefsky, former US trade representative: What I would say is that China's own reform agenda, right? Is bracketed by let the markets operate. That isn't what happens in China today. But there is an identification within China, within the plenum, within the various five-year plans, of the kinds of reform and opening that should be taking place. It's just none of it, or very little of it, I shouldn't say none, but very little of it has actually happened. So, China has articulated its own interest in further reform and opening. It needs to get on with it.

Commentator Feng Yuqing, Yicai Global: Will China, if President Trump you know push, has a tough policy on China, and to ask China to open more its economy, will it be the best outcome by threatening a trade war?

Huang Yasheng, professor at the MIT Sloan School of Management: No, I don't -- I mean, I agree with ambassador that there are many, many policy issues to be worked out in China. But the issue is that, let's just look at what has happened since 2008.

It's either through macroeconomic adjustments and/or through policy adjustments, the role of foreign investments in China has declined dramatically, relative to the size of the Chinese GDP. Just to give some benchmark statistics: the Chinese companies are investing about five times the level of US companies investing in China. Part of it is driven by policy restrictions and foreign direct investment restrictive regulations and things like that. Part of it reflects the relative changes in the two countries' cooperate capabilities and competitiveness. Part of it reflects the natural stage of Chinese companies diversifying their investment portfolios and making investment not just in China, but also abroad. So, some of it is functional natural economic evolution and development. Part of it definitely is policy restriction.

In terms of the trade and current account deficit, it used to be very, very big. Almost 10 percent of the Chinese GDP, the Chinese GDP is very big. Now it's 2 percent, maybe 3 percent. So, I don't really see the real actions in China having to do with foreign sectors. The bigger worry I have about China is really politics, rule of law, and broader economic reforms. One of the things that has happened in China is not collapse, but at least erosion of the confidence of the private sector, in property right, in financing access, and things like that. So, I don't see trade as a separate issue from sort of this broader reform agenda, and relative to these other issues, I would argue that the Chinese government should address those and the trade and foreign direct investment issues will kind -- will sort of become resolved almost on their own.

If you have rule of law, a lot of these disputes can be resolved in a relatively transparent manner. But the thing is -- the thing I worry about Trump is that his policy rhetoric is not helping the reformers in China. It's actually strengthening the hardliners, and not just in economics, but also in the military. So, that's not really helping the things there. I don't -- China can, China -- there's nothing that says China has to always move forward in economic reforms. China can go back.

So, it's a very important historical moment, how you nudge the Chinese policy makers in one way or the other. You know, we can, have a debate whether or not the Obama administration has done the right thing, but I don't think going so far away from that approach is the viable approach either, right? Maybe it has to be something in between.

Commentator Feng Yuqing, Yicai Global: Yeah, I think the policy is kind of danger because it's not able to open, ask China to open more of its economy, because the two country, two economy are so connected. If in one area they want punish China in one area, and the United States will get damage in other area. So, China is not thirty years ago. It's the -- China, right now, is second largest economy. So, it should be, any policy changes should be very, very careful.

Charlene Barshefsky, former US trade representative: So, if I could just make a comment about this, I think that the administration has already stepped back some and realized that it was talking before it had a policy. And it was talking before it understood the breadth and depth of the US-China relationship. And so you've seen a bit of pull back on One China Policy, for example, which was, I thought, an unfortunate issue on which to start, and an unfortunate issue on which to relent -- it was a mistake in both ways. The relenting was the right thing to do, let me say, but for an administration that's talking tough, it was an oddity, let me put it that way. So, that was a bad issue to begin with. But having pulled back from it, it suggested the administration is thinking through perhaps, now that is has some of its cabinet in place, what the policy should be.

Where I disagree is that if you look at the entirety of the relationship, think about what has sustained the relationship. It's the economic side. And but for the economic side the nature of the relationship in other areas would be very tentative, if they existed at all. So, when the economic side is under great stress, necessarily, that affects the entirety of the relationship. And it permeates the other areas less trust, less desire to cooperate more frustration. And that permeates other areas. Less trust, less desire to cooperate, more frustration, and that permeates other aspects of the relationship. That's why it's very important for the two sides to come to some understanding about the economic portion of the relationship. It's always been the ballast to the relationship. And now, it's under significant strain. And that's not good for either side.

Commentator Feng Yuqing, Yicai Global: Ambassador, you were the chief negotiator, you know, as China joined WTO. We all know that the accession to WTO made China's economy take off. Back then, 16 years early, at that time, you know, generally speaking, people, elites and policy leaders in the United States believed engage China is a good way. And most people in the developed countries believe trade is a win-win solution. So, 16 years later, you know, why things change so dramatically? You know, most people -- we are talking about trade war. We are talking about the lose-lose solution. So, how do you evaluate, you know, this -- the 16 years later -- evaluate the WTO, China's WTO accession? And how do you evaluate why so many people right now in developed countries, especially in developed countries, are so not happy with the trade?

Charlene Barshefsky, former US trade representative: So first of all, I think China's entry into the global system is one of the most important historic steps of our entire generation. So, when you think of a country that has taken six hundred million people out of poverty, you have to say that what is being done economically is successful, and successful not just for the Chinese who have been put out of poverty, but for the global system as a whole, cause it most assuredly can't be US or developed country policy that poor countries should remain poor.

One wants to see development. In the Clinton administration, the view was, here you a fifth of the world's population, a nuclear power, the world's largest standing army, a member of the perm five UN security council, and a country that wanted to reform in a manner more consistent with western norms, as opposed to as the Professor said, to Soviet norms. And add to it someone like a Zhu Rongji, a genuine reformer, of course the United States welcomed this. It would have been irrational and counterproductive not to welcome that and I think especially in the early years, China's reforms continued. It implemented its obligations and so on. It's more, from my point of view, in these later years, since '08, that reforms have fallen off, but I would make one other comment.

In the WTO agreement was a special provision to guard against an onslaught of imports, particularly in manufactured goods. It's a provision that lasted 12 years. It only just expired end of December in 2013. It was almost never used, even though companies experiencing difficulties or groups of workers or unions or the US administration could have brought cases under it. This to me is an incredible mystery, but it also suggests as this process was unfolding, people found benefit to it and I think it's important to remember that.

Commentator Feng Yuqing, Yicai Global: Professor, I think we all understand, you know, why so many people in developed countries feel not good about trade, because, you know, according to a data like only 1% of global elite benefit from the two decades' globalization from 1988 to 2008. And also, the big winner is the rising middle class in the emerging economy, like China's middle class is emerging. Every time I go back to China, I feel all my friends are so rich. And the big losers is the working class in the developed countries, in the advanced countries. Do you think it's understandable that people have such harsh feeling about trade now -- about the globalization?

Huang Yasheng, professor at the MIT Sloan School of Management: I don't mean to minimize the disruptions and the loses on the part of the working class members in the western countries and in the United States. But, it's very important to get some perspective right. You are talking about growth visa vie level, right? The Chinese growth has been tremendous. GDP growth 10% a year and income growth close to that. The emergence of the middle class very impressive 600 million people being lifted above poverty. The headline number is very, very big. But let's remember what's the definition of poverty line. It's living 1.5 or 2 dollars a day. Imagine business adjusted for purchasing power parity.

Imagine in New York City you live on $2 a day. It can't even buy you a Starbucks coffee, right? And, at least, not the fancy kind, maybe the regular one? So, it's really important that those opinion polls are subjective and they reflect the Chinese optimism, Indian optimism. That's only because they came so far from such a low, basic level, right? Whereas, so the political disruptions in those countries -- and long before Trump -- there were opinion surveys that showed that in India, in China, in Poland, there's greater support for globalization in poor countries than there is in developed countries, and that's because, the difference is that there is forward movement from a very low base, and then there is either lack of any movement or even some…

Commentator Feng Yuqing, Yicai Global: Income stagnation.

Huang Yasheng, professor at the MIT Sloan School of Management: Income stagnation in…

Commentator Feng Yuqing, Yicai Global: In developed countries, right?

Huang Yasheng, professor at the MIT Sloan School of Management: Well, especially in the United States, but this is a very confined geographically, confined socioeconomically, so it's very important to distinguish the overall effect of trade and technology and the sectional effect of trade and technology. Let's not minimize the sectional impact, but let's not overblow the issue without acknowledging trade has also brought forth benefits to the United States. Let's just look in at the living costs, right? The inflation, the low level of inflation that this country has enjoyed in the last 30 years, part of it is the United States' economy is now operating in a globalized system, right? Trade and goods flows more quickly, capital flows more quickly. That has this effect -- it has some negative effect, but the positive effect is long-term lower interest rates, so we can buy houses more cheaply, a lower cost of living, of goods and services, right? So, when I first came to the United States, when you bought a TV, you know, it was like $300, $400. A crappy TV, black and white, small TV, right? Now, you buy the same price, you know, high definition, you know, big screen TV, and all of that. So, the trade has brought forth also the benefits. The problem here is the matter of politics, not the matter of economics. The problem is that the costs of trade are concentrated in certain geographic regions, and then they tend to vote in a particular way. The benefits of the trade are widely dispersed across the entire country. So, nobody really feels the full benefit of the trade. So, the issue is really…

Commentator Feng Yuqing, Yicai Global: Because everyone can have the benefit. But for the working class people, their income is just to keep -- about 30 years is not improved, compared to the global elite, like compared the highly intellectual, highly educate people. They earn much more than -- they enjoy much more of the benefit of the trade.

Huang Yasheng, professor at the MIT Sloan School of Management: Yeah. So, but you know, this is probably a not meaningful point to make. But as a professor, I have to make that point -- correlation doesn't mean causation, right? So, and yes, you do see these two things going together. The simple fact is, if you look at what has happened in the United States, the income stagnation preceded the entry of China into the WTO. Preceded that.

It began in the late 1970s, and maybe early 1980s. The productivity growth in the United States, despite this and that, has not been very, very impressive. So, I think the productive discussion is to think about those issues, you know, and the income inequality and these are domestic issues. These are not -- they are correlated with global issues, but fundamentally, they are domestic policy issues.

Follow Yicai Global on Facebook @yicaiglobal and Twitter @yicaichina.

Follow Yicai Global on