Let's not build a wall around trade, China-US "big brothers" talks heat up

By Scott Williams

A dispute is between "brothers" 

President Trump has seemingly started a Sino-US trade war as of earlier last week.  If this conflict continues there are no probable winners, in fact both sides stand potentially to be significant losers as the conflict furthers.  

Aerial photo taken on Sept. 19, 2015 shows the Waigaoqiao container pier of the Shanghai free trade zone in Shanghai, east China. [Photo: Xinhua]

Let’s ask ourselves – why now?  China grew gradually and steadily from being a prior inbound investment and export driven economy to what is now a rapidly advancing consumer-driven economy. Over these past 30 years of steady economic development, hundreds of millions of Chinese have risen from poverty. This change and balance of interests and leverage between these two super powers did not happen overnight. Both countries are now positioned differently in the complex industrial chain. Meanwhile China's rapid growth in income, urbanization, industrial automation, e-commerce and cross border sharing of supply chains has catapulted China’s advancement.

Today’s complicated cross-border interdependencies have also changed, and both countries’ positions in the world economy have altered dramatically.  In the high technology field, supply chain cycles and processes are often complex and global in terms of procurement dependencies. For example, Lenovo is made in the U.S. for the U.S. market, while GM and Ford are made in China for China. In the case of Tesla, it is selling into China with virtually few parts sourced from aboard except for Japanese parts which are primarily made in the United States as well.  The normal case is complex internationally procured parts of products in developed countries. This complicates the on-coming trade conflict.

Historically the United States has been free-reeling in an open market free trade environment and this has aided itself given its own technological, logistical, and innovation advantages. Meanwhile China’s state managed economy has steadily built itself into being the number two economy and is set to surpass the United States in GDP. The inter-dependencies and balance of leverage has changed. Because of this, the U.S.’s open free trade mechanism is aching for increased intervention based on rules or what some call ‘loopholes’, in this case the U.S. utilizes Super 301 provision, a provision that is technically defined as a ‘national security’ provision.

What is President Trump’s motivation?  

It is not a surprise that it may be a political motive as he plays favors towards his election winning voter base, or it may be an attempt to build some early momentum leading up to the mid-term elections, or even as a pre-move well in advance of a next presidential election for 2022. If you look back at the 240 year history of the United States, a vast majority of presidents have been economic liberalists supporting free trade and a market-oriented mechanism. Trump however claims that non-managed free trade produces losers, and “most of the time it has been the United States losing”.  However if that were the case the tariffs would likely not be so substantial.

There isn’t wide spread support in the U.S. for a trade war. One of Trump’s key advisors, Gary Cohen, recently resigned in protest, as Trump pushed to impose tariffs on Chinese steel. China is now a well-functioning economy, and the United States has always been a bipartisan driven country known for its market economy, so even the president's party base is not entirely in agreement.

The intention for both sides to get to the table and negotiate? President Trump is driving aggressively a new way for both sides to take action, in so doing, quickly Beijing's voice was heard. Earlier last week Li Keqiang noted that trade protection is bad for both sides and with both sides waging new tariffs and an un-welcome cycle has begun.

Who do you think will be the biggest loser in the war? Both sides will lose a lot. The loss will not only be short term it could create long-term loss. Trade always follows opportunities like a vacuum and thus may open doors in other countries or regions for opportunities that may not be reversed easily. This is not just a question between the United States and China alone as these changes in procurement options could impact further protectionism globally. 

Does this impact the balance of technical acquisition and advancement? The United States has had an absolute influence over the past few decades in the high-tech arena, including Silicon Valley, Boston MIT, Seattle Silicon Forest and other. China quickly realizes this and has made great strides in the research and development over the years. In the application of technology to products, China has developed rapidly with the help of American science and technology, including green technology, medical science and products, software, automobile and other.

Results of increased cooperation versus a trade war

China's Belt and Road Initiative dwarfs the post-World War 2 U.S. "Marshall Plan" and is openly inclusive to the respective linked economies along its routes. As well, China's initiative has been created during peacetime, with great positive significance and the United States should also become an active participant. As well, the United States and China should return to the Bilateral Investment Treaty (BIT) talks as America needs China’s infrastructure capabilities, while China needs high-tech products, technology based partnerships and joint ventures including in the areas of medicine, environment, and intelligent manufacturing.

The good news is that Trump has shown himself to be a deal maker, a ‘winning businessman’ as he calls himself, and it is clear that he prefers bilateral trade dialogues to multilateral dialogues such as the dropped TPP.  Although the ‘weather is foggy’ at this time, it may actually be China’s opportunity to engage Trump with a balanced trade deal with innovative terms that force a positive deal win-win for both sides.

(Scott Williams is the Founder and Executive Governor of The Invest USA Committee in China)