Everyone Loses in the U.S.-Chinese Clash?

I was just skimming through my old copies of Foreign Affairs and came across this piece, from last year, by Weijian Shan.

It's amazing how quickly it's out of date, and badly wrong, considering the corona epidemic and its effects. President Trump has always been a nationalist on trade, and while he's been woefully uneven on China --- both praising and disparaging Beijing, often during the same press conference --- the strategy that Shan denounces is exactly what the U.S. should pursue.

Here, "The Unwinnable Trade War: Everyone Loses in the U.S.-Chinese Clash—but Especially Americans":

It is in the best interests of both the U.S. and China to move away from zero-sum thinking and put an end to the ad hoc decoupling that the trade war has threatened, argues Weijian Shan.https://t.co/oV4by2z06x

— Foreign Affairs (@ForeignAffairs) October 13, 2019

The trade war has not really damaged China so far, largely because Beijing has managed to keep import prices from rising and because its exports to the United States have been less affected than anticipated. This pattern will change as U.S. importers begin to switch from buying from China to buying from third countries to avoid paying the high tariffs. But assuming China’s GDP continues to grow at around five to six percent every year, the effect of that change will be quite modest. Some pundits doubt the accuracy of Chinese figures for economic growth, but multilateral agencies and independent research institutions set Chinese GDP growth within a range of five to six percent.

Skeptics also miss the bigger picture that China’s economy is slowing down as it shifts to a consumption-driven model. Some manufacturing will leave China if the high tariffs become permanent, but the significance of such a development should not be overstated. Independent of the anxiety bred by Trump’s tariffs, China is gradually weaning itself off its dependence on export-led growth. Exports to the United States as a proportion of China’s GDP steadily declined from a peak of 11 percent in 2005 to less than four percent by 2018. In 2006, total exports made up 36 percent of China’s GDP; by 2018, that figure had been cut by half, to 18 percent, which is much lower than the average of 29 percent for the industrialized countries of the Organ-ization for Economic Cooperation and Development. Chinese leaders have long sought to steer their economy away from export-driven manufacturing to a consumer-driven model.

To be sure, the trade war has exacted a severe psychological toll on the Chinese economy. In 2018, when the tariffs were first announced, they caused a near panic in China’s market at a time when growth was slowing thanks to a round of credit tightening. The stock market took a beating, plummeting some 25 percent. The government initially felt pressured to find a way out of the trade war quickly. But as the smoke cleared to reveal little real damage, confidence in the market rebounded: stock indexes had risen by 23 percent and 34 percent on the Shanghai and Shenzhen exchanges, respectively, by September 12, 2019. The resilience of the Chinese economy in the face of the trade war helps explain why Beijing has stiffened its negotiating position in spite of Trump’s escalation.

China hasn’t had a recession in the past 40 years and won’t have one in the foreseeable future, because its economy is still at an early stage of development, with per capita GDP only one-sixth of that of the United States. Due to declining rates of saving and rising wages, the engine of China’s economy is shifting from investments and exports to private consumption. As a result, the country’s growth rate is expected to slow. The International Monetary Fund projects that China’s real GDP growth will fall from 6.6 percent in 2018 to 5.5 percent in 2024; other estimates put the growth rate at an even lower number. Although the rate of Chinese growth may dip, there is little risk that the Chinese economy will contract in the foreseeable future. Private consumption, which has been increasing, representing 35 percent of GDP in 2010 and 39 percent last year, is expected to continue to rise and to drive economic growth, especially now that China has expanded its social safety net and welfare provisions, freeing up private savings for consumption.

The U.S. economy, on the other hand, has had the longest expansion in history, and the inevitable down cycle is already on the horizon: second-quarter GDP growth this year dropped to 2.0 percent from the first quarter’s 3.1 percent. The trade war, without taking into account the escalations from September, will shave off at least half a percentage point of U.S. GDP, and that much of a drag on the economy may tip it into the anticipated downturn. (According to a September Washington Post poll, 60 percent of Americans expect a recession in 2020.) The prospect of a recession could provide Trump with the impetus to call off the trade war. Here, then, is one plausible way the trade war will come to an end. Americans aren’t uniformly feeling the pain of the tariffs yet. But a turning point is likely to come when the economy starts to lose steam.

If the trade war continues, it will compromise the international trading system, which relies on a global division of labor based on each country’s comparative advantage. Once that system becomes less dependable—when disrupted, for instance, by the boycotts and hostility of trade wars—countries will start decoupling from one another.

China and the United States are joined at the hip economically, each being the other’s biggest trading partner. Any attempt to decouple the two economies will bring catastrophic consequences for both, and for the world at large. Consumer prices will rise, world economic growth will slow, supply chains will be disrupted and laboriously duplicated on a global scale, and a digital divide—in technology, the Internet, and telecommunications—will vastly hamper innovation by limiting the horizons and ambitions of technology firms...