Will the U.S. Allow China To Cut Its Losses

SCMP: China should cut its losses in the trade war by conceding defeat to Donald Trump
This setback has caused heated discussions domestically. People in academia, think tanks and the finance industry are concerned about China’s policy directions, not only in its recent dealings with the US about trade but also the overall trend over the past few years. There are increasing voices that China’s gain from the reform and opening-up policies of the past 40 years were because China has become integrated into a global economic system run by the US and its allies.

It is inappropriate, or at least premature, to send signals, intentionally or not, that China is about to build a new system to replace the existing one. China is still far from prepared for an economic confrontation with the US because China is much more dependent on US demand than the other way round, and it would only hurt itself if it were to take a hardline stance. Instead, China should be more focused on its own development and reforming the domestic economy.

It is possible that there were miscalculations several months ago when Beijing came up with the strategy of tit-for-tat retaliation, either because it underestimated Trump’s determination on trade policies, or because it underestimated the Washington establishment’s rising anti-China sentiments. By now, everybody in Beijing should have figured out how tough the situation is. Thus, Beijing has started to change its strategy.
The first mistake China made was not reforming its economy. It delayed opening up for 10 to 20 years depending on how you date it (whether you think Zhu Rongji was ahead of his time or not). China played a double game of accepting access to foreign markets through the WTO, but did not fully reciprocate.

China failed to reform the domestic economy. After the stimulus effects ran out in 2011, China realized endless real estate and infrastructure investment funded by rampant credit growth was a model it needed to break away from, yet nothing was done. It is 2018 and the government is still struggling with this issue.

China should have allowed the renminbi to weaken in 2008. Perhaps it was noble to coordinate with other nations to avert a deeper recession/depression, but taking the lumps in 2008 would have cleared the deck for growth. The renminbi weakened again in 2011/2 and 2015/6, and each time China intervened. Capital controls keep tightening because China's currency is becoming weaker.

Finally, China failed to understand the U.S. political system and cultural dynamism. Granted, even many "experts" in the U.S. missed rising populism right into the evening of the Brexit vote and the U.S. presidential election, but there should have been a sense that the good times wouldn't last. Americans wouldn't allow the "looting" of their country forever. In some sense the U.S. is also to blame for China's mess because it allowed it go on for so long. Had the U.S. confronted China earlier, perhaps this all would have been averted.

Today, China is in a weak position. Its currency is stable because of strict capital controls, but it also hasn't been tested by fire yet. If the U.S. Dollar Index is heading through 100 and on to 120 or higher over the next 12 to 18 months, the renminbi could weaken to USDCNY 8 before considering any outflow pressure. The country says it will embark on an inflationary stimulus, but we don't know if capital will pour into infrastructure and real estate again.

On the other side, if the U.S. dollar cycles keep going, a U.S. dollar peak in the next 12 to 18 months won't be challenged until sometime in the late 2030s. By then its likely the global monetary system will have reformed or collapsed. We may never see a stronger U.S. dollar in the future.

Once the U.S. dollar peaks and starts moving lower, the global economy will enter a new expansion phase. If China can make it through the next couple of years, financial pressure will alleviate. If the U.S wants substantial reform and opening in China, now is the time to press for it.

Everyone who wants a confrontation with China, be it Trump supporters, economists, defense officials or international trade experts, worries that Trump will fold early in pursuit of an expedient, short-term political victory. His behavior until now, plus recent comments by Steve Bannon, point to a larger goal. If Trump accepts a Chinese-favorable deal in September or October with an eye on the midterm elections, China can cut its losses and breathe a sigh of relief.

Assuming Trump extracts some major concessions as part of a quick deal, a victory for China would be a politically managed reduction in the trade deficit. China will make political import decisions. The trade deficit won't be allowed to exceed some figure such as $150 billion and China will target American markets, as it has done with soybean farmers, such that a future president won't even dare to risk a trade war. It might make concessions on IP that involve sending billions to the U.S. (which would offset the trade deficit), but it might also continue violating IP rights. The current trade relationship will largely be intact, but China won't profit as much. It will gain 10 to 20 years of breathing room.

If instead Trump wants a significant change in the relationship between China and the United States, one where China either opens up or the Logic of Strategy becomes U.S. policy, then China will suffer much greater "losses" before this trade spat ends.

No comments:

Post a Comment