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2018.10.15

China must avoid a US-China trade war -Japan can play a major role in improving US-China relations with Prime Minister Abe taking the lead in this situation -

An article published in July 18, 2018

  • Kiyoyuki SEGUCHI
  • Research Director
    Kiyoyuki SEGUCHI
  • [Expertise]
    Chinese Economy and Relations among Japan/China and the United States
1. Can China avoid a US-China trade war?

On July 6, the administration of Donald Trump in the United States announced that it would be raising tariffs on goods equal to 34 billion dollars in imports from China.

This is the first round of a hiking of tariffs on the equivalent of 50 billion dollars in goods that was announced on June 15. In response to this, the Chinese government immediately announced that it would adopt retaliatory measures by raising tariffs on the equivalent of 34 billion dollars worth of imports from the United States.

Following this, on July 10 the Trump administration announced that it would further raise tariffs on 200 billion dollars worth of imports from China, increasing the risk that the United States and China would fall into tit-for-tat retaliation.

In response to the outrageous trade sanctions by the United States, which are seen as a violation of World Trade Organization (WTO) rules, the Chinese government should have waited for the situation to calm down without adopting a hardline stance via similar measures.

Of course, when you take the domestic politics in China into consideration, adopting a conciliatory response to the US government under the current conditions carries enormous risk. The reason for this is because the government would be subject to criticism for engaging in weak-kneed diplomacy towards the United States.

Yet even so, China should have stayed its hand and refrained from retaliating in order to prevent the United States and China from plunging into a trade war. The advantages to China of avoiding a trade war include the three points listed below.



2. The advantages to China of avoiding a trade war

(1) Criticism from within the United States


First, 60% of the exports to the United States from China are exports from foreign firms, with the majority of these being US companies.

Therefore, if the US government were to raise tariffs on imports from China, even if the Chinese government were to do nothing it would still inflict massive damage on US companies and the US economy.

The Trump administration's measures of raising tariffs have already been subject to harsh criticism from the industrial world and others within the United States. This criticism would only grow increasingly severe once the damage suffered by the industrial world began to find its way to the lives of the public at large in the future.

If such conditions were to persist, then there is a good possibility that the Trump administration itself would be forced to reassess its sanctions against China due to pressure from within the United States.

Conversely, if China retaliates to every round of sanctions, this could conceivably lead to a wellspring of nationalistic sentiment that is opposed to China bubbling up among certain segments of the US populace. This would play directly into President Trump's hands.


(2) It is more important that China give priority to promoting structural reforms


Second, China is currently promoting the following three important structural reforms in the country.

These include: preventing financial risks, overcoming poverty, and preventing environmental pollution.

Since each of these reforms contain unsparing details that would entail pain on the part of vested interests such as local governments, financial institutions, corporations, and the wealthy, they are subject to powerful opposition from all quarters within China.

Both the political clout and securing economic stability for the time being are extremely important conditions to decisively act on these reforms by tamping down this opposition.

Supposing that a US-China trade war were to shift into high gear and Chinese exports were to suffer serious harm, then China would be forced to give priority to ensuring macroeconomic stability and the country would lose the leeway it has for boldly promoting structural reforms. Therefore, if this trade war grows in intensity then it could fatally wound China's efforts to promote reforms.

Every year, China holds its Central Economic Work Conference in December and its National People's Congress later on in March, where it adopts policies spanning the fiscal year in question as key challenges in cases where policy goals have been set for the year.

However, the key challenges for this year are not one-year targets, but rather structural reform targets that the country is aiming to achieve over the three-year period lasting up through 2020. When viewed in terms of the manner in which these targets were set, this clearly reveals the extent to which the Chinese government is emphasizing these three policies.

Achieving these key challenges is considered to be a major prerequisite for attaining the "moderately prosperous society" that the Xi Jinping administration is aiming to achieve by 2020.

Should Xi Jinping administration fail to attain these three important targets in a manner that is plainly obvious to anyone watching, then confidence in the administration will be shaken and this could potentially endanger President Xi Jinping's seeking of a third term when his second term of office comes to an end in 2022.

When you consider this point, aggravating its trade war with the United States is not a viable option for present-day China, which is facing a crucial stage when it comes to achieving its structural reforms.


(3) Preventing China's isolation among the international community


Third, it has recently been pointed out that China's efforts to improve its policy of forced transfers of technology targeting foreign companies and its protections for intellectual property rights have been inadequate, for which it has received harsh criticism from Western countries.

These issues have served as the backdrop for the hardening of anti-Chinese sentiment over the past two to three years among the Western business community. In particular, there has been a sudden drop off in direct investment in China from Germany, which had previously been the most enthusiastic about doing business with the country.

If both the United States and China were to engage in tit-for-tat retaliation by raising tariffs on one another under such conditions, this could potentially worsen China's relations with the United States. Not only that, but it also carries the possibility of strengthening moves by European countries to distance themselves from China.

The United States' protectionist policies have received harsh condemnation from European countries, Canada, and others, leaving the United States isolated at the last G7 meeting.

If China were to adhere to a position of defending free trade without getting swept up by the United States' provocations, and were to persist with a calm and composed response in a manner that respects the WTO's rules, then countries other than the United States would surely appraise China favorably for such an approach.

If it did this, then China, which is growing increasingly isolated over the issue of technology transfers, could expect to see results involving some measure of improvement in its standing.



3. King Zhou of Shang and President Trump

The exemplary Chinese classic the Book of Documents contains the story of how King Zhou of Shang caused great suffering for his people through misrule, and how the father and son duo of King Wen and King Wu of Zhou stood up in defiance against him. I cannot help but think that this incident is indicative of the course of action that China should take to navigate its current crisis.

King Zhou of Shang dismissed the government's loyal subjects and upstanding ministers and appointed retainers who were sycophantic to King Zhou to important posts, causing great suffering to the people of the Shang Dynasty due to the persistence of his atrocious rule.

Between February and March of this year, one after another President Trump forced out or accepted the resignations of people who had barely been preventing him from devolving into misrule since the inauguration of his administration, including White House Staff Secretary Robert Porter, Director of the National Economic Council Gary Cohn, Secretary of State Rex Tillerson, and Assistant to the President for National Security Affairs Herbert Raymond (H.R.) McMaster. As they left, President Trump began to pursue his protectionist policies.

His administration is similar to that of King Zhou of Shang in that he has dismissed loyal subjects and upstanding ministers and begun to engage in misrule.

In response to this, the father and son duo of King Wen and King Wu of Zhou governed their country by means of virtuous governance. They were ultimately able to put down King Zhou of Shang along with their neighboring country under a state of affairs in which the populace of the Shang Dynasty themselves were wishing for an end to King Zhou's misrule by drawing upon this popular sentiment.

One point that is important to note here is that King Wen and King Wu of Zhou did not employ the same means of misrule that King Zhou did.

If both the United States and China escalate this tit-for-tat retaliation by hiking tariffs on one another, then China's response can no longer be deemed an act grounded in virtuous governance.

The lesson from this Chinese classic literature is that the vicious road of a tyrannical despot must be countered by royal road.

Under the current political climate, choosing to tread the royal road by protecting free trade is an extremely difficult option, because it carries with it the enormous risk that China's leaders will be criticized at home for engaging in weak-kneed diplomacy. Yet precisely because the leaders find themselves in such trying circumstances, it is important that they take a back-to-basics approach to politics.



4. The role Japan should play

If the US-China trade war were to gather momentum the Chinese economy would slow down, and the Japanese companies that finally began to get serious about doing business with China last year would suffer a major blow.

Not only that, but if structural problems and risks materialized and gave rise to long-term instability for the Chinese economy as a result of postponing structural reforms to the country's economy, then the Japanese economy would also suffer a serious blow.

In other words, a trade war between the US and China would not be some far-off problem that does not concern Japan, but would be directly linked with the issue of maintaining the stability of the Japanese economy itself.

If the Chinese government adopts a policy of fully throwing itself into escalating its tit-for-tat retaliation of raising tariffs with the Trump administration in the United States, then it would be hard for Japan to intervene.

However, if the Chinese government were to give serious consideration to how to avoid having this trade war grow in severity in aiming to improve its relations with the US government, then the Japanese government can play a major role in this.

Within the US government, the Chinese government only has relations with Secretary of the Treasury Mnuchin that would allow it to engage in constructive discussions. But it is said that they would be hard-pressed to hold constructive discussions with some of the other cabinet members who are anti-Chinese hardliners.

It is believed that the relationship of trust between President Xi Jinping and President Trump has grown weaker than it was before, particularly with regards to the issue of North Korea. The fear is that if the two were to escalate this tit-for-tat retaliation, then it would be even harder for them to secure a positive relationship.

Amidst such conditions, a global consensus has formed that Prime Minister Shinzo Abe is the head of state who is closest to President Trump. In terms of Japan-China relations up through last year, there was virtually nothing in the way of diplomatic cooperation between the two countries. But this year has seen a rapid improvement in Japan-China relations.

If China were to seek out an opening for dialogue with the United States through Japan under such circumstances, then there is presumably a strong possibility that Japan, led by Prime Minister Abe, could play the part of a mediator for fostering communication and restoring mutual understanding and trust between the two countries.

This would have enormous significance in terms of checking this global drift towards trade protectionism, primarily among the two countries of the United States and China.

Following World War II, the United States asked that European countries lower their trade tariffs against imports from Japan, and lowered its own trade tariffs and granted the benefits of this to Europe as a form of compensation for this. It also lowered its own tariffs against Japan, thus promoting free trade.

Thanks in part to this self-sacrificing support from the United States, Japan was able to achieve its post-war recovery, which allowed the Japanese economy to achieve a miraculous recovery.

Japan had little in the way of leeway for contributing to the United States at the time, as the US economy was thriving back then.

However, in the United States of today, traditional industries are in decline and industrial regions that used to be rife with heavy industries are seeing a worsening of public order backed by unemployment and poverty, which have come to pose serious social problems. Now Japan has an opportunity to serve as an ally to the United States and pay the country back for its past kindness.

By having Japanese companies partner with US companies, the technical prowess of the Japanese companies could be used to revitalize the traditional industries in the United States and create employment. In order to boost the effectiveness of such investments, the industrial foundations must be strengthened by means of improving the infrastructure in these regions.

Therefore, Japan should take the lead in offering assistance for improving the infrastructure in the United States with cooperation from China, thereby restoring the industrial foundations for traditional industries in the country.

This is less a form of economic policy and more a form of security policy. While the economic advantages for Japanese companies would not be all that significant in the short-term, promoting the rehabilitation of the US economy and encouraging an improvement in relations between the United States and China are both crucially important for Japan's continued viability.

In this current difficult situation, Japan can play a major role for the stability of the global community, just like the United States once went above and beyond its own national interests to contribute to the global economy in the post-war era.


(This article was translated from the Japanese transcript of Mr. Seguchi's column published by JBpress on July 18, 2018.)

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