One of the messages that I keep telling my students is that economic globalization increases the chances of peace and prosperity for the world. I use the phrase “increases the chances” to underscore that while the risks are indeed reduced, they continue to exist, and we should do what we can to allay the risks further.
United States President Donald Trump, by his “reciprocal tariffs”, shocked the world into chaos. Stock prices around the world collapsed. Even US Treasury bond prices collapsed. Fears spread. Consumer confidence plunged. IPO applications stalled.
Americans suddenly realized that the reciprocal tariffs would effectively impede trade just as the COVID-19 pandemic did. When trade stops, even US manufacturing production, which the tariffs were supposed to help, also grinds to a halt.
In a highly globalized world, manufacturing supply chains become fragmented, with different countries participating in and contributing to different stages of production, in which they enjoy a comparative advantage. Generally, economically advanced countries will specialize in the upstream stages of production that carry the highest value-added content, such as product design, product testing, supply sourcing strategy, branding, and marketing, while other countries specialize in the rest stages. Final assembly is typically a downstream stage with very thin value-added. Still, because China is often the country that does the final assembly, exports of those products to the US are considered China’s exports. China naturally becomes the largest contributor to the US’ trade deficit.
Economists see production fragmentation as contributing to higher quality and lower prices for most goods, because specialization at each stage allows economies of scale and quality improvement that would not be possible if each country sourced all its supplies domestically. Obviously, these benefits come at a cost, which is a much higher risk of production disruption if the supply chain is broken when any country responsible for one or more stages fails to deliver. Because such a highly globalized world makes us depend on one another, the world should become more peaceful because we can ill afford any major wars. Shared human destiny is now a reality. The US simply cannot decouple from China.
Imagine if China and the US were to decouple totally. This would mean the latter would lose the vast and expanding Chinese market and forfeit the ability to source cheap products and industrial supplies from China. China would also miss out on the American market, as well as access to the US’ stock markets and supplies, from agricultural products and petroleum to drugs and aerospace and pharmaceutical products and chemicals. That is why we should work together and not against each other.
Then there is the lesson taught by the “Dutch disease”. Dutch disease refers to the loss of competitiveness of the manufacturing sector in the Netherlands after the discovery of the large Groningen natural gas field in 1959. Exports of natural gas boost the value of the Dutch currency and raise the wages of manufacturing workers, thus eroding the competitiveness of industrial products. The same mechanism works when any non-manufacturing activity does extremely well. Since New York is the top global financial center and a key exporter of financial and other services, the US dollar gains strength, pushing American wages higher relative to those of its competitors. This is why the US does not enjoy a comparative advantage in manufacturing, particularly downstream manufacturing. The US therefore has deficits in goods trade and surpluses in the services trade. Hong Kong is exactly in the same position. That is why the city’s manufacturing accounts for less than 1 percent of its GDP.
Hong Kong is trying to bring back some manufacturing but certainly not downstream production. Hong Kong’s Northern Metropolis project is intended to spearhead product innovation and product inventions. Hong Kong continues to operate as a tariff-free region. The US, as a country with a long history of embracing globalization and free trade — as demonstrated by its role from the Kennedy and Tokyo Rounds to the Uruguay Round concluded in 1994 that helped transform the General Agreement on Tariffs and Trade into the World Trade Organization — should honor its commitments made in the past and the rules-based international order.
In any case, as long as the US excels in finance and professional services and product inventions and innovations, it will never be able to bring back commercial manufacturing. There may, however, be a case for subsidizing some industries for strategic or national security reasons. For that reason, Trump may want to rebuild the US shipbuilding industry if he is contemplating a full-fledged war. I personally do not think any country would want to fight the US or its allies. China certainly would not. Which country would?
Although China’s political system differs from that of the US, the two countries do not for that reason cherish different values. We cherish the same values: equality of all before the law and respect for all regardless of race or background, freedom for all to self-actualize, peace and order in the world, and health, prosperity, and happiness for everyone. The Communist Party of China, just like any ruling party in any country is supposed to do, merely focuses on doing the best it can to serve the people of the country, hoping that the country will be respected as an equal member of the world community of nations.
The author is a former director of the Pan Sutong Shanghai-Hong Kong Economic Policy Research Institute, Lingnan University, and an adjunct professor, Education University of Hong Kong.
The views do not necessarily reflect those of China Daily.
