Published: 23:33, June 3, 2024
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What happens if America and China agree to a truce?
By Ho Lok-sang

This is a presidential-election year in the United States, and the front-runners — Joe Biden and Donald Trump — are engaged in an intense competition to “fight” China. Both President Biden and Trump want to hike tariffs substantially and impose more sanctions to prevent China from accessing American technology. 

There is no need to decide who would beat China harder. The more interesting question is: What would happen if instead of tariffs and sanctions, the US becomes friendly to China and starts lowering tariffs, removing sanctions on Chinese products and companies, allowing exports of semiconductors and other currently prohibited goods to China, and promoting cultural exchanges and tourism?

Freer trade and improved relations between the world’s two largest economies would be great news for the troubled planet. The prospect for world peace would be brighter; inflation would come down; climate change would be better contained; the US’ interest rates and fiscal deficit would fall; America’s trade deficit and current account deficit would narrow; the US’ economy would avoid a recession. It would be a big boon to the business world and to Mother Earth.

Yes, this “too good to be true” scenario that would have been humanity’s blessing in the new millennium is still possible. What is there to prevent this from materializing?

Whether you call it “decoupling” or “de-risking”, soured America-China relations means less trade between the two countries

Fear that China will overtake the US and become the world’s largest economy? This fear is absurd. China has a much bigger population. In per-capita terms, America’s GDP will continue to be way above China’s. What is bad about China becoming richer and buying more goods from America, and from other countries too? Americans, in particular, would have access to many more cheap and high-quality Chinese goods, including products for retirees and children.

Fear that cheap goods will ruin America’s companies? Americans will lose jobs? According to the theory of comparative advantage, if there were to be free trade, a new equilibrium would come about. What will China gain if it just sells to America and buys nothing or very little from America? All countries export only in order to import.

The US’ huge trade deficit with China is very much due to China indirectly reexporting many other countries’ exports of intermediate goods to China. An online article puts it well: “Because the overwhelming majority of iPhones have their final assembly done in China, the value of their Swiss gyroscopes, Dutch motion chips, Japanese retina displays and American glassware gets assigned to the Chinese economy and booked as part of China’s exports to the US.” Another reason is that America prohibits the export of many products, with which it enjoys a comparative advantage — namely, goods produced with advanced American technology, especially semiconductors, to China.

America, it is widely believed, worries that if China were to have access to American technology, it would overtake America. China is compelled to have to achieve self-reliance. The country is now forced to commit vast resources to develop its indigenous chips industry. The recently launched “Big Fund III” amounts to $47.5 billion and represents the third round of injection of public funds (after the first two rounds at $21.8 billion and $29.08 billion respectively) for the development of the country’s semiconductor industry. On the American side, to replace the cash that chip producers are deprived of because they are forced to abandon the Chinese market, the US also spends big. Funds committed under the CHIPS Act are now estimated at $280 billion.

Economics teaches that free trade benefits all countries. Although trade makes us mutually dependent, we would all enjoy lower costs, and the odds of a major conflict between mutually dependent countries would be much reduced. Self-sufficient countries are more likely to engage in a confrontation, a scenario that discourages investment. America also faces bigger deficits, delays in upgrading its infrastructure, and possible cuts to social support and healthcare. Soured China-America relations benefit no one.

Whether you call it “decoupling” or “de-risking”, soured America-China relations means less trade between the two countries. But in manufacturing, the US cannot really ignore China because even as the US buys from other countries, the chances are that considerable Chinese value-added products would still be represented in the supply chain. Americans would just have to pay a higher price. Stephen Roach pointed out in his May 29 opinion column in the South China Morning Post that the latest round of Section 301 tariffs on Chinese goods is targeting electric vehicles, solar panels and batteries — “all sectors where the US has little comparative advantage”. Compared to manufacturing, America has been much more successful with its strategy of “financial decoupling” with China, which had led to very low valuations in all Chinese stock markets, including the Hong Kong stock market. Initial public offerings have therefore slowed down, adversely affecting Hong Kong as a global financial center and China’s economic growth. But slower growth for Hong Kong and for the Chinese mainland would not benefit the US. The mainland and Hong Kong would simply import less from the US.

Thanks to President Xi Jinping’s sharp foresight and strategic thinking, China launched the Belt and Road Initiative in 2013, and the Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area in 2019. The former has opened up more markets for China, so China has now made more friends. The latter is also particularly timely as a strategy for promoting the country’s further opening-up and advancing its innovation drive.

The author is director of the Pan Sutong Shanghai-Hong Kong Economic Policy Research Institute, Lingnan University.

The views do not necessarily reflect those of China Daily.