Trade
Why the United States and China need to end the trade war
Author: Ligang Song, ANU
The trade war between the United States and China has already lasted for more than a year leading many to think that both countries have entered into a prolonged and costly battle over trade. Yet, there are compelling reasons that call for the United States and China to end the trade war as soon as possible.
The US strategy of imposing tariffs on China is not an effective tool for dealing with the US–China bilateral trade imbalance which is fundamentally caused by structural domestic factors: excessive savings over investment and spending on part of the surplus country and excessive investment and spending on part the deficit country. Reducing the imbalance would require each country to make big structural adjustments. For China, the task would be to expand its imports and increase domestic consumption while for the United States it would be to reduce expenditure and increase savings.
Further, for the United States, tit-for-tat tariff policies will have highly distortionary effects on the production and consumption of the domestic economy. Revenues collected from the imposition of tariffs can somewhat offset the losses of American producers, but they cannot fully offset them. These losses are compounded when tariffs are imposed across all goods, including intermediate goods, as has been done by the United States administration.
The United States has fundamentally misunderstood the causes and consequences of its trade deficit with China without recognising that there has already been a global rebalancing in response to underlying structural problems that has been occurring since the global financial crisis.
As part of a global rebalancing, China’s exports-to-GDP ratio fell from 35 per cent in 2006 to about 17 per cent in 2018 and its consumption contribution to GDP rose to 76 per cent in 2018. The current account surplus in GDP has fallen from 11 per cent in 2007 to less than 1 per cent in 2018. Together with a rapidly aging population and falling savings ratios, this trend will continue towards more balanced trade.
If looked at from this perspective, the trade imbalance between the United States and China is a transitory rather than permanent phenomenon. Fighting over the trade imbalance through tit-for-tat tariff and non-tariff measures is simply inconsistent with the economic interests of both the United States and China.
While US expansionary fiscal and monetary policies worked for a period in 2018-19, growth has been easing towards the second quarter of this year and business confidence and investment are weakening. During the first half of 2019, imports from China to the United States also fell by 12 per cent and US exports to China fell by 19 per cent with the total value of bilateral trade falling by 14 per cent. The United States trade deficit actually increased by 10.4 per cent year-on-year in 2018 and in the first 6 months of 2019 the trade gap widened by a further 7.9 per cent.
Engaging in a trade war did not address the bilateral trade imbalance — it weakened domestic economic growth instead.
For China, much of what has been agreed in the bilateral trade negotiations is related to domestic reform such as market entry, technology transfer, intellectual property rights protection, SOE reform and private sector development. Despite concerns over the country’s ultimate alignment with the rules and spirit of the multilateral system, these reform measures together with China’s continued efforts to make up what was missing from its accession to the WTO in 2001 and its incremental process of transition can be viewed as a movement towards a more multilateral approach.
In this interconnected world, a country cannot thrive by isolating itself from international trade, capital flows and more advanced technologies — making the notion of a ‘decoupling’ of the world’s two major economies seemingly impossible. The simple truth is that the United States can’t thrive behind a high tariff wall and China can’t successfully restructure its model of growth and development without relying on global markets and technologies.
The economic growth rates of all major and emerging economies have already begun to decelerate and a world-wide economic slowdown is now a real possibility. The IMF lowered its forecasts for global growth in both 2019 and 2020. Ending the trade war is an urgent and important step towards restoring trade as an engine for growth and, depending on how it ends, it can be a beneficial outcome for both the United States and China as well as for the global…
Trade
Self-Reliance and Openness: Core Principles of China’s Third Plenary Session
The Third Plenum communique from the CCP indicates a prioritization of stability and compromise in response to China’s economic challenges. It highlights the concept of Chinese-style modernization and establishes political guidelines for balancing regulation and market forces.
The CCP’s Third Plenum communique signals a focus on stability and compromise in the face of China’s economic challenges. It emphasises Chinese-style modernisation and sets political directions for balancing regulation and market forces. While not as groundbreaking as previous plenums, it acknowledges the importance of market mechanisms and technological self-reliance, aiming to address issues like high youth unemployment and private sector uncertainty. The communique seeks to navigate the complexities of global competition and domestic innovation, potentially reshaping global supply chains and trade dynamics. Overall, it presents a pragmatic blueprint for China’s economic future.
Source : Self-reliance and openness central pillars of China’s Third Plenum | East Asia Forum
Trade
Trade Prevails Over Political Persuasions in China-Germany Relations
China and Germany maintain a strong bilateral relationship, rooted in economic cooperation despite ideological differences. Recent visits and agreements focus on expanding trade and addressing mutual concerns, navigating challenges while nurturing ties.
Evolving Bilateral Ties
China and Germany share a strong bilateral relationship, rooted in history since 1972. This connection has seen moments of cooperation intertwined with periods of tension. German Chancellor Olaf Scholz’s April 2024 visit underscores Germany’s commitment to fostering this partnership, reflecting a mutual interest in maintaining economic ties despite ideological differences.
Economic Pragmatism
As the second and third largest global economies, China and Germany’s economic interdependence is crucial. Germany emerged as China’s primary trading partner in 2023, with trade values reaching €254.4 billion (US$280 billion). In response to global scrutiny, Germany has taken a balanced approach, emphasizing economic stability over political discord. This was evident during Scholz’s prior visit in November 2022, where his diplomatic tone contrasted with broader EU sentiments.
Facing Challenges Together
Despite increasing public skepticism in Germany regarding China’s global influence and human rights issues, both nations continue to seek common ground. Their October 2023 Joint Statement highlights intentions to pursue cooperation in areas like carbon neutrality and open markets. To navigate these complex terrains, Germany can utilize its institutional frameworks to enhance dialogue, while also considering supply chain diversification to reduce dependency on China. The intertwining nature of their economies suggests that, despite challenges, both countries will continue to prioritize their substantial trade relations.
Source : Trade trumps political persuasions in China–Germany relations
Trade
Fixing fragmentation in the settlement of international trade disputes
Fragmentation in global trade due to the lack of development in multilateral trade rules at the WTO has led to an increase in FTAs. The Appellate Body impasse has further exacerbated fragmentation, requiring a multilateral approach for reform.
Fragmentation in Global Trade
Fragmentation in global trade is not new. With the slow development of multilateral trade rules at the World Trade Organization (WTO), governments have turned to free trade agreements (FTAs). As of 2023, almost 600 bilateral and regional trade agreements have been notified to the WTO, leading to growing fragmentation in trade rules, business activities, and international relations. But until recently, trade dispute settlements have predominantly remained within the WTO.
Challenges with WTO Dispute Settlement
The demise of the Appellate Body increased fragmentation in both the interpretation and enforcement of trade law. A small number of WTO Members created the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) as a temporary solution, but in its current form, it cannot properly address fragmentation. Since its creation in 2020, the MPIA has only attracted 26 parties, and its rulings have not been consistent with previous decisions made by the Appellate Body, rendering WTO case law increasingly fragmented.
The Path Forward for Global Trade
Maintaining the integrity and predictability of the global trading system while reducing fragmentation requires restoring the WTO’s authority. At the 12th WTO Ministerial Conference in 2022, governments agreed to re-establish a functional dispute settlement system by 2024. Reaching a consensus will be difficult, and negotiations will take time. A critical mass-based, open plurilateral approach provides a viable alternative way to reform the appellate mechanism, as WTO Members are committed to reforming the dispute settlement system.
Source : Fixing fragmentation in the settlement of international trade disputes
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