How a Trade Dispute Between China and the United States Might Evolve

The worsening trade dispute between China and the US was triggered by the Americans. Frictions appear to be increasingly difficult to keep under control. So far we have witnessed U.S President Donald Trump swing back and forth between threats and accommodation. We have seen the imposition of broad tariffs on imports of steel and aluminum from China，the US government's announcement of a 301 investigation into some $50 billion of Chinese products，and a suggestion that the U.S Department of Commerce should conduct an investigation into another US$100 billion of Chinese goods. Some of these measures have temporarily been taken off the table as the two sides sit down to discuss the dispute. China has warned it will respond in kind. But the reckless moves by the U.S have been made in disregard of multilateral rules. Moreover，a lack of communication and consultation has caused great public concern. Will the trade dispute between China and the US spread to investment，finance and other fields? Will there be greater obstacles to Sino-US relations and even the global economic recovery? These issues are addressed in the following discussion.

Moderator: Zhong Wei，deputy editor-in-chief of China Forex

Panelists: Shen Jianguang，managing director and chief of Mizuho Securities Asia Limited

Zhang Ming，chief economist of Ping An Securities and researcher at the Institute of World Economics and Politics of the Chinese Academy of Social Sciences

Zhong Wei: First，I'd like to welcome our two guests to this round table discussion. The trade dispute between China and the US has been worsening since late March of this year. We have already seen proposals such as US President Donald Trump's broad tariffs on imports of steel and aluminum，including products from China，and Trump’s suggestion that the US Department of Commerce should conduct an investigation into Chinese goods worth US$100 billion. It seems that the US has slipped further and further along on road of unilateral action. The US president has refused to communicate or negotiate，while China has made a powerful and rational response. What is your view of China's overall tariff level and the opening up of the market? What do you think is the root cause of the trade imbalance between China and the US? And what measures can be taken to ease this imbalance gradually?

Shen Jianguang: Since China's accession to the World Trade Organization (WTO)，the nation's tariff levels have been reduced continuously. The average tariff rate in China fell from 15.6% in 2000 to 9.8% in 2015，and this is lower than than the average level of the five BRICS countries (Brazil，Russia，India，China and South Africa). However，in addition to  customs duties，China's taxes overall are still high and these include  import consumption tax and value-added tax in addition to import duties. There also are various restrictions on foreign participation in the auto，finance and service sectors，however. This means there is still room for further market opening efforts.

At the Boao Forum for Asia，President Xi Jinping stated that it is necessary to further open up the financial and manufacturing sectors，particularly the automobile industry，in order to improve the investment environment. He added it was necessary to strengthen the protection of intellectual property rights，take the initiative to expand imports，reduce automobile tariffs，and accelerate the accession to the WTO Government Procurement Agreement.  Moreover，President Xi stressed that it is better to implement such measures sooner rather than later. Such an expansion of the opening up policy is equivalent to a second accession to the WTO as far as China is concerned.

In my opinion，the root cause of the trade imbalance between China and the United States involves complex structural issues. First，there is the structure of the US economy. With its twin annual deficits，that is the Federal budget deficit and the deficit on the current account，the US is a typical consumer-driven society. The contribution of consumption to gross domestic product in the US is as high as 80%. US import demand is higher than demand in other developed economies. Second，there is the structure of the global industrial chain. After China's accession to the WTO，the nation gradually became the world's factory. Half of China’s exports are processed by foreign-funded enterprises in China，and half of foreign investment is made by US companies. Third，the US dollar is an international currency. The trade deficit provides a supply of US dollars to the rest of the world as a monetary export. Demand for the US dollar is strong  and dollars return to the US under the capital account. Fourth，the US restricts its exports of high-tech products to China，and that holds down China’s imports from the US.

Zhang Ming: There are at least three reasons for the trade imbalance between China and the US. First，China’s domestic savings are higher than its domestic investment，while US domestic savings are lower than its domestic investment. This means that naturally China has a current account surplus，and the US has a current account deficit. In other words，Chinese residents are extending credits to US residents，making American consumption higher than current income.

Second，the two countries have different comparative advantages. For example，although China has a sustained trade surplus with the US，at the same time，China has a continuous service trade deficit with the US. This shows that China's manufacturing industry has relative advantages while the same is true for the US service sector. Third，the US put restrictions on the exports of high-tech products to China. In order to fundamentally reduce the trade imbalance between China and the US，China and the US need to reduce the domestic savings and investment gaps. China needs more consumer spending while Americans need to save more. The US also needs to control the government’s fiscal deficit. At the same time，the US government needs to relax its export restrictions on China in order to allow the Chinese government to step up imports of US products. In any case，there must be a certain degree of trade surplus or deficit between China and the US，and this is permissible within the framework of trade globalization.

Zhong Wei: In addition to trade，the US has imposed sanctions on ZTE，and people are worried that other Chinese information and communication companies may be affected in the future. This will hurt US chip makers to some extent. The US seems also seems to have doubts over the objectives of the ¡°Made in China 2025¡± program. Some people have suggested that there are ulterior motives behind the Sino-US trade dispute. There are suspicions that the US is trying to thwart China’s efforts to catch up with the US. What’s your view of China’s progress in the field of intellectual property protection? Would China be able to quickly improve its technology in aircraft engines，high-end chips and other areas of economic weakness solely through its own innovation?

Shen Jianguang: First，I very much agree with the point of view that there are ulterior motives behind this dispute. From the ZTE issue we can see that the US has undergone profound changes in its attitude towards China，especially with the targeting of a relatively high-tech company that has an advantage over the US. The US feels threatened by the rapid development of China over the past decade and its potential for further development. It can be seen that China has become a powerhouse in high-tech fields such as artificial intelligence，cloud technology，and the Internet of Things.

Second，we must adopt a dialectical perspective in viewing the protection of intellectual property rights. Although China has achieved rapid economic development over the past 30 years，it is still in a catch-up phase as far as technology is concerned. But things are changing. China has reached the forefront in some areas of science and technology. People are  aware that the protection of intellectual property rights is conducive to innovation and creativity. The current emphasis on the protection of intellectual property rights is both an external appeal and a demand for internal growth.

Of course，I hold the view that independent innovation can quickly fill the gap as far as China’s aircraft engines and high-end chips are concerned. I believe that independent innovation in high-precision areas is a lengthy process. Pushing for technological breakthroughs will lead to improvements in areas where China is still lagging. But we should not get carried away.  We should not be forced into overly hasty development as that could result in overcapacity in the mid- and low-end areas of technology.

Zhang Ming: If Sino-US trade frictions are limited to bilateral trade，the negative impact on t