Stabilizing the US-China trade conflict
The recent imposition of tariffs on Chinese electric vehicles (EVs) by the United States, the European Union, and Canada highlights the West’s deepening wariness of China’s leading-edge technological progress. While both sides are locked in an escalating tit for tat, China and the United States can still find negotiation space for positive-sum outcomes which advance their economic and national security interests.
In the past, tariffs, coupled with the United States’ hegemonic heft, were enough to bring economic disputes to a resolution. The most notable example was the backlash to Japanese auto and steel imports in the 1980s. Within the span of five years, Japan acquiesced to US and European tariffs, agreed to joint ventures and technology transfer, voluntarily cut back auto exports (chart 1), and—most importantly—allowed the yen to appreciate significantly as part of the 1985 Plaza Accord.
Today, a multitude of export bans and tariffs have yet to force China to address the West’s concerns over its trade practices. Instead, Chinese leadership continues to expand the scope of critical technologies for exports, whether in EVs and batteries—where China has clear dominance—or in semiconductors—where it does not despite decades of investment.
From tariffs to export controls, the West’s measures have only sharpened China’s awareness that technology is fundamental to a great power’s sovereignty. China’s response to allegations of unfair trade practices has thus been combative. Its representatives have retorted that China’s record trade surplus (chart 2) is merely a byproduct of its comparative advantage and asserted that it is “offering Chinese wisdom and solutions to a common problem facing humankind.”
However, given China’s already advantageous position in global trade, Beijing’s adversarial approach may be counterproductive to its economic interests and standing in the world. China’s pivot to the “new quality productive forces” (chart 3a) has clearly paid off. However, an economic strategy that treats citizens as labor rather than consumers has led to rock-bottom household confidence (chart 2b) and subpar domestic economic growth.
By implementing policies that reboot confidence within China, the government can revive overall growth, generate more organic demand for imports, and alleviate some of the West’s concerns over widening trade imbalances.
Some argue that encouraging people to spend is ideologically inconsistent with Xi Jinping’s China. But the reality is that Chinese officials are now turning to policy options they once despised, as the latest indicators show worsening deflation and slowing manufacturing activity. A case in point is the People’s Bank of China’s quiet foray into debt monetization in August. The monetary policy is one widely adopted by developed countries, but historically rejected by top Chinese policymakers as one that risks inflating asset bubbles and endangering financial stability.
China need not look far for policies that are more philosophically palatable than monetizing its debt. Education subsidies and childcare support were provided to support households after the 2008 financial crisis. Similar measures to stimulate household spending would unlock some internal demand and appetite for imports. They would also be well-suited to an aging population with high ambitions for developing critical technologies.
The United States could also use a recalibration of strategy.
Just as China is locked in an uncompromising stance, American politicians from both parties have increasingly sought to fend off advanced Chinese technologies across the board. That seems to be the case even for technologies like EV batteries that may not pose the same level of national security threat as AI and semiconductors. In contrast, countries in Europe have adopted a more measured approach to trade restrictions, balancing between Chinese technology transfer and safeguarding national security more pragmatically.
In a similar vein, the United States could strategically loosen restrictions on selective Chinese technologies which, on balance, bolster America’s economic resilience. China has worked tirelessly for decades to acquire technologies to outpace the West. It is perfectly reasonable for the United States to do the same.
For example, the Inflation Reduction Act excludes EVs made with made-in-China battery components from qualifying for the full $7,500 tax credit—a requirement that very few EVs will meet when the rule is fully implemented in 2025. Similar restrictions on developing battery manufacturing through Chinese investments or joint ventures further complicate efforts to jumpstart US production capacity.
The United States set an ambitious goal of ensuring that EVs account for half of all new vehicle sales by 2030. Finding win-win outcomes with Chinese technologies increases the United States’ chance of achieving a goal, solidifying Washington’s global leadership.
Expanding the bargaining scope could also help stabilize the cycle of escalation between the United States and China. However tenuous de-escalation is, it should be a priority for both sides.
Upholding the liberal international order in a multipolar world increasingly requires strategic empathy with partners and adversaries alike. The United States and its allies no longer wield the kind of unparalleled dominance that facilitated straightforward solutions to Japan’s trade imbalances in the 1980s. Nevertheless, the United States can still demonstrate leadership by strategically integrating a rival’s technology for its own benefit. “Immature poets imitate, mature poets steal.” The great American poet T.S. Eliot’s wisdom remains relevant.
Andrea Wong is a macroeconomist with PGIM Fixed Income where she’s responsible for connecting the dots between global macro trends and analyzing their impact on asset prices.
At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.
Further reading
Thu, Aug 22, 2024
Why the next trade war with China may look very different from the last one
Sinographs By Mrugank Bhusari
Far more countries share concerns over the impact of an expansion of Chinese exports. This time, they will likely target finished consumer goods over intermediary inputs.
Mon, Dec 11, 2023
China’s manufacturing overcapacity threatens global green goods trade
Econographics By Niels Graham
Chinese lending is exacerbating a growing glut in its green manufacturing sector. Beijing is increasingly looking abroad to absorb excess capacity. This may have devastating effects for the global trading system as economies move to protect their own domestic industry.
Image: Stacks of carton boxes having national flags of the USA and China. Illustration of the trade war, import tariffs and extreme protectionism