Most foreigners in China are losers

Interview - trade dispute: why China can't do much against the US

Trade dispute: why China can't do much against the US

There is great uncertainty in China about the escalating trade conflict. This is what the Chinese economist Zhang Jun says. He advises the government not to let the situation escalate.

Mr. Zhang, how dangerous is the trade conflict with the US for China?

The damage caused by the punitive tariffs levied so far is limited. But Donald Trump has already made it clear that he is not satisfied with the measures taken so far and has announced further punitive tariffs. Then it could get bitter. China is now the second largest economy in the world. Trade with the USA in particular has brought China ahead enormously and is still important for further economic development. A trade war between the two largest economies in the world causes considerable damage in every respect: for China, for the USA, for the whole world.

China asserts that the country is well prepared for a trade dispute.

No, I do not share this assessment. The trade conflict is already causing enormous uncertainty among Chinese companies. You can no longer estimate what to expect in the next few months. The trust is gone. Even the government no longer dares to predict how and whether this conflict can be resolved at all. China currently exports $ 508 billion worth of goods to the United States annually. That is a very large chunk.

What is China's strategy?

The Chinese government has imposed counter-tariffs. But that won't work in the next round. China cannot impose as many punitive tariffs on US goods as the other way around. Because China doesn't import that much from the USA. Beijing has now announced measures both “quantitative and qualitative”. What the Chinese government very likely means by this: There are many US companies that are active in China and have invested a lot. It could then hit them directly.

Could China devalue its currency, the renminbi, and thus ensure that exports remain cheap?

That is no longer so easily possible - not even for the Chinese leadership. The renminbi is no longer just pegged to the dollar. The value is based on a shopping cart for a whole range of currencies. It is much more determined by the market. If the renminbi is valued a little weaker, as it is currently, this has to do with the uncertainties in the wake of the trade dispute. A weak renminbi is not in Beijing's interest. Because that would mean that capital flows out and foreigners invest less in China. We are already seeing the first signs of this.

China is the largest believer in the United States. Couldn't the Chinese just turn off the money to Trump?

It's not that easy. Selling even a small portion would depress the price of the bonds. And since other creditors would also be affected, they might also sell. The result: It could lead to a downward spiral. China would have harmed itself. In fact, the Chinese government has been in the process of reducing this interdependence for a number of years and is buying fewer US Treasuries than in the past. China wants to diversify its foreign exchange reserves more. But she can only do this slowly and carefully. Selling US Treasuries too quickly could trigger a global financial crisis.

Then what could China do?

China is indeed on the defensive and cannot do that much against the powerful US. This also explains why the government has so far been conciliatory and has tried to be accommodating. But we shouldn't forget: Trump's trade war is by no means directed only against China, but against all major economies in the world, not least against Europe. Therefore, China should join forces with the other countries.

Europe also accuses China of unfair trade practices.

Personally, I have long been of the opinion that China should no longer seal off its markets so tightly, but rather open them up more to foreign companies. I also consider the forced technology transfer to be wrong. The corporations should come to China and be able to decide for themselves which technologies they share with the Chinese and which not. But it is precisely this required market opening that is now taking place. The compulsory joint venture has been lifted, as have the restrictions on banks and insurance companies from abroad. China is doing its homework.

So Trump has definitely initiated something positive?

The Chinese government came to this conclusion even before Trump. The People's Republic has long since reached a stage of development in which it is only beneficial if there is more competition for Chinese companies in the domestic market as well. That promotes innovation. In addition, China needs more foreign knowledge and experience, especially in the service sector. It is time for another opening.

Could this knowledge help resolve the dispute?

From Trump's point of view, it comes too late. He seems to be betting on escalation. So the next two months should be difficult. It is all the more important that China does not take overly drastic countermeasures and keeps an eye on the effects on world trade. It's not an easy task. Only: trade wars do not have winners, only losers. China should therefore continue to use every opportunity to keep in touch with Washington.

Zhang Jun (55) is the director of the China Center for Economic Studies and dean of the Fudan University Economic Institute in Shanghai.