By Wan Zhe Source: China Daily Published: 2019-8-27
Root cause of the trade war lies in the discomfort caused by the structural adjustment of China and the US.
Behind the Sino-US trade dispute is the contest between the structural transformation between the two countries. The root cause of the trade friction lies in the discomfort caused by the two countries' structural adjustment.
The United States has a long-term containment strategy for China. The "purchase of American goods" clause, which was highly protective in nature, was introduced by the previous administration, which then began to raise "trade sanctions" against China and accused it of manipulating the yuan's exchange rate to gain an unfair advantage in trade. The current US administration has adopted a more direct approach by declaring a trade war and has sought to gain the support of people at the bottom of society.
Of course, the most fundamental problem for the US lies in its internal structure, namely the growing gap between the rich and the poor. For half a century, the richest 0.1 percent of the population in the US has owned 20 percent of the wealth of the whole of society, and the second richest 9.9 percent own 60 percent of the wealth. If you were in the middle-income group and you wanted to work hard to reach the top 10 percent, you would need to double your wealth 25 times in 2016, up from 5 times in 1963. For ordinary people, upward social mobility has become more and more difficult. As a result an increasing number of people seek a change to the status quo. The previous administration's most popular campaign slogan was "Yes, we can (change)", yet substantive reform measures were always hindered. Those desperate for change have thus pinned their hopes on the seemingly more radical approach of the current administration.
But the root cause of the wealth gap in the US is the constantly expanding gap between capital gains and labor gains. Even though the administration introduced tax cuts soon after taking office to gain support from the people at the bottom of society, it has not fundamentally solved this problem. Instead, the current administration has blamed the growing wealth gap in the US on other countries, inciting the masses to believe that overseas markets such as China, are robbing US workers of their jobs and depriving US companies of their profits.
This is a false proposition. US data shows that 86 percent of the country's population is employed in the service sector. Even if there is a return of manufacturing jobs, the United States does not have enough skilled workers. In addition, the US blue-collar wages are generally higher than in China. So the return of manufacturing would increase the companies' costs.
In the face of the unilateral trade war initiated by the US, how can China respond?
This is a contest of structural transformation. And China is carrying out structural reforms to seize the opportunities of structural transformation.
First, China is constantly pushing forward supply-side structural reforms. The policies of capacity reduction, destocking, deleveraging, cost reduction and improving underdeveloped areas and the policies to eliminate ineffective supply, are fostering new growth drivers and reducing the cost of developing the real economy. Supply-side structural reform has brought about significant changes in the supply-demand relationship of key industries, optimization of the economic structure, improvement of economic efficiency, and a decline in systemic risks. In 2018, due to changes in the international environment, the downward pressure on China's economy continued to increase. Despite this, economic growth has been maintained at a reasonable range of more than 6 percent.
Second, China is speeding up its pace of opening-up to the outside world. The 2019 edition of the negative lists for foreign investment, which were implemented on July 30, has 40 clauses instead of the previous list's 48, with new opening-up measures introduced in a series of areas. Eleven financial industry opening measures have been implemented, including allowing foreign institutions to carry out credit rating business for all types of bonds in the interbank bond market and exchange bond market in China, encouraging foreign financial institutions to participate in the establishment and investment of the financing subsidiary of commercial banks. The market-oriented reform of exchange rates and interest rates has been further advanced. The overall plan for the Lingang New Area of the China (Shanghai) Pilot Free Trade Zone has clarified that it should be a special economic function zone with international market influence and competitiveness, focusing on investment freedom, trade freedom, capital freedom, freedom of transport and freedom of personnel. While recently issued guidance on supporting Shenzhen as a pilot demonstration area for socialism with Chinese characteristics clearly proposes building Shenzhen into a high-quality development highland, a model rule of law city, a benchmark for people's quality of life and a pioneer of sustainable development. It means that the pace of reform and opening-up is accelerating.
Third, China advocates building a global community with a shared future, and is constantly committed to maintaining multilateral trade.
China has fully realized that while grasping the international trend, we should focus on self-improvement. The strength of the US, the rise of China, and the prosperity of the global economy, are the result of the business environment of each country in the global market. A good business environment is not limited to the business world. There must also be a good talent development mechanism to attract and retain talents. This is why the US was able to achieve prosperity in the past. At present, China's market-oriented reforms, including the proposal to build a better business environment, are constantly improving its market attractiveness. And China will continue to make efforts to enhance its long-term attractiveness.
The Sino-US trade war, in the short term, will be painful for both the US and China. China fully understands this. But it is working hard to survive the short-term pain and embrace the long-term benefits. After all, whoever wins this structural transformation, wins the future.
The author is a visiting fellow of Chongyang Institute for Financial Studies at Renmin University of China.