China / USA: Against a Backdrop of a Trade War, a Technological Rivalry
By Ghazi Ben Ahmed, published in 1er, juillet 2019
Commercial Cold War and / or Technological Rivalries?
In a changing world, undergoing the turmoil of the 2008 financial crisis, the vacuum created by Brexit and the election of Donald Trump and his protectionist and isolationist threats, the world discovered in 2017, with amazement in Xi Jinping, the new champion of multilateralism. Taking advantage of the climate of generalized uncertainty, during his speech at the opening of the World Economic Forum in Davos, the Chinese president posed as leader of an open and connected world, comparing the global economy to a big ocean that you can’t escape from”. “ Any attempt to cut off the flow of capital, technologies, products, industries and people between economies, and channel the waters in the ocean back into isolated lakes and creeks is simply not possible. Indeed, it runs counter to the historical trend, causing thunderous applause across the room. These words will confirm what he said several months earlier in his inaugural speech at the G20 summit in Hangzhou, in eastern China, where he called for an open global economy that favors the growth of commerce and investments.
Since then, the escalation of tensions between the United States and China seems endless, almost every day, both countries pose new threats of retaliation. The world holds its breath and wonders about the real reasons for these tensions, rebalancing trade, technological rivalries ... What to do? It should be noted that these tensions with the United States can benefit Africa in terms of negotiations, as China is looking for more reliable and consistent partners than the United States. This is more tempting as China is becoming the world's largest market. All Chinese politics are consumer-oriented. It is a huge market for consumer products and agrifood products.
Towards a rebalancing of the exchanges?
The tariffs escalation initiated by the Trump administration in January 2018 is very intense and continues to be widely reported around the world.
The deeper reasons are probably to be found in the economic situation of the United States, marked by the explosion of economic and territorial inequalities for several decades, and the inability of successive governments to cope with a growing malaise. Indeed, the bottom 90% of the American population have seen their incomes stagnate over the last 25 years. 43 million Americans are officially listed as poor and live food aids (coupons) and life expectancy is decreasing in the United States. Only the most privileged 1% have improved their situation. This trend is becoming widespread and taking alarming global proportions. Thus, eight men hold as much wealth as the 3.6 billion people who represent the poorest half of humanity, according to a report published by Oxfam on the occasion of the meeting in Davos.
Quite logically, Donald Trump's warlike arguments and his raw language have seduced America from below, which is worried about unemployment, relocations, the state of infrastructure, immigration ... A feeling of anger exacerbated since crisis of 2008, and who considers, rightly or wrongly, that the federal power in Washington only cares about finance and Wall Street. The new president of the United States was wishing to restore customs barriers, review trade treaties, tax imports and penalize countries that regularly devalue their currency; by simply putting the United States at the center of its America First mandate.
The temptation to reintroduce tariffs and other barriers to protect domestic firms and jobs in the face of a US trade balance (for goods) that is regularly in deficit with the rest of the world (more than $ 800 billion in 2016) is not new to politicians. The fact that Trump actually carries out his threats, after being elected, causes trouble and could very quickly lead to a real global trade war, with disastrous consequences both for the United States and the rest of the world.
President Trump's protectionist stance is therefore clearly counter-productive and, moreover, unsustainable in the long run, as it runs up against the need for the US to resort to foreign savings as well as trade deficits. Joseph Stiglitz, to name just a few, eloquently recalls how the economy works: The trade deficit, by definition, is equal to capital inflows. All this is also equal to the difference between domestic savings and domestic investments. As Donald Trump wants to lower taxes and increase spending, the public deficit will increase, so national savings will decrease. For that to be possible, it will be necessary to borrow money abroad, so the trade deficit will have to increase. As a result, the dollar will appreciate, which will make the United States less competitive and directly affect the populations that Donald Trump says he is defending.
It is useful to recall two basic truths about international trade. The first is that the real gain from international trade is the imports it allows, and that exports are the price to pay for that gain.
The second truth is that it is the macroeconomic reasons that explain the imbalance of the trade balance and not the reasons related to international trade. It can easily be illustrated by simple analysis. In an open economy, the value added produced Y is equal to the goods consumed by the households C plus the goods used for investment purposes I plus the exports X minus the imports M. We can therefore write this equality as follows: Y = C + I + (X - M) where (X -M) is the country's trade balance. If we define the savings S as the difference between the value added produced and consumed S = Y - Calors we obtain S - I = X - M. This relation shows that the imbalance of the trade balance in the short term is only the result of the imbalance between savings and investment and therefore the result of internal macroeconomic variables.
It is understandable that the use of tariffs or other restrictive measures is not appropriate to restore balance of trade balance. President Trump's protectionist stance is therefore clearly counter-productive and, moreover, unsustainable in the long run, as it runs up against the need for the United States to resort to foreign savings as well as trade deficits.
This suggests that economic rebalancing may not be the primary reason behind these tensions and this new escalation of the cold war.
Technological rivalry?
To the political dimension, described above, which sees for a number of years, a reaction more and more hostile to globalization and multilateralism on the part of a population that feels excluded, adds a technical dimension, associated with the exacerbation of competition, especially with the rise of China, the workshop of the world, since its accession to the WTO.
Indeed, its accession to the WTO in 2001 is a milestone to understand the changes in the global economy over the past eighteen years. For some, China's entry into the WTO is more important than the creation of the WTO itself.
In the last fifteen years, China has become the second largest economy in the world after the United States (its GDP has increased eight folds), the world's largest exporter (ahead of Germany since 2010) and the largest holder of foreign exchange reserves. Many Chinese companies are now major players, and foreign buyouts are now in the headlines.
By becoming a major market power, China has changed the global situation, and this, it must be emphasized, without contravening the rules of the WTO, as testified by Pascal Lamy, former Director-General of the WTO, at the XXI Forum of the Maghreb Economist in Tunis, 2-3 May 2019: The opening of China was done in fair conditions. It is incorrect to claim that China is violating the rules of international trade. This is an impression that made multilateralism unjust at the national level, unfair at the international level. However, several countries have expressed their desire to reform the WTO rules, particularly with regard to state industrial subsidies and state control of enterprises in order to promote more equitable conditions of competition. Public funds are often unavoidable when it comes to developing a new strategic activity. This was particularly the case for Silicon Valley which, since its inception, has woven and maintained close ties with the defense sector and the US government.
Pascal Lamy also adds a systemic dimension to the extent that we have entered a phase of rivalry and relations between the United States and China much more strained than in the past. This tension is fueled by Donald Trump's protectionist measures, which is an evolution of the American position, and is perceived as unjust and arbitrary by China.
There was already a precedent with the Multifibre Agreement. While China pledged to implement all WTO agreements, when it joined, the EU would postpone the opening of its textile market to Chinese products, in contravention of the Agreement on Textiles and Clothing, which planned the total lifting of import quotas on 1 January 2005 for all WTO members. Sharp negotiations had begun in 2013, to convince the Chinese side to limit its volume of textile imports on the European market after the end of quotas. The Chinese had retorted that they needed to sell clothes on the European market in order to buy airbus, and that Europeans could not win on all fronts
In vain, the EU will impose an agreement that allowed it to control and, if necessary, limit imports of 12 categories of textile products for the years 2005-2007. The Chinese learned the lesson, quickly realized that it was necessary to go into high-end market and leave the T-shirts to others. Less than 3 years later, the first COMAC aircraft manufacturing plant was created. Officially, the Chinese skies should see the first Made in China medium-haul in 2021 with the first deliveries of the C919, a medium-haul designed to carry up to 168 passengers over 5,500 kilometers, and which will compete with the A320 range. China will very soon become the world's largest aviation market. But the business opportunity is almost secondary. The C919 project, nicknamed the big Chinese plane, is a symbol of the technological emergence of the country, despite the constraints.
A few years later, history is repeated and another champion of liberalism tries to slow down the emergence of China, this time on the mobile phone and 5G. China's Huawei was placed on a blacklist in the United States on May 16, preventing it from sourcing from American manufacturers, a decision that led to the defection of some of its suppliers and disrupted the entire technology sector. The reason given is that Beijing could use Huawei for espionage purposes, suspicions denied by the world's leading equipment manufacturer on many occasions.
After the USA, Australia and New Zealand have decided to exclude Huawei from their fifth-generation mobile networks, which are currently being rolled out, while in Europe there is still some hesitation on the way forward. This will certainly be one of the hot issues for the next European Commission, which should be operational by the end of 2019. Indeed, Europe and the United States are overwhelmed by cyclical arguments such as military spending, transatlantic trade imbalances, the Iran nuclear deal ....
For this, as Julianne Smith states in a recent article on the New York Times (June 12, 2019), If Trump wants to attack China, he needs allies. Trump administration officials have made little effort to inform their allies of their policy in China or to propose a unified transatlantic strategy. And she concludes that Europeans are tired of receiving Trump's American orders, which makes them more likely to ignore US guidelines on topics like Huawei. Europe will certainly want to assess this delicate issue from the perspective of possible economic benefits. A report by the GSM Association, the leading association of mobile phone professionals (800 operators and industrialists), indicates that Europe is likely to pay a high price for a possible sidelining of Huawei and ZTE. It reads: The exclusion of Chinese equipment for 5G networks would have far-reaching consequences for the deployment of 5G in Europe and for the wider economic benefits associated with this technology for citizens and businesses in Europe. It could cost operators 55 billion euros and delays 18 months in the deployment compared to the planned schedule. A bill of 55 billion for operators therefore, would add a loss of productivity that would amount to about 15 billion euros by 2025 and 45 billion by 2034.
China will react, as it has done before, whenever it is cornered. It will further increase the research and development budget, and will develop national technologies (without cooperating with US researchers and institutions) that will directly compete (and supplant) US companies like Google in the long term, with an incidental Internet split into two between China and the United States. US universities will no longer attract the brightest students and researchers in China. The benefits of new technologies developed without the input of the United States will no longer be shared with them.
We can’t help wondering if we are on the eve of a paradigm shift, where we would witness the end of globalization.
For a renewed multilateralism
Pascal Lamy's answer is enlightening. As much as I believe that the superstructures of globalization will continue to be demonized, the infrastructure of globalization, which has allowed this considerable commercial interpenetration, will resist. There will be, to a certain extent, bits of globalization everywhere, systems of globalization applied to a certain number of sectors. But I do not believe in the end of globalization.
However, it is undeniable that we are witnessing a geopolitical readjustment against the background of a commercial battle and a technological race. China will play a larger role and the United States will play a smaller role than before in global and regional governance. The United States apprehends their loss of status. Hence the tensions between the two are not about to subside.
The Russian President, Vladimir Putin, announced in one of his speeches, the next issue of the domination of the globe is technology. He said that artificial intelligence would bring colossal opportunities and threats difficult to predict today, before going on, to galvanize young Russia, that whoever will become the leader of this sphere will be the one who will dominate the world .
Artificial intelligence could eventually enable the Chinese to better control the economy than the capitalist market and its invisible hand.
There is reason to be seriously concerned, especially as history shows that in periods when an established world power is challenged by a rising power, geopolitical tensions tend to be exacerbated.
In the fifth century before Christ, Sparta, the powerful Greek city, had to face the rich and commercial Athens, whose emergence she feared. Although Sparta and Athens belonged to the same Hellenic world, they incarnated two irreconcilable visions of the world and of politics, which did not favor their understanding. Today, the impetuosity of China and its technological and commercial successes disturb the United States strongly, and worry it. Rivalry is coupled with a real clash of cultures.
Traditionally, China is not a bellicose power. Throughout its history, China has never waged war outside the country, and is not trying to spread her model, despite what her detractors say. China obviously defends its interests, but its goal is not to repaint the world with its colors.
The worst scenario for China would be to see the United States, the European Union and Japan form a coalition to contain China commercially. Trade agreements have been concluded with Canada, Mexico and South Korea, and negotiations have begun with Japan and the European Union.
On November 30, 2018, at the 13th G20 Summit in Buenos Aires, Argentina, President Xi Jinping emphasized that the G20 should adhere to principles of open cooperation, partnership, innovation and mutual benefits, and demonstrate a responsible attitude towards a better understanding of the general direction of the global economy. He also suggested that the group of major economies support the multilateral nature of trade and continue to advocate openness and mutual benefits, in order to increase the size of the cake of the global economy, while urging G20 to step up their efforts to support Africa's development and to implement the agreement reached at the Hangzhou Summit on the Industrialization of Africa and the Least Developed Countries.
A renewed multilateralism requires an inclusive WTO reform.
Special and Differential Treatment is the cornerstone of WTO reform. The current WTO system allows its members to self-identify as a developing country, and this status is accompanied by certain rights, such as the right to special and differential treatment (SDT). The United States is frustrated by the lack of criteria in the designation of developing countries and therefore calls for more objectivity and concrete criteria in the definition of these countries.
For the Chinese, the status of China as a developing country is indisputable because of the unevenness of the level of development between the different regions of the country.
As China's ambassador to the WTO Zhang Xiangchen points out: If anyone wants, in the name of WTO reform, to impose on China a set of rules made to measure, it will come out disappointed.
In order to safeguard the WTO mechanism and provide a clear and shared benchmark, the Montaigne Institute argues in a study that the current trade war between the US and China needs to be resolved through the WTO and not outside of his frame.
Any bilateral agreement between the United States and China that is not in conformity with WTO principles will create new problems. And since the United States and China are the two main players in the globalized economy, any bilateral agreement they could sign is essentially a multilateral issue.
In short, WTO reform is crucial to saving multilateralism and requires coordination by the major trading powers. China accepts the idea of reform, but emphasizes the importance of national conditions.
China - Tunisia - Africa 2.0
In this context, Tunisia signed on July 11, 2018, the accession to the Belt and Road initiative of China. More commonly known as the Silk Road, this program aims to connect China to the Near East, Africa and Europe, by land and sea, with the aim of promoting trade and investments. The accession of Tunisia to this initiative is supposed to consolidate China's contribution to the realization of development projects in Tunisia, especially the major infrastructure projects included in the 2016-2020 development plan.
However, Tunisia should aim at a much more ambitious partnership with China, and go much further than financing infrastructure. Making China a strategic partner could enable it to expand its offer to Europe and thus take full advantage of privileged access to the European market as part of a comprehensive future Free Trade Agreement, as well as develop its strategy on Africa, especially on services, and thus fill the gap. Tunisian products are not adapted to African demand. They often correspond to productions that European companies subcontract. To be competitive, Tunisia must adapt its products, packaging and specifications to the needs of Africa, its requirements and the consumption capacity of its people. For that, strategic cooperation with China would be wise, and would be a win-win partnership.
Tunisia must be more reactive, develop a more entrepreneurial and pragmatic economic diplomacy in the face of upheaval in world geopolitics, and implement vital reforms without which it would not attract Chinese and Asian investors. The next government will have to tackle the following priority reforms: modernize the (now archaic) exchange code, guarantee the repatriation of dividends to foreign investors, review and drastically simplify the investment code, taxation, the financial sector, modernize customs , privatize the ports of Rades, Bizerte, Zarzis and Enfidha and STAM (Tunisian company of stevedoring and handling) ... and the modernization of the state and the public administration, the informal trade, the economy parallel, the General Compensation Fund, the reform of the education system and vocational training are also necessary.
* President of MDI
Translated by WEN Yuehan
Notes:
January 17, 2017
https://www.oxfam.org/fr/rapports/une-economie-au-service-des-99
On the order of 2% of the US gross domestic product (GDP), the trade deficit with China is equivalent to half of the total trade deficit of the United States and 80% of their current account deficit.
https://www.letemps.ch/economie/2017/01/13/joseph-stiglitz-politique-macroeconomique-trump-va-detruire-emplois
The accession negotiations had lasted fifteen years, starting from the request made by China to the GATT in 1986.
China supports the reform of the World Trade Organization on the basis of necessity. The key for China is to protect the fundamental values and core principles of the World Trade Organization, such as openness, inclusiveness and non-discrimination, as well as safeguarding interests and space development policy of developing countries.
Commercial Aircraft Corporation of China Ltd is a Chinese aviation manufacturer, founded May 11, 2008
Excluded from the US market and soon deprived of Android license, Huawei will lose up to $ 30 billion in revenue in the year 2019, equivalent to ¾ of Tunisia's GDP in 2019.
https://www.nytimes.com/2019/06/12/opinion/china-europe-trump.html
Cited by REUTER, https://fr.reuters.com/article/frEuroRpt/idFRL8N23E25J
Zhang Xiangchen, China Will Propose WTO Reform, But It Will not Fall Into Someone Else's Trap, WTO Jingji Daokan (China WTO Tribune), Vol. 181, November 2018, pp.57-58
https://www.institutmontaigne.o