How China Will Benefit from a Trade War with America

How China Will Benefit from a Trade War with America

A trade war with China will generate immense pressure on Beijing and companies in the short run, but allow it to stop relying on the overseas market in the long run.

China further benefits from the advantage of an active state in making long-term development strategies and its impressive abilities to implement them. Examples of such strategies include China’s 1982 strategy to quadruple its 1980 GDP by 2000, the 2002 strategy to quadruple its 2020 GDP again by 2020, and most recently the “Made in China 2025” program. In the past, China has reached its goals years earlier than the preset deadlines (its GDP grew four times its 1980 level in 1995, and four times its 2000 level in 2015). The secret behind China’s successes in achieving its goals in the past is the stability of its government and the predominance of technocrats in it, who formulated and implemented long-term development plans without being controlled by any specific interest groups or interrupted by the change of government. This is in sharp contrast with the powerful influences of interest groups in the making of short-term domestic or foreign policies, and the frequent change of governments or administrations that makes the formulation, not to mention the implementation, of long-term national strategies nearly impossible, as widely seen in many other developing and even developed countries.

To recapitulate, China’s huge population and the immensity of its domestic market allow for the growth of all sectors of manufacturing and the emergence of thousands of industrial clusters throughout the country; these, coupled with the abundant supply of a well-educated, hard-working labor force and the unusual stability of a homogeneous society, explain China’s unparalleled attractiveness to investors home and abroad. The central government’s implementation of long-term growth plans, and its massive investment in infrastructural networks further contribute to China’s global competitiveness. It is, in a word, the functioning of all these factors or the meta-power they generate that propels the phenomenal growth of the Chinese economy.

It is apt at this juncture to put into perspective the recent trade dispute between the United States and China. A trade war with China will generate immense pressure on the Chinese government and companies in the short run, especially those that have long benefitted from the poor protection of foreign intellectual-property rights, high tariffs on targeted imports, and subsidies on selected manufacturing sectors. The sanctions against Chinese firms, such as the seven-year ban of business transactions between American companies and the Chinese ZTE in April 2018, would likely paralyze the core businesses of the latter, which relied on chipsets and other components in large quantity from its U.S. suppliers. In the long run, however, the sanctions would function as a stimulus for Chinese high-tech enterprises to invest in the development and manufacturing of the key components that they had long relied on the overseas market. Since 2013, each year China has imported more than $220 billions of chips and IC components, or twice the annual cost of its imported oil. For most Chinese companies, buying such components has been the most cost-effective way to do business, because their business model has been path-dependent; they see no necessity to produce them on their own, which entails huge and long-term investments. As a result, China has consumed as much as 59 percent of all chipsets of the world in recent years. But the recent sanction against ZTE has served as a wake-up call, forcing the indigenous Chinese firms to invest massively in the development and manufacturing of chips—and China’s meta power almost guarantees their success in this endeavor. Once these new investments come into operation in the following years, China would be a formidable competitor in the global market of chips and IC products, following the steps of South Korea and Taiwan. Given that China is more than ten times the two minor East Asian tigers in size, however, the future impact of its rise as a global rival in high-tech industries on the existing world economic order is beyond our imagination. As a matter of fact, China’s shift to high-end manufacturing has been ongoing for years and will continue whether or not a trade war breaks out between the two largest economies. But the sanctions against the Chinese firms would likely facilitate, rather than impede, the process.

Huaiyin Li is a professor of history and director of the Center for East Asian Studies at the University of Texas at Austin.

Image: Reuters