The China-U.S. Trade War and Future Economic Relations · 2020. 1. 9. · including cancer drugs,...
Transcript of The China-U.S. Trade War and Future Economic Relations · 2020. 1. 9. · including cancer drugs,...
The China-U.S. Trade War
and
Future Economic RelationsLawrence J. Lau 劉遵義
Ralph and Claire Landau Professor of Economics, The Chinese Univ. of Hong Kongand
Kwoh-Ting Li Professor in Economic Development, Emeritus, Stanford University
Open University of Hong Kong Great Speakers Series
Hong Kong, 6 January 2020
Tel: +852 3943 1611; Fax: +852 2603 5230
Email: [email protected]
WebPage: http://www.igef.cuhk.edu.hk/people/professor-lawrence-j-lau/
*All opinions expressed herein are the author’s own and do not necessarily reflect the views of
any of the organisations with which the author is affiliated.
Outline Introduction
The Chronology of the Trade War
The Different Measurements of the Bilateral Trade Balance
The Relative Benefits from the Bilateral Trade
The Immediate Impacts of the China-U.S. Trade War
The Real Impacts of the Mutual Tariffs on the Two Economies
Economic and Technological Competition
Economic Complementarities between China and the U.S.
Coordinated Expansion of Trade
Concluding Remarks
2
Introduction The China-U.S. trade war actually started in January 2018, even
though the first tariffs did not actually take effect until mid-2018.
Thus far, the trade war does not seem to have done too much
noticeable damage to either the Chinese or the U.S. economy.
In 2017, the Chinese economy grew 6.8%. In 2018, the Chinese
economy grew 6.6%, exceeding the Plan target of 6.5%. For 2019Q1-
Q3, the Chinese economy grew an annualised 6.2%, a decline of 0.6%
from 2017. For 2019 as a whole, the target is between 6% and 6.5%.
This target should be achievable without difficulty.
The U.S. economy grew 2.9% in 2018, close to its long-run average of
3%. It grew 3.1%, 2.1% and 2.1% in 2019Q1, Q2 and Q3
respectively. The latest forecast made by the U.S. Federal Reserve
Board for the rate of growth in 2019 is 2.3%, a decline of 0.6%. 3
Quarterly Rates of Growth of
Chinese Real GDP, Y-o-Y
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Per
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Quarterly Rates of Growth of Chinese Real GDP, Y-o-Y
GDPQ1 GDPQ2
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Monthly Rates of Growth of Real Value-Added
of the Chinese Industry, Y-o-Y
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Monthly Rates of Growth of Real Value-Added of the Chinese Industry, Year-over-Year
Introduction Even if the Phase 1 agreement is signed, as U.S. President Donald Trump has
announced, in Washington D.C. on 15 January 2020, a large proportion of the tariffs, especially on Chinese exports of goods to the U.S., will remain in effect. The Phase 1 Agreement will take effect 30 days after signing. But at least the situation is stabilized, and a great deal of uncertainty is eliminated.
However, it is also inevitable that there will continue to be economic, technological and geo-political competition between China and the U.S., the two largest economies in the world. This is because the U.S. has been the unchallenged leader of the non-Communist world since the end of the Second World War in 1945 and the sole hegemon since the dissolution of the former Soviet Union in 1991. Some people in the U.S. feel that its global leadership position is threatened by the rise of China even if China professes not to wish to replace the U.S. And it is better to take on China sooner rather than later.
The economic and technological competition between China and the U.S. will become the “new normal”. Moreover, the trade war itself might have damaged the longer-term relations between the two countries.
It is also in part a reflection of the rise of populism, isolationism, nationalism and protectionism almost everywhere in the world, including in the U.S.
6
Introduction The chronically large China-U.S. bilateral trade surplus is the proximate
cause of the current China-U.S. trade war, but there are other underlying economic, technological and geo-political causes as well.
We begin by summarizing the chronology of the China-U.S. trade war. However, the two countries do not even agree on the size of the bilateral
trade surplus. We shall show that the China-U.S. trade surplus, correctly measured, is not as large as it is made out to be, but is nevertheless still a large number.
We then show that the gross value of the bilateral trade surplus does not reflect the relative benefits of the bilateral trade to the two trading-partner countries. Instead, we should look at the value-added (GDP) and employment generated directly and indirectly by the bilateral exports.
In terms of both direct, indirect and total value-added generated by the exports of goods to each other, the China-U.S. bilateral gap is much smaller than that measured in terms of gross value of exports, and it appears feasible to close the gap with coordinated expansion of trade between the two economies within a couple of years.
7
Introduction We then analyse the real impacts of the mutual tariffs on the two
economies. When two countries trade, they both benefit in the
aggregate because their choice sets are enlarged. As long as the
trade is voluntary, economic welfare must rise in both countries.
A country always loses when it restricts its own choice set--its
aggregate welfare will decline. But their trading-partner country
will also lose. Thus, the mutual imposition of tariffs is a lose-
lose proposition.
However, it is also inevitable that there will be economic,
technological and geo-political competition between China and
the U.S., the two largest economies in the world.
8
Introduction We identify the economic complementarities between China and
the U.S. The potential benefits from bilateral trade are higher
when two economies are more different, with different
endowments, existing capital stocks and comparative advantages.
We then discuss the possibility of coordinated expansion of trade
that can be win-win for both countries and consider how mutual
economic interdependence can and should be enhanced.
Finally, we discuss some Chinese economic policy options in the
light of the trade war.
Brief concluding remarks are made at the end.
9
The Chronology of the Trade War The trade war began in March 2018 with a Section 301 investigation
of China by the U.S. Government, which resulted in a 25% tariff on US$50 billion, in two separate batches of US$34 billion and US$16 billion worth of Chinese exports of goods to the U.S., in June and August 2018 respectively.
China retaliated with a tariff on US$50 billion of U.S. exports of goods to China in June 2018.
In September 2018, the U.S. imposed 10% tariff on US$200 billion of Chinese exports of goods to the U.S. and China announced a 5%-10% tariff on US$60 billion of U.S. exports to China.
On 10 May 2019, the 10% tariff rate on the US$200 billion of Chinese exports was raised to 25%. However, the marginal effect of this increase in the tariff rate from 10% to 25% was not likely to be large because the 10% tariff rate would be already high enough to be almost prohibitive for most Chinese exports to the U.S. There simply is not that kind of profit margin for such exports for the tariffs to be absorbed by the Chinese manufacturers and exporters.
10
The Chronology of the Trade War Tariffs at a rate of 10% on the remaining approximately US$300
billion of Chinese exports of goods to the U.S. were ordered by
President Donald Trump to take effect on 1 September 2019.
This last batch of Chinese exports to the U.S. consists of products
such as the Apple iPhones (around US$50 billion), personal
computers, garments and shoes and packaged re-exports of semi-
conductors. The incidence of the tariffs would be mostly borne
by U.S. enterprises and households including Apple Inc. (One
incidental and unintended beneficiary would be Samsung of
South Korea whose Galaxy cellphones compete with the Apple
iPhones and they are not subject to the new tariffs on U.S.
imports from China.) 11
The Chronology of the Trade War However, on 13 August, U.S. President Donald Trump
announced that the tariff will be delayed until 15 December on
approximately US$160 billion worth of goods such as
cellphones, laptop computers, shoes and toys, so as not to affect
the Christmas shopping season. The tariff was dropped altogether
on 25 types of products “based on health, safety, national security
and other factors”.
On 23 August 2019, it was announced that the 10% and 25%
tariff rates would be raised by 5% to 15% and 30% respectively
on 1 October 2019.
However, as a gesture of goodwill, the U.S. postponed the 5%
increase in the tariff rates to 15 October 2019. 12
The Chronology of the Trade War Chinese tariffs, with rates up to 25%, have also been imposed on
US$110 billion of U.S. exports of goods, with $75 billion of which subject to increased tariffs on 1 October.
However, on 11 September, the Chinese Government announced an exemption of Chinese tariffs on 16 types of U.S. goods including cancer drugs, lubricant oils and some specialty chemicals, for one year beginning on 17 September.
Moreover, on 13 September the Chinese Government announced an exemption from tariffs for pork, soybeans and other agricultural imports from the U.S. and signalled that Chinese enterprises would be making large purchases of both pork and soybeans from U.S. suppliers. Subsequently there have been reports that actual purchases have been made by Chinese enterprises.
13
The Chronology of the Trade War On 10-11 October, the Chinese and U.S. teams resumed their
negotiations in Washington, D.C. and reached what was called a “Phase 1” Agreement, which provided for significant Chinese purchases of U.S. agricultural commodities of between US$40-50 billion and a delay in the implementation of new and increased tariffs scheduled for 15 October. There are also provisions for strengthening intellectual property protection and facilitating the provision of financial services.
On 13 December, both sides agreed to cancel the additional tariffs in different stages. In particular, the U.S. has not imposed the additional tariffs that are supposed to take effect on 15 December.
Meanwhile, China's General Administration of Customs and the Ministry of Agriculture and Rural Affairs are studying lifting the restrictions on US exports of poultry products to China.
14
The Chronology of the Trade War Under the Phase 1 Agreement, the full details of which are not yet
known, China has apparently agreed to increase overall imports of U.S. goods and services by $200 billion over the next two years.
China also announced that it would lower import tariffs for all trading partners on 859 types of products including frozen pork, pharmaceuticals and some high-tech components starting from 1 January. The plan will also cut import tariffs for more than 8,000 products even lower for countries and regions that have free-trade agreements with China, including Australia, South Korea, Iceland, New Zealand and Pakistan. Moreover, China will further reduce the tariff rates on some information-technology products and services from 1 July 2020.
Ahead of the signing of the Phase 1 Agreement, U.S. President Donald Trump also pledged on 31 December that he would travel to Beijing to begin negotiation of a Phase 2 Agreement at a later date.
15
Chinese Surplus and U.S. Deficit with the
World, Trade in Goods and Services
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US
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Chinese Surplus and U.S. Deficit with the World, Trade in Goods and Services
Chinese Trade Surplus U.S. Trade Deficit
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Chinese Trade Surplus and U.S. Trade Deficit in
Goods and Services as Percents of Respective GDPs
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Annual Chinese Trade Surplus and U.S. Trade Deficit in Goods and Services
as Percents of Respective GDPs
Chinese Trade Surplus as a Percent of GDP
U.S. Trade Deficit as a Percent of GDP
17
The Different Measurements of the Bilateral
Trade Balance In 2018, despite the trade war and the tariffs, Chinese exports of goods
to the U.S. in nominal US$ terms actually increased by 11.3% to US$478 billion. In real terms, the increase was even higher, because of the slight devaluation of the Renminbi in 2018. Part of the increase may be attributed to the acceleration of exports in anticipation of the imposition and increases of tariffs. U.S. exports to China actually declined by7.3% to US$121 billion, reflecting the Chinese tariffs on U.S. agricultural commodities as well as U.S. restrictions on high-technology exports.
The official U.S. estimate of the U.S.-China trade deficit in goods only in 2018 is US$419.6 billion, an increase from US$375.8 billion in 2017. The official Chinese estimate of the bilateral trade surplus is US$323.3 billion, an increase from US$275.8 billion. There is a difference between the Chinese and U.S. estimates of almost US$100 billion.
However, these numbers suffer from a number of imperfections and are not directly comparable.
18
The Different Measurements of the Bilateral
Trade Balance: A Summary
19
Measurement Official Chinese Estimates Our Estimates Official U.S. Estimates
Goods Only, Exports FOB,
Imports CIF323.3 419.6
Goods Only, Based on Bilateral
Exports FOB Data356.4
Goods Only, Based on Bilateral
Exports and Estimated Re-
Exports, FOB
350.9
Goods, Exports FOB, Imports
CIF, and Services268.4 380.8
Goods, including Estimated Re-
Exports, FOB, and Services Based
on U.S. Data
312.1
Goods, including Estimated Re-
Exports, FOB, and Services Based
on Bilateral Imports Data
276.0
The Relative Benefits from the Bilateral Trade However, the gross value of exports does not reflect accurately
the real benefits of exports to the exporting country. What really matters is the GDP created by the exports, that is, the domestic value-added created by the exports, directly and indirectly. (The employment and GNP generated by the exports are also important.)
As an example, consider the Apple iPhone, an export of China since it is finally assembled by Foxconn (Hon Hai Precision Industry Co., Ltd. of Taiwan) in China. The value of an iPhone is at least US$600 whereas the Chinese domestic value-added is less than US$20, with a direct value-added content of at most 3.3%. (The GNP generated is even lower since Foxconn is not a Chinese company.)
20
The Relative Benefits from the Bilateral Trade
in Terms of Value-Added: A Summary
21
Measurement China The U.S. Difference
Direct Value-Add, Goods Only, Based
on Bilateral Exports and Estimated
Re-Exports, FOB
159.8 128.6 31.2
Indirect Value-Added, Goods Only,
Based on Bilateral Exports and
Estimated Re-Exports, FOB
201.9 53.3 148.6
Total Value-Added, Goods Only,
Based on Bilateral Exports and
Estimated Re-Exports, FOB
361.8 181.9 179.9
Value-Added from Service Exports,
Based on U.S. Data18.3 57.1 -38.8
Value-Added from Service Exports,
Based on Bilateral Service Imports
Data
18.3 93.2 -74.9
Total Value-Added, Good and
Services, Based on U.S. Service Trade
Data
380.1 239.1 141.1
Total Value-Added, Good and
Services, Based on Bilateral Service
Imports Data
380.1 275.1 105.0
Summary of Comparisons of Relative Benefits in 2018
The Rate of Growth of US Non-Oil Price Index
and the Chinese Share of Non-Oil Imports
221.0
1.5
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Chinese Share of U.S. Non-Oil Imports (Percent)
The Chinese, Hong Kong and U.S. Stock
Market Indexes, 2018M1 to Date
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130Stock Price Indices of Various Stock Exchanges, 1 January 2018 = 100
Hong Kong (Overall) Hong Kong (China Enterprise)
Shanghai Shenzhen
MSCI China S&P 500 Index
The Quarterly Rates of Growth of Chinese Real
GDP versus the Chinese Stock Price Index
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Quarterly Rates of Growth of Chinese Real GDP vs.
Quarterly Rates of Changes of the Shanghai Stock Exchange Composite Index
GDP vs. Index of Shanghai SE
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The RMB Central Parity Exchange Rate and
the CFETS Index, 29/12/2017 to the Present
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23-M
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806
-Ap
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18-M
ay-1
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813
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27-J
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1810
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g-18
24-A
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1807
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805
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ov-1
830
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14-D
ec-1
828
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925
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922
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ar-1
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ay-1
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ay-1
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912
-Ju
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26-J
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1909
-Au
g-19
23-A
ug-
1906
-Sep
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ep-1
904
-Oct
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ct-1
901
-Nov
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15-N
ov-1
929
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13-D
ec-1
927
-Dec
-19
The Central Parity Rate and the CFETS Index, 29 Dec. 2017 = 100
Index of CFETS Currency Basket (Yuan/Currency Basket)
Index of Central Parity Rate (Yuan/US$)
Quarterly Rates of Growth of Exports of
Goods: Selected Asian Economies
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Quarterly Rates of Growth of Exports of Goods: Selected East Asian Economies
China,P.R.:Hong Kong India
Indonesia Korea
Malaysia Philippines
Singapore Thailand
China,P.R.: Mainland Japan
Taiwan Prov.of China
Quarterly Rates of Growth of Imports of
Goods: Selected Asian Economies
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Quarterly Rates of Growth of Imports of Goods : Selected East Asian Economies
China,P.R.:Hong Kong India
Indonesia Korea
Malaysia Philippines
Singapore Thailand
China,P.R.: Mainland Japan
Quarterly Rates of Growth of Real GDP, Y-o-
Y: Selected Asian Economies
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Q1
2011
Q3
2011
Q1
2012
Q3
2012
Q1
2013
Q3
2013
Q1
2014
Q3
2014
Q1
2015
Q3
2015
Q1
2016
Q3
2016
Q1
2017
Q3
2017
Q1
2018
Q3
2018
Q1
2019
Ann
ualiz
ed R
ates
in P
erce
nt
Quarterly Rates of Growth of Real GDP, Year-over-Year: Selected East Asian Economies
China,P.R.:Hong Kong India
Indonesia Korea
Malaysia Philippines
Singapore Thailand
China,P.R.: Mainland Japan
Taiwan Prov.of China
The Real Impacts of the Mutual Tariffs on the
Two Economies The maximum negative impact to the Chinese economy, assuming that half
of Chinese exports to the U.S. are halted, may be estimated at 0.45% of Chinese GDP in the first instance, and eventually cumulatively 1.2% of Chinese GDP, if all the indirect effects are included. If all of Chinese exports of goods to the U.S. are halted, the eventual total damage would be 2.4% of Chinese GDP.
The maximum negative impact to the U.S. economy, assuming that half of U.S. exports to China are halted, may be estimated at 0.145% of GDP in the first instance, and eventually cumulatively 0.26% of U.S. GDP, if all the indirect effects are included. If all of U.S. exports of goods to China are halted, the eventual total damage would be 0.51% of U.S. GDP.
However, these estimates do not include the effects of the uncertainty and unpredictability created by the trade war.
They also do not include U.S. losses of exports of goods or royalties and license fees through its own restrictions on Chinese high-technology enterprises such as Huawei from using U.S. products such as the Intel chips and the Android operating system of Google.
29
Chinese Exports of Goods and Services and
Goods Only as a Percent of Chinese GDP
0
5
10
15
20
25
30
35
40
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Per
cent
Exports of Goods and Services as a Percentage of GDP
Exports of Goods Only to the World as a Percentage of GDP
30
Chinese Exports of Goods and Services and
Goods to the U.S. as Percent of Chinese GDP
3
3.5
4
4.5
5
5.5
6
6.5
7
7.5
8
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Per
cent
Exports of Goods
Exports of Goods and Services
31
The Distribution of U.S. Apparel Imports by
Countries and Regions of Origin
0
10
20
30
40
50
60
70
80
90
100
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Per
cent
Hong Kong, South Korea and Taiwan
China (Mainland)
ASEAN
The Rest of the World
32
Exports to the World as Percent of GDP: Hong
Kong
0
30
60
90
120
150
180
210
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
Per
cen
t
Total Exports of Goods and Services
Total Exports of Goods Only
Domestic Exports of Goods Only
Re-Exports of Goods Only
33
Exports to the U.S. as Percent of GDP:
Hong Kong
0
5
10
15
20
25
30
35
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
Per
cen
t
Total Exports of Goods and Services
Total Exports of Goods Only
Domestic Exports of Goods Only
Re-Exports of Goods Only
34
U.S. Exports of Goods and Services and Goods
Only as Percent of U.S. GDP
0
2
4
6
8
10
12
14
16
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Per
cent
Exports of Goods and Services as a Percent of GDP
Exports of Goods Only to the World as a Percent of GDP
35
U.S. Exports of Goods and Services and Goods
Only to China as Percent of U.S. GDP
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Per
cent
Exports of Goods and Services
Exports of Goods
36
Chinese Inbound Foreign Direct Investment as
Percent of Chinese Gross Domestic Investment
370
2
4
6
8
10
12
14
16
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Per
cen
t
Chinese Inbound Foreign Direct Investment as Percent of Gross Domestic Investment
Total Chinese Inbound and Outbound Direct
Investments, US$ billions
0
20
40
60
80
100
120
140
160
180
200
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
US
$ b
illi
ons
Total Chinese Inbound and Outbound Direct Investments, US$ billions
Total Chinese Inbound Direct Investment
Total Chinese Outbound Direct Investment
Non-Financial Chinese Outbound Direct Investment
38
Chinese National Savings and Gross Domestic
Investment as Percents of GDP
10
15
20
25
30
35
40
45
50
55
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Per
cent
Chinese National Savings and Gross Domestic Investment as a Percent of GDP since 1952
Savings Rate Investment Rate
39
Economic and Technological Competition Even though the proximate cause of the current trade war
between China and the United States is the large trade imbalance
in China’s favour, but it is actually a manifestation of the
potential competition between China and the U.S. for economic
and technological dominance in the world.
This competition, whether explicit or implicit, and whether
intentional or not, will not go away soon. It did not begin with
President Donald Trump. Both the “pivot to Asia” and the
“Trans-Pacific Partnership” were initiated by President Barack
Obama as strategies aimed in part at containing China. It will not
go away even after President Trump leaves office.
40
Economic and Technological Competition In terms of aggregate GDP, China went from only one-fifth of
the U.S. GDP in 2000 to two-thirds in 2017, in only 17 years (64.1% in 2018 because of exchange rate changes). It is only a matter of time that the Chinese GDP will catch up with the U.S. GDP, probably in the early 2030s.
However, in terms of GDP per capita, China is still way behind, with US$9,415 (less than S$10,000, thus technically still a developing economy), compared to US$62,609 for the U.S. in 2018.
My own projections suggest that it will probably take until the end of the 21st Century before Chinese GDP per capita can approach the U.S. level, if ever. (Because of the differences in natural endowments between China and the U.S., China may not be able to catch up with the U.S. in terms of GDP per capita.)
41
Growth Rate vs. Level of Real GDP per Capita
(2018 tril. US$): China, Japan and the U.S.
-30
-20
-10
0
10
20
30
0 10 20 30 40 50 60 70
Per
cent
Real GDP per Capita, thousand USD, in 2018 prices
China USA Japan
42
Comparison of National Savings Rates:
China, Japan and the U.S.
10
15
20
25
30
35
40
45
50
55
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Per
cen
t
The United States
China
Japan
43
Comparison of Capital-Labour Ratios:
China, Japan and the U.S.
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
US
$, in
201
7 pr
ices
The United States China Japan
44
The Distribution of Chinese GDP by Sector
Since 1952
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
The Distribution of Chinese GDP by Originating Sector Since 1952
Primary Sector Secondary Sector Tertiary Sector
45
The Distribution of Chinese Employment
by Sector Since 1952
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1952
1953
1954
1955
1956
1957
19
58
19
59
19
60
19
61
19
62
1963
1964
1965
1966
1967
1968
1969
19
70
19
71
19
72
19
73
19
74
1975
1976
1977
1978
1979
1980
1981
19
82
19
83
19
84
19
85
19
86
1987
1988
1989
1990
1991
1992
1993
19
94
19
95
19
96
19
97
19
98
1999
2000
2001
2002
2003
2004
20
05
20
06
20
07
20
08
20
09
20
10
2011
2012
20
13
20
14
20
15
20
16
20
17
20
18
The Distribution of Employment by Sector since 1952
Primary Sector Secondary Sector Tertiary Sector
46
Scatter Diagram between the Shares of
Employment and GDP of the Primary Sector
0
10
20
30
40
50
60
70
80
90
0 5 10 15 20 25 30 35 40 45 50 55
The
Per
cent
age
of t
he P
rim
ary
Sec
tor
in N
atio
nal
Em
ploy
men
t
The Percentage of the Primary Sector in GDP
China
Taiwan
South Korea
Japan
47
The Number of Internet Users in Selected
Economies
0
50
100
150
200
250
300
350
400
450
500
550
600
650
700
750
800
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
2011
20
12
20
13
20
14
20
15
20
16
20
17
million
per
son
s
The Number of Internet Users in Selected Economies, million persons
China
United States
Japan
India
Germany
Korea, Rep.
Taiwan
48
The Number of Internet Users as a Percent of
the Population in Selected Economies
0
10
20
30
40
50
60
70
80
90
100
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Per
cen
t
The Number of Internet Users as a Percent of the Population in Selected Economies
China
United States
Japan
India
Germany
Korea, Rep.
Taiwan
49
Actual and Projected Levels and Growth Rates
of Chinese and U.S. Real GDP (2018 tril. US$)
-3
0
3
6
9
12
15
18
21
24
-5
0
5
10
15
20
25
30
35
40
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
Percent
USD
tri
llion
s, 2
018
pri
ces
Actual and Projected Chinese and U.S. Real GDPs and Their Rates of
Growth (trillion 2018 US$)
Rates of Growth of U.S. Real GDP (right scale)
Rates of Growth of Chinese Real GDP (right scale)
U.S. Real GDP, in 2018 prices
Chinese Real GDP, in 2018 prices
50
Actual and Projected Chinese and U.S. Real GDP/Capita
and Their Annual Rates of Growth (1,000 2018 US$ & %)
-4
-2
0
2
4
6
8
10
12
14
16
-25
-20
-15
-10
-5
0
5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
80
85
90
95
100
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
percentU
SD th
ousa
nd, 2
018
pric
es
Actual and Projected Chinese and U.S. Real GDP per Capita and Their Rates of
Growth (thousand, 2018 US$)
Rates of Growth of U.S. Real GDP per capita (right scale)
Rates of Growth of Chinese Real GDP per Capita (right scale)
U.S. Real GDP per Capita, in 2018 prices
Chinese Real GDP per capita, in 2018 prices
51
Actual and Projected Levels and Growth Rates
of Chinese and U.S. Real GDP (2018 tril. US$)
-3
0
3
6
9
12
15
18
-20
-10
0
10
20
30
40
50
60
70
80
90
100
110
120
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
2036
2038
2040
2042
2044
2046
2048
2050
Percent
USD
tri
llion
s, 2
018
pri
ces
Actual and Projected Chinese and U.S. Real GDPs and Their Rates of
Growth (trillion 2018 US$) Rates of Growth of U.S. Real GDP (right scale)
Rates of Growth of Chinese Real GDP (right scale)
U.S. Real GDP, in 2018 prices
Chinese Real GDP, in 2018 prices
52
Actual and Projected Chinese and U.S. Real GDP/
Capita and Their Rates of Growth (1,000 2018 US$)
-4
-2
0
2
4
6
8
10
12
14
16
-40
-20
0
20
40
60
80
100
120
140
160
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
2036
2038
2040
2042
2044
2046
2048
2050
percentU
SD th
ousa
nd, 2
018
pric
es
Actual and Projected Chinese and U.S. Real GDP per Capita and Their Rates of
Growth (thousand, 2018 US$)
Rates of Growth of U.S. Real GDP per capita (right scale)
Rates of Growth of Chinese Real GDP per Capita (right scale)
U.S. Real GDP per Capita, in 2018 prices
Chinese Real GDP per capita, in 2018 prices
53
R&D Expenditures as a Share of GDP and Their Target Levels
at 2020: G-7 Countries, 4 East Asian NIEs, China & Israel
Japan
Germany, U.K.,
France
China
Italy
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2020
Taregt P
ercentP
erce
nt
R&D Expenditures as a Ratio of GDP: G-7 Countries, 4 East Asian NIEs, China & Israel
U.S. Japan W. Germany
Germany U.K. France
Canada Italy South Korea
Singapore Taiwan, China Mainland, China
HK, China Israel
54
Patents Granted in the United States: G-7
Countries, 4 East Asian NIEs, China & Israel
55
U.S. Patents Granted and R&D Capital Stocks:
G-7 Countries, 4 EANIEs, China & Israel
0
1
10
100
1,000
10,000
100,000
1,000,000
0 1 10 100 1,000 10,000
Nu
mb
er o
f U
.S. P
aten
ts G
ran
ted
R&D Capital Stocks, in 2016 US$ billions
Canada France
Germany Italy
Japan United Kingdom
United States China
Hong Kong, China South Korea
Singapore Taiwan, China
Israel Linear Regression
𝒚 = 2.160 + 1.145 𝐱 (0.126) (0.025)
56
Basic Research Expenditure as a Share of Total
R&D Expenditure: China, Japan and the U.S.
4
6
8
10
12
14
16
18
20
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Per
cent
Basic Research Expenditure as a Percentage of Gross Expenditure on R&D
China
Japan
United States
57
Technological Competition: Cumulative
Number of Nobel Laureates in Physics
58
0
5
10
15
20
25
30
35
40
45
50Cumulative Number of Nobel Prizes in Physics
Canada China France Germany Italy Japan U.K. U.S.
Economic Complementarities between China
and the U.S. China and the U.S. have very different economic endowments. China
has a large population that is more than four times that of the U.S. The U.S. has more arable land, more tangible capital stock, more human capital, almost four times more R&D capital stock than China, and much more natural resources (for example, oil and gas deposits) than China.
China has a high savings rate and the U.S. has a low savings rate. Chinese savings exceed Chinese domestic investment and U.S. savings are less than U.S. domestic investment. China is a net capital exporter and the U.S. a net capital importer.
China has a large bilateral trade surplus in goods; the U.S. has a large bilateral trade surplus in services.
Economic theory tells us that the more different two economies are, the greater they potentially benefit from trading and interacting with each other.
The two countries are economically complementary to each other.59
Economic Complementarities between
China and the U.S.
60
2015 2016 2017 2015 2016 2017
Arable land per capita, hectare 0.098 0.098 0.097 0.474 0.470
Real capital stock per capita, 2016 prices, US$ 15,472 16,927 18,237 83,880 85,448 86,080
Real R&D capital stock per capita, 2016 prices, US$ 654 734 819 12,463 12,685 12,900
Working age population per capita 0.725 0.720 0.715 0.661 0.659 0.656
China U.S.
Coordinated Expansion of Trade A bilateral trade gap can be closed by either the deficit country
increasing its exports to the surplus country, or by the surplus country reducing its exports to the deficit country. (If two countries stop trading, the bilateral trade balance is by definition zero.) It is much better to close a bilateral trade gap by increasing the exports from the deficit country to the surplus country than for the surplus country to reduce its exports to the deficit country. In the former case, both countries win; in the latter case, both countries lose.
It is conventional wisdom that reducing a bilateral trade surplus per se, for example, by increasing exports from the deficit country to the surplus country, cannot change the aggregate trade deficit with the world of the deficit country, nor increase the GDP of the deficit country.
61
Coordinated Expansion of Trade However, this is based on the assumption that the aggregate output of the
deficit economy is given so that a simple reallocation of its trade flows among its trading partners cannot change its aggregate trade balance with the world.
It is not necessarily true if the increased exports can come from new domestic production based on previously idle resources in the deficit country, which increases both its domestic GDP and employment, rather than the diversion of existing exports from another trading-partner country. One way to think about it is that there is an autonomous increase in permanent supply in response to an exogenous increase in permanent demand.
Coordinated long-term increases of U.S. production and exports of agricultural products such as beef, chicken, pork and soybeans, and energy commodities such as shale oil and liquefied natural gas, for exports to China can increase both U.S. GDP and employment and decrease the bilateral U.S.-China as well as the overall U.S. trade deficit with the rest of the world.
62
Coordinated Expansion of Trade Two sources of potential U.S. exports to China that can be huge and
are relatively uncontroversial are agricultural commodities and energy. China has a huge demand for agricultural commodities, and, in addition, there is also great potential for the U.S. to increase the value-added content of U.S. agricultural exports, for example, by producing and exporting meat (beef, pork and poultry) instead of feed grains (corn and soybeans) to China.
In 2017, China imported more than US$115 billion of agricultural commodities, but only 20 percent of the imports came from the U.S. Moreover, Chinese imports of agricultural commodities has been increasing by more than 10 percent per year. Thus, there is the potential of U.S. exports of agricultural commodities to China rising from the current US$20 billion plus a year to US$50 billion a year in three to five years, on the basis of new as well as higher value-added U.S. production. The U.S. has significant surplus production capacity (for example, it has an abundance of land, water and pastures) for agricultural commodities if there is assured long-term demand.
63
Coordinated Expansion of Trade There is also a huge and growing Chinese demand for energy,
especially relatively clean energy, which can be met by exports of liquefied natural gas (for example, from Alaska) and shale oil, which are again new production, from the U.S.
In 2016, China imported a total of US$117 billion of crude oil and US$9 billion of natural gas. Chinese imports of oil and gas from the U.S. was minuscule, at US$0.2 billion and US$0.08 billion respectively. Given China’s huge and growing demand for energy, and especially for non-polluting energy such as natural gas, and the U.S. being transformed into a net energy exporter because of its rising shale oil and gas production, it is entirely possible for the U.S. to become a top energy exporter to China, gradually increasing to US$50 billion a year or more, again based on new production and not the diversion of existing production, thus increasing both U.S. GDP and employment.
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Coordinated Expansion of Trade However, coordination is necessary to make possible the
development of the natural gas reserves in Alaska to be sold to
Chinese customers. Significant long-term investments will have
to be made in Alaska. Without committed Chinese buyers, the
project cannot be financed (future markets for natural gas does
not extend beyond a couple of years). Without committed and
well-capitalised developers with a track record in the U.S., the
potential Chinese buyers are unlikely to commit either.
Moreover, only a U.S. firm or a consortium of U.S. firms is
likely to be able to navigate successfully the federal, state and
local regulations governing the development of the natural gas
reserves in Alaska. 65
Coordinated Expansion of Trade Another fast-growing component of U.S. exports of services to China
that has huge potential for expansion is education and tourism. The expenditures of Chinese students (currently totalling 360,000) and tourists in the U.S. have been rising rapidly. Moreover, their presence in the U.S. can enhance the understanding between the Chinese and American people and improve long-term ties. And on their return to China, they can act as goodwill ambassadors for the U.S., especially those who have been students in the U.S. U.S. students and tourists in China can also play the same role.
A further area of significant potential win-win collaboration is the deployment of the excess Chinese savings in the U.S. for the financing of the renovation and upgrading of U.S. basic infrastructure as well as the augmentation of the equity capital of U.S. corporations through a secondary listing of their shares on the Chinese stock market.
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Concluding Remarks The competition between China and the U.S., whether friendly or
unfriendly, can be assumed to be an ongoing and long-term one.
It is the “new normal”. The trade dispute is only a symptom of
the potential possible conflicts between the two countries.
Prof. Graham Allison, of the Kennedy School of Government at
Harvard University, has written a book titled Destined for War,
about the inevitability of a war between China and the U.S. As a
rising power challenges the dominance of an established power,
the established power is likely to respond with force. He refers
to this “inevitability” as the “Thucydides Trap”, drawing on the
book by Thucydides, History of the Peloponnesian War, a war
in ancient Greece (431-404 B.C.) between Athens and Sparta. 67
Concluding Remarks However, the rise of the former Soviet Union between the end of the
Second World War and 1990 provides a counter-example that an established power and a rising power must go to war. The truth is that a thermonuclear war today is so devastating that there are effectively no real winners. It is this “mutually assured destruction” that prevented the Soviet Union and the U.S. from going to war and instead to enter into a number of arms control treaties such as the Anti-Ballistic Missile (ABM) Treaty. And it will similarly prevent wars between major powers in the future.
It is also important to distinguish between the rivalry between the U.S. and the former Soviet Union with the competition between China and the U.S. The former was existential, as the former Soviet Union would like to impose the Communist system on other countries. China has no intention of proselytising its ideology or system of government to other countries and hence its competition with the U.S. is non-existential. 68
Concluding Remarks China and the rest of the world, except possibly the U.S., will
continue to uphold the current multilateral trading system under the World Trade Organisation (WTO). After all, they have all benefitted and will continue to benefit from it.
China is committed to further opening of its economy to international trade and both inbound and outbound direct investment. It will likely adopt, over time, a “three zeroes strategy”—zero tariffs, zero barriers and zero subsidies and offer national treatment to foreign direct investors on a reciprocal basis.
Maintaining good economic relations with the rest of the world, and opening its economy further to international trade and investment, in particular, to the European Union, ASEAN, Japan and Russia on a reciprocal basis, is a must for China going forward.
China is the largest trading-partner country of almost all of the East Asian countries and regions. It is also becoming the largest foreign direct investor in these countries and regions. 69
Concluding Remarks In the long run, if China and the U.S. cooperate and work together,
many global problems such as reform of the World Trade Organisation (WTO), denuclearisation, prevention of climate change, and the economic development of Africa, can be solved.
If the two countries compete in a friendly way, much innovation is possible, as in the competition to build the fastest super-computer. China and the U.S. can also both collaborate and compete in finding cures for diseases such as cancer and Alzheimer’s disease, and every country in the world will benefit from it.
The U.S. can invite China to participate in the exploration of Mars and share in the cost, which has been estimated to be hundreds of billions of U.S. dollars.
There are still many win-win possibilities for the Chinese and U.S. economies to work together, e.g., exchange rate coordination, which will rebound to the benefit of the entire world.
The two countries should aim to become competitive partners! 70