A U.S. Perspective on China's External Economic Disputes in the Past 40 Years and in the Coming 40 Years
26 Pages Posted: 2 Jul 2018 Last revised: 16 Jul 2018
Date Written: June 11, 2018
On the disputes over China’s trade imbalance, (1) they were marked by analytical confusion over the meaning of the term “equilibrium exchange rate”; (2) China’s trade imbalance reflects the economic conditions in both China and abroad, and that the efficient and fair solution of the problem requires policy changes not only by China but also by the US; (3) the dispute on exchange rate misalignment has been a diversion away from (a) addressing the underlying structural factors causing the trade imbalance, and (b) improving the inadequacy of US job transition programs that has exacerbated US unhappiness with trade imbalance.
On the industrial policy dispute, (1) the issue of forced technology transfer is largely a dispute about a large economy using its market power to benefit itself at the expense of its trade partners; (2) this use of market power is normally temporary because of the almost inevitable retaliation by other large countries; (3) notion of national security that is commonly adopted in the US trade policy debate is overly broad and short-sighted, and, unless these two aspects are corrected, they will hurt the US economy and weaken US national security in the long-run; (4) the US must reform the CFIUS (Committee on Foreign Investment in the United States) process of reviewing foreign acquisition of US technology by (a) making the process more comprehensive (e.g. setting up foreign-owned R&D centers in US) and (b) making the process more operational by a defining a list of technologies for CFIUS to cover, a list that is constantly updated.
On China’s Belt Road Initiative (BRI), (1) as the number of BRI project grows and as the number of partner countries increases, the number of economic disputes that China will be involved in will grow; (2) China should ensure that the BRI projects in a country are beneficial to the general population of that country and not just politically-biased toward the government in power at that time because, unlike in China, most governments in other countries come and go more frequently; and (3) economic disputes are a systemic feature of the present uncoordinated multi-polar world.
Our principal policy suggestion to China is that, because China’s economy in 2018 is very different from that in 1978, there should be more reciprocity in China’s trade and investment relations with the advanced economies. China should not only give national treatment in the near future to foreign firms but should also set up a mechanism to start easing up on foreign acquisition of Chinese firms in a manner that is consistent with China’s national security concerns. Our principal policy suggestion to the US is to stop equating strategic competition with economic competition. Strategic competition is normally a zero-sum game while economic competition is usually a zero-sum game in the short-run, but generally creates a win-win outcome in the long-run. National economic dynamism and economic resilience emerge from international economic competition and not from sheltering domestic high-tech firms permanently.
Keywords: Trade War, Currency Manipulation, Forced Technology Transfer, US-China Relation
JEL Classification: F13, F32, F41, F52, O19, O32, O34, P33
Suggested Citation: Suggested Citation