Opinion

China’s view of the trade war has changed—and so has its strategy

The truce agreed on by China and the United States at the sidelines of the recent G-20 meeting in Buenos Aires doesn’t really change the picture of the U.S.’s ultimate goal of containing China. The reason is straightforward: The U.S. and China have become strategic competitors and will continue to be so for the foreseeable future, which leaves little room for any long-term settlement of disputes.

By: Date: December 19, 2018 Topic: Global Economics & Governance

This opinion piece has been published in Brink

 

Thinking Strategically, Not Tactically

China’s recognition of the much more structural features of the U.S.-led trade war has also brought about a drastic change in its response to the U.S.

China has shifted from a tit-for-tat tactic based on retaliatory measures on trade to a three-pole strategy: sustaining domestic growth at any cost, finding alliances externally, and accelerating China’s upgrade of its technology capacity.

First and foremost, China needs to cushion its structural deceleration in growth. The problem became more acute in 2018 because of a much worsened sentiment stemming from the U.S.-led trade war. So far, monetary easing and a half-hearted fiscal stimulus have taken place in 2018, but neither has been enough to stop the deceleration of the economy. In fact, the announced 1.3 trillion yuan cuts in taxes($188 billion) do not seem to have been effective in stimulating the economy, and fiscal expenditure has not expanded, either.

The latter may be related to the increasingly tighter control of the central government on the investment of local governments, especially the clamp down on shadow banking, as well as the fear of President Xi Jinping’s anti-corruption campaign. On the monetary side, the liquidity injected by the People’s Bank of China (PBoC) since the spring to lower the cost of funding across the board has not been effective beyond the money market. In fact, private companies, in particular, have not profited from the reduction in the cost of funding.

Stimulating the Economy, Whatever It Takes

Given the above and the increasingly worrisome data on the investment and even the consumption front, China has no choice but to pull out all the stops and stimulate the economy. On the fiscal front, China is coming back to the quick fix—namely increasing infrastructure investment by allowing local governments to leverage further.

China’s realization of the structural nature of its competition with the U.S. has led the Chinese authorities to a more strategic, rather than tactical, response.

On the monetary side, the key for the PBoC is to improve the transmission mechanism of its monetary actions so that the private sector gets access to cheaper credit. In that regard, the PBoC is expected to do “whatever it takes” to support growth, which means pushing credit toward the private sector.

Given the size of the stimulus, China should be able to achieve a stabilization of growth or, at least, a moderate deceleration in 2019. This will constitute the best response to the U.S. containment, but we cannot forget that the sustainability of such growth is the key question mark down the road. In fact, leverage will only increase as the economy is stimulated through demand policies once again.

Cultivating the EU

Beyond growth, China has two key external objectives.

First, it needs to embrace more alliances, especially with the largest economies in the world. The European Union is the most obvious target, as its economic size as a bloc is comparable to that of the U.S. or China. This explains China’s recent push to improve its economic relations with the EU and with individual member states—the so-called 16+1 platform, composed of 16 Eastern European and Balkan countries and China is a good example as is President Xi’s recent trip to Spain and Portugal. The recently improved relationship with Japan is also clear in the light of China’s frantic quest for alliances.

Technological Self-Reliance

China’s second external objective—to achieve self-reliance by reducing its technology gap with the developed world—can be achieved more easily (or more quickly) by purchasing technology abroad. This would push China’s M&A activity to a further high, at least in the sectors targeted in China’s medium-term industrial strategy, Made in China 2025. The increasingly wary attitude of the U.S administration, along with other developed countries including Japan and Korea, makes the EU an easier target—although protection against China’s M&A is also on the rise in the EU.

All in all, China’s realization of the structural nature of its competition with the U.S. has led the Chinese authorities to a more strategic, rather than tactical, response to the U.S. containment push, which has characterized Sino-American bilateral relations since the beginning of the year.

More specifically, from a tit-for-tat retaliatory tactic, China is now focusing on pushing growth domestically, even if it requires pulling out all the stops and finding alliances externally while it accelerates its technological self-reliance through the acquisition of technology, especially in Europe.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read article More on this topic
 

Blog Post

A world divided: global vaccine trade and production

COVID-19 has reinforced traditional vaccine production patterns, but the global vaccine trade has changed considerably.

By: Lionel Guetta-Jeanrenaud, Niclas Poitiers and Reinhilde Veugelers Topic: Global Economics & Governance Date: July 20, 2021
Read article More by this author
 

Blog Post

The European Union’s carbon border mechanism and the WTO

To avoid any backlash, the European Union should work with other World Trade Organisation members to define basic principles of carbon border adjustment mechanisms.

By: André Sapir Topic: Energy & Climate, Global Economics & Governance Date: July 19, 2021
Read article More on this topic More by this author
 

Opinion

Could the RMB dislodge the dollar as a reserve currency?

The dollar remains the world’s largest reserve currency, but it is facing both domestic and external risks.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: July 14, 2021
Read about event More on this topic
 

Upcoming Event

Sep
3
09:00

The role of the EU's trade strategy for an inclusive and sustainable recovery

Bruegel Annual Meetings, Day 3 - We are delighted to welcome Valdis Dombrovskis, Executive Vice President of the European Commission for An Economy that Works for People to talk about Europe's trade strategy.

Speakers: Valdis Dombrovskis and Alicia García-Herrero Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1
Read about event More on this topic
 

Past Event

Past Event

Strengthening the weak links: future of supply chains

What new supply chains trends will we see in the post-pandemic era?

Speakers: Ebru Özdemir, André Sapir and Guntram B. Wolff Topic: Global Economics & Governance Date: July 7, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

CCP's 100th Anniversary: Reflecting and looking forward

As the Chinese Communist Party celebrates its 100th anniversary, we looked into the past, future and present of the country's economic development.

By: The Sound of Economics Topic: Global Economics & Governance Date: July 7, 2021
Read article Download PDF More on this topic
 

Policy Contribution

Commercialisation contracts: European support for low-carbon technology deployment

To cut the cost of decarbonisation significantly, the best solution would be to provide investors with a predictable carbon price that corresponds to the envisaged decarbonisation pathway.

By: Ben McWilliams and Georg Zachmann Topic: Energy & Climate Date: July 1, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

Avoiding a requiem for the WTO

The WTO has been 'missing in action': how can we restore the organisation's role as a global forum for cooperation on trade?

By: The Sound of Economics Topic: Global Economics & Governance Date: June 16, 2021
Read article
 

Opinion

Relaunching transatlantic cooperation with a carbon border adjustment mechanism

The best way for the EU and the US to jointly introduce carbon border adjustment would be to form a ‘climate club’.

By: Simone Tagliapietra and Guntram B. Wolff Topic: Energy & Climate, Global Economics & Governance Date: June 11, 2021
Read article More by this author
 

Podcast

Podcast

A transatlantic climate alliance

When Joe Biden visits Europe for the first time as US president, he should begin forging a transatlantic green deal.

By: The Sound of Economics Topic: Energy & Climate, Global Economics & Governance Date: June 11, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

Challenges and growth of China's private sector

Is the dynamic role of the private sector in China under threat by its economic model and the United States?

By: The Sound of Economics Topic: Global Economics & Governance Date: June 9, 2021
Read article
 

Blog Post

For the climate, Asia-Pacific must phase out fossil-fuel subsidies

An exit from coal in the Asia-Pacific region is a global decarbonisation priority.

By: Alicia García-Herrero and Simone Tagliapietra Topic: Energy & Climate, Global Economics & Governance Date: May 31, 2021
Load more posts