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 communication@bruegel.org.

View comments
Read article Download PDF More on this topic

External Publication

Europe – the global centre for excellent research

This report, requested by the European Parliament's Committee on Industry, Research and Energy, analyses the EU’s potential to be a global centre of excellence for research as a driver of its future growth in a complex global S&T landscape, and how EU public resources can contribute to this.

By: Michael Baltensperger and Reinhilde Veugelers Topic: Innovation & Competition Policy Date: May 22, 2019
Read article More on this topic

Blog Post

India in 2024: Narendra Modi once more, but to what end?

Even with the recent economic slowdown, India still boasts Asia’s fastest growing economy in 2018. But beneath the veneer of impressive GDP expansion, uneasiness about India’s economic model clearly tempers enthusiasm.

By: Alicia García-Herrero and Trinh Nguyen Topic: Global Economics & Governance Date: May 17, 2019
Read article More on this topic More by this author

Blog Post

What is in store for the EU’s trade relationship with the US ?

If faced with a resurgent President Trump after the next US election, the EU will have some difficult decisions to make as it is compelled to enter a one-sided negotiation. Failure to strike a deal will imperil the world’s largest trade relationship and contribute to the progressive unravelling of the rules enshrined in the World Trade Organization – although the changes required of Europe by Trump’s demands may ultimately turn out to be in the interest of Europeans.

By: Uri Dadush Topic: Global Economics & Governance Date: May 16, 2019
Read article More on this topic More by this author

Podcast

Podcast

Director's Cut: Evolution of US-China relations amid trade-tariff conflict

Bruegel director Guntram Wolff and Bruegel fellow Uri Dadush welcome William Alan Reinsch, senior adviser and Scholl chair in international business at the Center for Strategic and International Studies, for a discussion of how China-US relations are developing in the context of unfolding trade war.

By: The Sound of Economics Topic: Global Economics & Governance Date: May 14, 2019
Read article More on this topic More by this author

Blog Post

Implications of the escalating China-US trade dispute

If allowed to escalate, the trade dispute between China and the United States will significantly increase the likelihood of a global protectionist surge and a collapse in the rules-based international trading system. Here the author assesses the specific impacts on the Chinese and US economies, as well as the strategic problems this dispute poses for Europe.

By: Uri Dadush Topic: Global Economics & Governance Date: May 14, 2019
Read article More on this topic

Opinion

Will China’s trade war with the US end like that of Japan in the 1980s?

The outcome of the US-China trade war is anticipated to be quite different from the experience of Japan in the 1980s and 1990s, due to China’s relatively lower dependence on the US and having learned from the Japanese experience.

By: Alicia García-Herrero and Kohei Iwahara Topic: Global Economics & Governance Date: May 13, 2019
Read article More on this topic More by this author

Opinion

Trade war: Is the U.S. panicking due to China's big hedge?

U.S.-China trade war has suddenly taken centre stage following Donald Trump’s unexpected announcement to ramp up tariffs if no deal is reached. U.S. is in desperate need for a comprehensive victory, and China is ready to make concessions, but not to the extent of transforming its state-led economic model into a market-based economy.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: May 9, 2019
Read article More by this author

Blog Post

Spitzenkandidaten visions for the future of Europe's economy

What are the different political visions for the future of Europe’s economy? Bruegel and the Financial Times organised a debate series with lead candidates from six political parties in the run-up to the 2019 European elections.

By: Giuseppe Porcaro Topic: European Macroeconomics & Governance, Global Economics & Governance, Innovation & Competition Policy Date: May 8, 2019
Read article More on this topic More by this author

Blog Post

All eyes on the Fed

Last week the US Federal Reserve left the federal funds rate unchanged and lowered the interest rate on excess reserves. We review economists’ recent views on the monetary policy conduct and priorities of the United States’ central bank system.

By: Inês Goncalves Raposo Topic: Global Economics & Governance Date: May 6, 2019
Read article More on this topic

Opinion

Life after the multilateral trading system

Considering a world absent a multilateral trading system is not to promote such an outcome, but to encourage all to prepare for the worst and instil greater clarity in the mind of policymakers as to what happens if compromise fails.

By: Uri Dadush and Guntram B. Wolff Topic: Global Economics & Governance Date: April 25, 2019
Read article More on this topic More by this author

Blog Post

Does attaching environmental issues to trade agreements boost support for trade liberalisation?

This blog post shows that the omission of environmental issues in the new EU-US trade negotiations may make it challenging to pass the trade agreement in the European Parliament. In particular, the inclusion of environmental issues is pivotal to keep the second largest, centre-left S&D group in the pro-trade coalition.

By: Boram Lee Topic: Global Economics & Governance Date: April 24, 2019
Read article More on this topic More by this author

Opinion

What else China can do to support growth in the short term

Recent data shows the downward spiral in the Chinese economy has somewhat eased on a cyclical basis, but it is still too early to cheer for a full stabilization.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: April 23, 2019
Load more posts