S
Source: ANBOUND
Tuesday, May 14, 2019

As the U.S.-China trade talks see both sides continue to engage in negotiations, there are huge differences present, and an agreement does not appear to be possibly reached within the short term. On the one hand, the U.S. raised tariffs on US$ 200 billion worth of Chinese imports from 10% to 25% and this posed tremendous pressure on Chinese exports; on the other hand for China's latest counter response, it raised tariffs on US$ 60 billion of U.S. goods effective June 1. The situation seems to show that the United States hopes to exert an all-rounded pressure on China with its own advantages in the economy, finance, science and technology. Its goal is not merely to resolve bilateral trade imbalances, but also to regard China as a long-term strategic competitor and implement suppressive measures. Facing America's pressures, it appears that China is still lacking strategic solutions for this "U.S.-China co-opetition".

Since Anbound first brought up the "U.S.-China strategic co-opetition", it raised a warning about the change in the direction of U.S.-China relations. We believe that the U.S.-China trade conflict is part and parcel of strategic competition and it is a long-term strategic environmental change that China must face. China cannot hope for an easy solution around this. Anbound has always emphasized for China to pursue expanding market space, reform and opening-up. In other words, China should have a strategy of adopting both internal and external facing measures, with more emphasis given on the internal ones. This should be China's strategic breakthrough direction in its economic and social development decision under the new changes presented in the international environment. We believe that in response to the new U.S. trade barriers and global competition, China needs to place more consideration on a systematic response to the U.S. pressure from a well-rounded perspective, taking into account the economic and social development aspects.

Firstly, in terms of economy and trade, China should adopt a strategy of "unilateral confrontation and multilateral openness." Under normal circumstances, the upgrade of industry and the increase of economic competitiveness would emphasize on improving efficiency, technology sharing or establishing supply chain to evoke an agglomeration effect. However, our current time is not a time of normal circumstances. China can instead consider lowering tariffs on certain economies and even think about imposing zero tariffs. Yet, China should not open-up to the United States and should instead isolate the United States. This approach is not only compatible with the "1+3" geo-economic pattern previously proposed by Anbound, but it also creates a condition for other countries in the world to introduce American technology into China while bringing up the attractiveness and drawing power of the Chinese market scale. This might encourage the United States to abandon its tariff increasing policy. This "zero tariff, zero barrier" approach can also be extended from trade to investment. For instance, China can implement a "zero barrier" for businesses under the framework of the WTO, expanding the current special policies of free trade zones to a wider scope.

Secondly, China will also need to continue to expand its domestic market and make it more attractive. As mentioned above, Anbound continues to stress that China should adopt both internal and external measures, with more emphasis given on internal measures. This means that China should expand its domestic market and seek to resolve the problems that are present in the domestic market. As a huge country, China has sufficient market space. As per Anbound's analysis, in this age of overproduction and excess capital, market space itself can be regarded as a competitive power. In terms of the internal measure of building up the Chinese market, the main aspect is to ensure employment and consumption. To achieve this, it requires not only the stimulation of fiscal policy, but also the coordination of monetary policy in order to promote infrastructure investment, improve people's livelihood and increase residents' income. The most important thing at the moment is to reduce the total costs of society. This means taking a look at taxes, the cost of real estate, institutional barriers, government administration and so on. Stabilizing all these aspects would bring stability to the increasing cost and ensure it matches the speed of consumption. In turn, this would effectively increase the demand for a market space expansion.

In addition, China must continue to expand its financial market. Anbound's scholars have analyzed that the biggest problem faced by China due to the deterioration of the condition of the trade friction is not from the loss in tariffs, but because of the loss of capital and the departure of foreign capital, which has led to the depreciation of the RMB exchange rate. Even if all trade issues are resolved, the subsequent major issue is the financial problem between China and the United States. This financial problem comes from a combination of internal and external issues. Failure to deal with the problem can lead to huge fluctuations in the economy. Many people are still skeptical about China's continued financial openness, but it is important to understand that when the external economic environment is under pressure, China's insistence on financial openness and the improvement of financial market rules is of great significance. If China attracts the entry of international financial capital with stable financial openness, and uses the depth of its financial market to accommodate international financial capital and encourage them to remain, from a macro financial point of view this will partially "hedge" the reduction of capital inflows in the economy and trade, as well as the capital outflow losses of the real industry. In other words, the entry of international financial capital will partially compensate for the capital losses caused by the trade conflict. Additionally, capital inflows brought by the opening-up of the financial market will also help maintain the stability of the RMB exchange rate.

Finally, China needs to continue its reform. The real problem of the Chinese economy is actually not from the trade conflict, rather it lies in the Chinese economy itself. Whether or not the trade conflict exists, these internal problems will occur and might create a huge impact. The extensive development caused by the lapse in development strategy and the stagnation of China in its direction of market-oriented reform have become institutional obstacles to the sustainable development of China's economy. Further reforms, optimizing resource allocation and establishing a healthy market mechanism are the keys to solve China's economic structural problems. The reforms of urbanization, state-owned enterprises, and rural areas can release potentials in the Chinese economy for China to gain advantages and momentum to achieve sustainable growth. This is also one of the fundamental reasons behind our strategy of adopting both internal and external measures, while placing more emphasis on internal measures.

Final Analysis Conclusion:

The change of the U.S.-China trade environment and the relations between the United States and China are long-term strategic changes. China's response should not be limited to international trade itself, but should also seek to expand market space with the overall strategy of reforming and opening up to face the pressure the United States puts on China.

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