Chamber in Review
No Need to Panic
Trade War

“The sky is not falling,” said Professor Lawrence Lau of the ongoing trade tensions between the United States and Mainland China. “There will be negative effects, but they will not be devastating.”

Lau was speaking at a roundtable luncheon on 4 March about his new book, “The China-U.S. Trade War and Future Economic Relations.” Lau is currently the Ralph and Claire Landau Professor of Economics at the Chinese University of Hong Kong, and Kwoh-Ting Li Professor of Economic Development, Emeritus, of Stanford University. 

To consider whether the trade war was having an impact, Lau first looked at major stock markets in the Mainland, which fell in 2018 before starting to recover. But he urged caution in placing too much emphasis in this area. “The stock market is not a very good barometer of the Chinese economy – there is very little correlation between the two.”

Currency changes also offer little reason for alarm, even though the RMB has declined almost 10% against the U.S. dollar. If you look at a trade-weighted currency index, Lau explained, the RMB has remained relatively stable.

He then turned to exports – the most likely victim of any increase in tariffs. Lau noted that Chinese exports and imports have fluctuated recently, but the Mainland’s huge domestic market means these fluctuations have limited impact.

“Being such a large economy, China is relatively immune to what happens outside,” he said. “Historically this has been true.”

Looking in more detail at the recent trade figures, Lau pointed out that Chinese exports of goods to the U.S. make up only 3.4% of GDP. And if you take into consideration value-added, it is even lower. For example, in the case of a US$600 iPhone made in China, the value added in China is probably only about $20. “My point is that there is no need to panic, and the reduction in GDP will be bearable.”

The trade war has also triggered concern about manufacturers moving out of the Mainland. But taking a longer view shows that this is just part of a wider pattern of shifting production amid economic development.

“Taiwan used to be the biggest shoe manufacturer in the world. Now, it doesn’t make a single pair of shoes,” Lau said. “Manufacturers are moving to ASEAN already, and the trade war will just accelerate this. This is a natural phenomenon that would have happened anyhow.”

The main reason given by the U.S. for triggering the trade war is the trade deficit. Lau shared his thoughts on the number used by the U.S. authorities of US$376 million. 

“This figure includes direct exports from China and re-exports that come through Hong Kong,” Lau said. “But does not include U.S. exports to Mainland China through Hong Kong. Which makes no sense.”

With this and other factors taken into account, the deficit is considerably smaller, about US$111 billion. 

But trade is only the tip of the iceberg, Lau said. There are other reasons behind the tensions, not least the rapid development of the Mainland.

“China and the U.S. will continue to compete for economic dominance in the world, and also for technological dominance.”

Lau then addressed some other concerns, such as intellectual property protection. In this area, China is making progress, he said. Its IP courts are now working well and handing down punitive fines to infringers.

This issue should also be put in historical perspective – Japan in the 1950s did not respect IP very much, he said. “There is a process, and China is now going over that tipping point.”

Forced technology transfer is also likely to become less of an issue, as foreign firms increasingly do not need to partner with a local company to operate in China.

Where Lau sees a stumbling block for the Mainland is in technology development. He said that the country’s Achilles’ heel is that it is not investing enough in R&D. “If you want to make breakthrough discoveries or breakthrough inventions you need to invest in basic research. Applied research is not enough.” 

To conclude, Lau said that although ties between Mainland China and the U.S. are at a low ebb, mutual trust can be rebuilt though increasing economic interdependence. Overall, he remains optimistic that the relationship will improve. 

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