Why China May Very Well Win a Trade War…

In a recent New York Times International piece (May 4, 2018) Thomas Friedman noted that America and China are coming at the current trade discussions from very different angles. The Trump Administration wants to draw the line now on trade before it is too late, before China gets too big. The Chinese believe they are already big and need to be treated as such. As one Chinese expert noted, “No one can contain China anymore.”

China has come a long way from the 1980s when it was simply the location of choice for cheap manufacturing. Under Xi Jinping’s vision of “Made in China 2025,” the country hopes to dominate 10 next-generation industries including robotics, self-driving cars, artificial intelligence, biotech and aerospace. America is scared and angry now. Part of the anger is justified. The Chinese have required foreign multinationals to share their best technology with local partners, who in turn often use this knowledge to set up competing operations. This is not right but it is the brutal fact of life of economic history. One hundred and fifty years ago we stole textile technology from Britain and took the center of the clothing industry from Manchester, England to Manchester, NH. Now it is our turn to feel the pain.

So why will China win a trade war? My father, Haldore Hanson wrote a book back in 1939 (Humane Endeavour, Farrar and Rinehart) recounting his 5 years as a newspaper reporter in China. In the last chapter he speculated that the Chinese would eventually win the war (which they did in 1949). Why? Because the Chinese have a peculiar indifference to time and an age-long patience. As one banker told him, “we must make enormous sacrifices for the next five years and perhaps ten. But I have complete faith that China will again be independent within twenty-five years.” Anglo Saxon impatience would not tolerate this but China is a country that bides her time.

Second, China has moved quickly to develop its own national champions, aided by the Government to keep foreign competitors out. Alibaba in online sales, JD.com in logistics, Tencent in social media, Huawei and Xiaomi in cellphones, the list goes on. An all-out trade war would just increase China’s urgency to produce national champions.

And finally, China’s ‘pragmatic authoritarianism’ can move much more quickly than our Democratic institution in countering the painful affects of a trade war.

The reality, however, is that China’s economic ascendency is not a slam dunk. They have many things to worry about. First is demographics. China is getting old fast. The one child policy has been very successful and with fewer young people, China’s employment pool is already shrinking. As the saying goes, China will get old before it gets rich.

A second concern is the income and opportunity gap in the country. Migrant labor has moved from the country to the city for better jobs. This group is now just about equal in number to the rising middle class. The migrants are discriminated against in education and health care and this group of younger workers may not be as docile as their parents.

And finally there is the whole issue of ‘pragmatic authoritarianism.’ Whenever China’s growth has lagged, the government has quickly initiated a stimulus program. This can’t go on forever. Debt is rising rapidly and there are only so many fast trains and subway lines the country can afford.

So it is a complicated world out there. President Trump needs to work hard to open China to American business but I would be careful of an all-out trade war. The Chinese have a lot of trump cards in their arsenal so to speak.

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