Is China About to Overtake the US for World Trade Leadership?

 
 
China is talking about championing open markets just as the United States is warning of tariffs, border taxes, and renegotiated agreements. Are the two countries about to switch places for world trade leadership? asks James Heskett. What do YOU think?
 
 
by James Heskett

For once, I’ll disclose a personal bias up front. In the early 1960s, I signed on as a member of a group that sponsored an ad in The Columbus Dispatch titled, “Trade With Red China.” Rather than advocate a position, the ad laid out the pros and cons of establishing a trade relationship between the United States and a largely isolated but feared China. Nevertheless, it got my name on a blacklist of faculty members attached to a letter from an alumnus to the president of The Ohio State University at the time, demanding a reprimand or worse.

How times change. Of course, a few years later, president Richard Nixon embarked on his momentous trip that literally changed the course of US-China relations and history. Little by little, trade relations between the two expanded. China, for a time, became a primary manufacturer of goods for US markets--economists estimate that up to 2 million manufacturing jobs shifted from America to China.

At one time, the Chinese government was taking obvious steps to hold down the value of its currency, triggering a chain reaction that some believe contributed to the Great Recession of 2008. Here’s their thinking: Although the depressed value of the yuan increased the cost of raw materials imported by China, it produced a huge flow of manufactured goods from China to this country. A large current account trade deficit for the US followed, with the resulting funds invested by the Chinese government in US Treasury bonds instead of going into increased consumption by Chinese consumers. This depressed global interest rates and encouraged what turned out to be imprudent borrowing (and lending) practices in the world’s largest economy.

Since then, labor costs in China have risen to the point where a great deal of the original kind of manufacturing performed there has moved to lower-cost countries. Currency manipulation is thought to have subsided. The current account trade imbalance has shrunk. Chinese consumers are being encouraged to spend more of it. And the leadership of the Chinese government appears to be adopting a new stance concerning free trade, one that appears to be at odds with core beliefs of China’s ruling Communist Party.

When President Xi Jinping spoke to the World Economic Forum in Davos recently, according to a report in The New York Times, “He championed free trade and open markets, setting the tone for the week.” The facts on the ground seem to support that position. China is overtaking the United States as a trade partner of Latin American countries, for example. The Chinese government/industrial complex (it’s hard to sort it out) is buying companies and investing in projects around the world. In the meantime, a populist and nationalist wave has produced a power shift in America. Whether it will lead to the threatened tariffs, border taxes, and renegotiated trade agreements (with an emphasis on bilateral agreements) mentioned by the new administration is still subject to debate. But the tone of utterances by those now in position to influence US trade policy is in distinct contrast to the position of free trade advocates in past administrations.

The biggest factor influencing world trade leadership is the relative health of the economies of the US and China. As Thomas Christensen put it in his book, The China Challenge, “before we worry ourselves about Chinese economic growth, it might be best to consider the implications of Chinese stagnation!”

So are the roles of the US and China in world trade reversing? If President Xi believes, as he says, in free trade, will he be in a position to deliver? In the meantime, is current US talk about renegotiating long-standing trade agreements along with tariffs and tighter borders just talk? Is Chinese world trade leadership on the horizon? If so, what will it mean for the rest of us? What do YOU think?

References:

Thomas J. Christensen, The China Challenge: Shaping the Choices of a Rising Power (New York: W. W. Norton & Company, 2015)

Alexandra Stevenson, “Global Elites See an ‘Abyss’: The Populist Surge Upending the Status Quo,” The New York Times, January 20, 2017, p. B2.

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