By Masahiro Kawai, specially-appointed professor at University of Tokyo
(Interviewed by economic reporter Taisuke Takeda)
It is very common in history for a hegemonic state to fear the rise of an emerging nation. The Chinese economy is expected to overtake the U.S. economy and China is expected to become the number one economic power in the world around 2030.
The Trump administration is very apprehensive that the U.S.’s economic hegemony and technological superiority will be threatened by China, which continues to grow under its “Made in China 2025” plan to strengthen its high tech industries. This is the background behind the intensification of the U.S.-China trade friction.
On the other hand, the U.S.-China relationship has been characterized by increasing interdependence through trade, investment, and finance. Neither of them desires to be hit with sanctions. China is very much a part of the supply chains of American, European, and Japanese multinational companies. Many American and Japanese companies do business and invest in China. They manufacture products in China to export to other countries.
With the trade frictions escalating and sanctions and punitive tariffs reaching several hundred billion dollars, the breakdown of these supply chains is becoming a real possibility. This will not only deal a serious blow to China, which has continued its growth as the “world’s factory,” but will also have a tremendous impact on the world economy as a whole.
President Donald Trump takes issue with the enormous trade deficit with China and is adamantly demanding that it be reduced. However, even if the deficit with China can be reduced, products and materials will have to be imported from other countries as long as demand exists in the U.S., so its overall trade deficit will not diminish. It is practically impossible to reduce deficits through trade policies.
Yet Trump continues to put stronger pressure on China probably out of his desire to show the voters that he succeeded in forging a “deal” with China ahead of the midterm elections in November.
China also needs to change in many areas. It needs to strengthen protection of intellectual property rights, refrain from forcing foreign companies to transfer technology, and stop providing subsidies and other unfair government support to state-owned companies.
It is important for Japan to continue to urge the U.S. to return to the TPP. There is growing discontent among U.S. industries and agricultural organizations, which will become less competitive due to the U.S.’s withdrawal from the TPP. If the Trump administration’s trade policies become untenable, it is not totally inconceivable that the U.S. would return to the TPP.
Japan and Europe should work together to call the U.S.’s attention once again to the importance of trade based on WTO rules. Japan should take the lead in working to implement measures that will also benefit the U.S., such as the reduction of government subsidies, with China in mind.