Trade wars hit global recovery

China should push ahead with its policy of trade liberalization despite all the protectionist measures introduced by the US

Superficially, turning to trade protectionism will improve a country's international payment conditions and its economic structural adjustment, but it will also aggravate the shrinking of the global economy and further increase the costs for countries trying to emerge from the lingering international financial crisis. Trade wars will also result in distorted resources distribution in the countries involved and undercut the efficiency of global economic development.

The Obama administration knows this, but plagued by domestic economic woes, it has chosen to instigate trade wars, turning a blind eye to the fact that such acts contravene its own long-standing calls for trade liberalization.

The US is confronted with high unemployment and an economy that is undergoing another long and profound "cyclical adjustment". Although there have been some signs of economic recovery and the jobless rate has declined following the introduction of innovation-led measures, there is still a large army of non-technical laborers who can't find jobs.

The "Occupy Wall Street" movement and other protests across the US over the past year have prompted the Obama administration to seek every available means to create jobs in a bid to boost his re-election chances. Similarly, the "re-industrialization" strategy put forward by the Obama administration is also a reflection of its intention of playing the trade card with China to regain the China-bound low-end industries and resolve the issue of employment for its low-end labor.

The US also views trade wars as an important means to regulate the US' economic contest with China. Compared with Washington's struggling efforts to change its economic and financial deficits since the start of the global financial crisis, China, as the largest holder of US debt, has greatly consolidated its position in the global economic arena. Whether in trade or in the build-up of its real economy or in the internationalization of its financial strategy, China has demonstrated a positive and proactive approach. In particular, its efforts to promote reforms of the international monetary system and its efforts to push for internationalization of its currency, have all been viewed by Washington as a huge challenge to an indebted US that has witnessed the decline of its international reputation.

Washington regards reversing its trade deficit with China and preventing the decline of the US dollar as the world's hegemonic currency as top priorities. At the same time, containing the continuous expansion of China's trade surplus is also believed to be an important way to check the threat to its long-established economic dominance.

The US-spearheaded trade wars against China under the US-dominated world's economic pattern will have extremely unfavorable effects on China's trade relations with its other trade partners. Given that trade wars waged by one country can easily spread to the rest of the world in an era of economic interdependence, the US' protectionist practices are likely to cause other countries to follow suit. This, if it becomes reality, will cast a huge shadow over the already-fragile global economy.

In the face of increasingly complicated trade wars, China should continue adhering to its policy of trade liberalization, especially as its domestic demand is yet to be fully cultivated. At the same time, it should try to increase its international policy coordination with other countries and take advantage of the platform of international organizations and other multilateral cooperative channels to increase imports from the US or other trade partners who suffer trade deficits with it to prevent China alone sustaining the cost for international payment imbalances. China can also consider working together with other nations enjoying a trade surplus with US to adopt voluntary measures to help the US create job opportunities instead of allowing Washington to implement a quantitative easing monetary policy.

China should be well aware that any of its measures to promote industrial upgrading, structural adjustment or increase incomes, if not suitable for its current national conditions, will possibly have unwanted economic results. The accelerated adoption of an impracticable industrial upgrading strategy is very likely to force young sectors to abandon industrial development and enter the fictional economic field, which will fuel the growth of bubbles.

The author is vice-dean of the School of Economics at Fudan University.

(China Daily 04/06/2012 page8)