The future of China's economy under the influence of trade tensions with the United States

Stepanov Nikita Sergeevich ORCID: 0000-0002-5136-8580 PhD in Economics Senior Scientific Associate, Institute of Economics of the Russian Academy of Sciences 117218, Russia, g. Moscow, ul. Nakhimovskii Prospekt, 32, kab. 720 stepanov720@inecon.ru Other publications by this author

A trade war begins when one country introduces solutions that protect its market from imports from another country or their group. Classical solutions (tariffs), non-tariff or parallel instruments (for example, the weakening of the exchange rate; the introduction of requirements, for example, certificates, the use of stickers with specific information; voluntary quantitative restrictions; fair trade requirements) can be used as protection tools), the content of ingredients, the condition of the ratio of ingredients coming from certain markets, etc. Analyzing from a historical point of view the conditions for the introduction of protective measures over the past hundred years, we can say that they have undergone a profound evolution. The tools used and the effects of protection measures introduced by individual countries have also changed ^[12].

Trade wars are a byproduct of protectionism, which is part of the government's efforts to restrict international trade. The policy of protectionism presents various arguments depending on the level of development of the economy and its commitment to the international division of labor. In developed countries, they often talk about protecting jobs from foreign competition, and in developing countries this is an argument based on the concept of protecting developing industries (young industry). On the other hand, in emerging economies, an argument is made in favor of business support, which is aimed at preventing the practice of absorption of developing companies by companies dominating the world market.

Often, the protection policy is applied in conditions of commercial scarcity. Protection measures can be taken by each country individually, regardless of its level of development, economic structure or share in the world market in terms of production, GDP or participation in trade. At present, it can be said that trade policy in countries with a higher level of development is characterized by greater openness than in the case of economies with a lower level of development. The first one notes a low level of protection using tariff barriers, which, however, is complemented by additional and parity protection. The situation is different in the case of three countries representing a group of emerging market economies, or developing countries and least developed countries. In general, we can say that the lower the level of development, the higher the protection of the market.

In less developed countries, tariff protection prevails. Experts argue about protection: some advocate the use of market protection, others - for the liberalization of access to it. Currently, protection, in addition to the traditional instruments mentioned above, increasingly includes activities aimed at restricting imports from countries that do not apply decisions taken by law or international agreements (violating democratic legal or institutional principles, not guided in their policies by regulations protecting the environment and countering climate change or violators of humanitarian law). Protection solutions were often implemented in practice, so that a country that had not used them before could use reductions as a mobilizing measure to reduce its partners. Such a solution is used, for example, when a State joins the General Agreement on Customs and Trade (GATT), which in practice means the introduction of tariffs that can be reduced during accession negotiations.

Currently, an attempt to strengthen protection is usually associated with specific practices of trading partners, attempts to stimulate their own exports, or policies aimed at changing the behavior of partners who are considered to be the source of a country's current account deficit. payments. The reason for using protection may be, on the one hand, an attempt to achieve a change in the terms of trade with a partner or partners whose actions are considered illegal. On the other hand, these are the actions of individual countries related to an attempt to stimulate exports or protect their own market (producers, jobs, businesses at the initial stage of development). The freedom to take protective measures is currently restricted as a result of certain global agreements within the framework of the International Monetary Fund (IMF), the World Trade Organization (WTO) and regional agreements. Institutionalization of international relations also means that States can take coordinated actions in response ^[10].

The rivalry between the US and China is a clash of two world systems: The Bretton Woods monetary System and the Chinese New Silk Road Initiative, which is the germ of a parallel system. The coronavirus pandemic has accelerated changes in both of these systems and increased friction between them. And today we are talking not only about the influence in the field of financial and monetary systems or the identity of civilization - the West against Confucian values, but also about the control of 5G infrastructure and international image in the context of responsibility for the outbreak of the pandemic.

China has already surpassed Europe, the United States and other Western countries in many ways, which has an impact on research ethics and public policy, as well as lead to the evolution of global political systems. The growing power of China has already set the United States the task of strategic rivalry ^[11]. Over the past decade, China's economic power and political influence have grown to unprecedented proportions at an extraordinary pace, reflecting the country's desire to become the world's leading power (Figure 1).

Figure 1. China's GDP dynamics ^[3]

As we can see, China's GDP has increased 15 times in two decades, which suggests that China can no longer be considered as a developing country. It is a key player in the international arena and a leading technological power, and its growing role in the world, including in Europe, should be accompanied by greater responsibility for maintaining a rules-based international order, as well as greater reciprocity, non-discrimination and openness of the Chinese economic system ^[1].

All these changes led to the fact that friction began to arise between the two states. According to statistics for 2017, 93% of China's exports were manufactured goods. Their share in imports is lower and amounted to 62.5%. There is an excess of exports over imports in the country. In the case of the USA, the share of manufactured goods in exports was 72.9%, and in imports - 77.8%. From February 2018 to January 2020, the United States increased customs duties on goods imported from China in the amount of 550 billion US dollars. In response, China imposed duties on imports from the United States in the amount of 185 billion US dollars ^{[2, 3]}. Steps on both sides were introduced gradually, as an agreement was expected to be reached. The structure of imports and exports of the countries involved in the conflict shows that the imposed burden affects the Chinese market more than the American one. Nevertheless, their influence is felt both in the economies of both countries and in the markets of other trading partners. An economic conflict of this magnitude is also noticeable in the existing transnational value chains.

As a result of long negotiations, on January 15, 2020, the US and China signed a Phase 1 agreement. The agreement, in fact, assumed a reduction in US tariffs on goods from China and an increase in imports from the US to China (an increase in the cost of importing certain categories of goods and services by at least 200 billion US dollars over the next two years, although it should be borne in mind that in 2017, China purchased $ 130 billion worth of products from the United States, and $56 billion worth of services). However, the tariff reduction did not apply to all imports from China, since imports worth $250 billion were still outside the scope of the agreement ^[5]. The agreement lists the categories of goods and services imported by China, which were divided into four commodity groups. These are industrial goods, agricultural goods, energy raw materials and services (Table 1).

Table 1. Additional imports of US goods and services from China provided for in the EPA (billion US dollars) ^[5]

Moreover, the parties pledged not to increase the level of duties in mutual trade. The agreement also imposed certain obligations to protect intellectual property on the PRC. With regard to this protection, it is interesting (in the context of emphasizing that the PRC economy is not a market economy) China's commitment to eliminate the practice of pressure on foreign companies to transfer technology to Chinese companies as a condition for market access or profit from the Chinese government, as well as the PRC's commitment to refrain from direct support of foreign investments aimed at acquisition of foreign technologies ^[7].

The PRC has previously made legal changes by adopting the law on foreign investment, which, in particular, prohibited administrative authorities from transferring technologies and changed the Law on Administrative Licensing, introducing a ban on disclosure of trade secrets by officials. The Phase 1 transaction also related to certain obligations of the PRC related to foreign exchange transactions (as a result of earlier reservations made by the US administration regarding the activities of the PRC in the foreign exchange market), and obliged China to open the financial services market to American companies. The provisions of the Phase 1 deal themselves seem to indicate that the US has won in the trade conflict being analyzed. We believe that the global economic dependence of states and industries on the PRC (which can be seen, for example, in the healthcare sector, especially in the pharmaceutical sector, etc.) may reveal a different distribution of accents in the future.

China is introducing innovative solutions, including in the field of artificial intelligence or global Internet infrastructure, which gives it a significant impact on the digital transformation of the world economy. A particularly important area for both powers is digital security, which has already contributed to the escalation of the trade war, as both China and the US are aware of the key role that 5G will play in new political and economic structures. When the economy returns to normal, monetary policy will return to it. In particular, with regard to monetary policy easing, as the Chinese authorities continue to prioritize reducing the level of public debt and reducing excessive debt ^[4].

Although investments in fixed assets, especially in infrastructure and real estate, helped to support economic growth in 2020, it is expected that this direction will develop in the near future. In particular, the development of 5G, data hubs and the Internet of Things is expected. In other areas, consumer habits in China will continue to evolve as their incomes grow. As part of long-term qualitative changes in consumption, spending on a wider range of higher-quality and more expensive goods and services has increased, which will stimulate the growth of domestic consumption ^[8].

The US dollar is expected to weaken in the long term due to the large double deficit (fiscal and current account) and unlimited quantitative easing programs. This will lead to a wider spread of the yuan. used all over the world. There are other factors that, in our opinion, should justify the strengthening of the yuan in the coming period. These include China's continuing economic advantage, the high interest rate gap between China and other major economies, the country's improving current account position, and limited demand from the global community. investors seeking to diversify away from the US dollar ^[9].

In the new conditions, the trade war between the United States and China should be considered as a conflict that sets a certain trend. There is more and more talk about new terms of trade liberalization agreements, whether bilateral, regional or global. The conflict between the United States and China did not turn into a deep collapse, similar to the conflict of the 1930s, because the institutional and real (production) ties between the economies have changed. They create a bond of interdependence that promotes consensus. The channels and methods of communication have also changed.  It is difficult to describe the current situation as a situation where the trade conflict that began in 2018 has ended. There is a possibility of new conflicts between the United States and China (not only trade), for confirmation it is worth pointing out that China calls for post-coronavirus expansion of Chinese enterprises, especially in sectors sensitive to the internal security of each country, but primarily in the context of human and civil rights and freedoms, such as 5G technology, artificial intelligence or industrial Internet of Things (IIoT) ^[6].

Thus, the determining factor in the development of China's economy in modern conditions is scientific and technological progress, which is realized in production processes through investment and innovation activities. The institutional subsystem is developing under the influence of changes in socio-economic relations: the development of methods and methods of self-organization and self-regulation of production (at this stage - market mechanisms), the development and implementation of ways of conscious, purposeful regulation of the economy (first of all, state policy on the formation of the economic environment) objectively necessary coordination of economic behavior between economic entities of different countries under the influence of deployment of globalization processes. At the same time, the nature of long-term dynamics depends on a sufficiently large set of different-quality factors that form the conditions of supply and demand within the national economy.