The Politics and Economics of the US-China Trade War

Abstract

The US declared trade war after substantial defections from the internationalist (in geo-strategy and economics) lobby in US politics to a new coalition between conflict-is-inevitable proponents and anti-globalization activists. Many internationalist businesses changed sides after experiencing disappointments on economic fronts including China's non-compliance with some of its WTO obligations; China's acquisition of foreign technology at lower-than-expected prices; and the serious inadequacies in the WTO's governance of global trade. Many of the disillusioned internationalists have given too much weight to the contribution of globalization to negative developments in the US labor market, and too little weight to the role of powerful capital-biased technological changes and to the inadequacies of state-provided programs for social insurance and human capital formation. Resolution of the trade war and prevention of its frequent occurrence will become more likely when (a) China adopts much greater reciprocity in its economic engagement with the advanced countries despite its status as a developing country under WTO rules; and (b) US stops equating geostrategic competition with economic competition; recognizes that economic dynamism and economic resilience comes from strengthening indigenous innovation capability rather than from holding China back technologically; and institutes social programs to significantly reduce the trauma that is created by frequent job changes. Deep reform of WTO is urgently needed but is unlikely to happen in the medium run. For the medium-run, the US should mobilize country cooperation in regional settings (like the TPP) to introduce policy innovations to serve as templates for a re-designed WTO architecture, and to harness collective market power to be used in future negotiations on WTO reform.