MA Hong on Deep-seated Reasons for U.S.-China Trade Disputes and Future Prospects

Tsinghua Professor predicts a trade pattern of China exporting upstream products to many smaller economies which process, assemble, and finish products for Europe & America.

The following is a speech published in the WeChat blog of the School of National Development at Peking University on January 21, 2025. It’s concise and straightforward, so no summary is necessary.

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马弘：中美贸易分歧的深层原因与未来

Ma Hong: Deep-seated Reasons for U.S.-China Trade Disputes and Future Prospects

On December 21, 2024, taking advantage of the 4th Annual Academic Conference of CCER-NCER, the School of National Development at Peking University and the editorial department of 比较 Comparative Studies from CITIC Press specially held the 29th Chengze Forum. Several scholars and editors-in-chief were invited to discuss the principles and methods of economic research in China's new era, using the 经济学研究年评 Annual Review of Economic Studies (Volume 1, 2024) as a model.

The discussion focused on how to innovate while upholding integrity in economic research during this new stage of historical development. The following article is based on a speech by Professor MA Hong from the School of Economics and Management at Tsinghua University, Deputy Director of the National Center For Economic Research at Tsinghua University, and Associate Editor of the Journal of Comparative Economics, China Economic Review, and Review of International Economics.

The U.S.-China trade war has sparked numerous discussions. The articles I collected in the book Annual Review of Economic Research mainly explore three aspects: the causes, impacts, and future of the U.S.-China trade war. Today, I will briefly share my understanding.

The Deep-seated Causes of the U.S.-China Trade War

Milton Friedman once famously said, "The social responsibility of a company is to increase its profits." This view is quite different from today's popular opinions. I believe Friedman meant that when a company's profits grow, it can clearly identify that its products are marketable, leading to expanded production, which in turn increases the demand for labor. In a society with full employment or near full employment, hiring more workers will raise wage levels and increase workers' incomes. The increase in workers' incomes will then prompt them to buy more goods. As the sales volume of goods increases, the company's profits will rise again. This process forms a positive feedback loop.

Under this logic, since the Ronald Reagan administration, a new political and economic system of neoliberalism has been initiated and has developed to this day. Looking back at its history, some problems that were not foreseen at the time have been discovered.

On the one hand, Wall Street has triumphed over Main Street, and the financial industry has become the most profitable and prioritized sector in society. In the production process, the interests of shareholders, especially large shareholders, are placed first. At the same time, the pursuit of efficiency has reached its extreme.

On the other hand, starting in 1989 and 1990, with the rise of the Iron Curtain and the fall of the Berlin Wall, history seemed to have reached its end. Multilateralism triumphed over the Cold War, and market economy, economic liberalization, and globalization became the consensus. During this process, China successfully joined the World Trade Organization (WTO).

On one side, Wall Street became Main Street, and on the other side, history ended. Ideology no longer constituted an obstacle to our communication and free trade. At this time, multinational corporations grew increasingly large, crossing the borders of sovereign nations, and began to advocate for asset-light models, outsourcing heavy asset production links to countries rich in labor resources and with relatively lax environmental regulations. When demand increases, companies expand production through outsourcing rather than hiring more employees. Therefore, jobless growth has appeared in developed countries, while in developing countries, especially in countries like China, the economy has developed rapidly since joining the WTO.

In the report of the 16th National Congress of the Communist Party of China, (then) General Secretary Jiang Zemin very accurately explained the achievements of China's accession to the WTO: "In response to the new situation of economic globalization and China's entry into the WTO, we should take part in international economic and technological cooperation and competition on a broader scale, in more spheres and on a higher level, make the best use of both international and domestic markets, optimize the allocation of resources, expand the space for development and accelerate reform and development by opening up." I believe this statement is extremely accurate. The concept of dual circulation mentioned in the report to the 19th National Congress of the Communist Party of China is roughly the same.

Mr. Lee Kuan Yew said in 1994 [Zichen’s note: actually 1993], "The size of China’s displacement of the world balance is such that the world must find a new balance in 30 to 40 years. It’s not possible to pretend that this is just another big player. This is the biggest player in the history of man. ”This raises a question for us: What is the "size of China’s displacement of the world balance"? In the book Annual Review of Economic Research, I have sorted this out and tried to reveal some explicit manifestations of China as the largest participant in human history.

Looking back at China's share of global manufacturing output since 1995: in 2021, China's manufacturing output accounted for 35% of the global total, three times that of the second-place United States, almost equal to or even exceeding the total of the G7 old industrialized countries. According to the import and export data of China's manufacturing industry over the years, the value of China's exports has significantly exceeded the value of manufactured goods imported from abroad. In 2023, the value of China's manufacturing exports exceeded the value of imports, with a surplus of $1.6 trillion, equivalent to about 9% of our GDP and 1.5% of the global GDP. Before the U.S.-China trade war broke out in 2017, China's trade surplus with the United States had long been maintained at about 50%. I understand that a considerable part of the U.S. global trade deficit comes from China. More data is not needed to illustrate; these are enough to prove that China has become an extremely important participant in human history. Some scholars have begun to explore the profound significance of this status for human history.

Professor QIN Hui of Tsinghua University pointed out in 2008: 中国模式将迫使福利国家降低福利标准，同时迫使自由经济体重塑贸易壁垒 "The Chinese model will force welfare states to lower their welfare standards and force free economies to reshape trade barriers." This view reflects the deep insight of outstanding historians into the historical process. Indeed, we are witnessing welfare states lowering their welfare standards, and free economic entities are reshaping their trade barriers. In 2013, three outstanding American economists wrote an article revealing that as China's share of U.S. total imports gradually increased, U.S. manufacturing output and worker employment rates rapidly declined. [Zichen’s note: possibly The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade by David H. Autor, David Dorn, and Gordon H. Hanson.] The problems described in Hillbilly Elegy by U.S. Vice President JD Vance in 2016 and Deaths of Despair and the Future of Capitalism by Nobel laureate in economics Angus Deaton can be partially attributed to globalization and international trade. If the problem of income inequality is not properly solved, and intergenerational mobility decreases, leading to the solidification of classes in society, it may encounter corresponding political countermeasures. In areas more affected by import competition from low-income countries, residents were more likely to support Trump in the U.S. presidential elections in 2016, 2020, and 2024.

The Impact of the U.S.-China Trade War

In this article in the book, I reviewed the impact of the U.S.-China trade war, the U.S. imposition of additional tariffs, and the U.S. counter-tariffs on the trade volume, import prices, welfare, GDP, consumption, employment, business operations, and supply chains of the two countries. Due to the numerous details, I will not list them one by one here. It is worth emphasizing that the observed phenomena indicate that after the U.S. imposed additional tariffs on China, U.S. import prices rose rapidly, leading U.S. importers to start importing from other countries, which in turn led to industrial transfer. By 2023, the proportion of U.S. imports from China in its total global imports had dropped to about 14%, compared to 21.6% before the U.S.-China trade war broke out in 2017. This change is significant.

The Future of U.S.-China Trade

Looking to the future, the pattern of international trade will change significantly due to the U.S. imposition of trade tariffs on China. The U.S. import volume from the Chinese mainland has plummeted, while the U.S. import volume from Mexico, Vietnam, Taiwan, Canada, South Korea, India, and other regions has rapidly increased, filling the gap left by the Chinese mainland. At the same time, as China's export volume to the United States decreased, China instead exported products to Vietnam, Mexico, Malaysia, Thailand, and other countries. This will lead to a significant overlap in trade flows.

Traditionally, we are familiar with the pattern where many countries export upstream products to China, which are then processed and assembled before being exported as finished products to European and American markets. In the future, this pattern may change to China exporting upstream products to many smaller economies, where they are processed and assembled before being exported as finished products to European and American markets.

Another possible future trade pattern is the fragmentation and reorganization of the global market, with the WTO being marginalized and the world shifting from the past super-globalized multilateralism to regionalization. In the process of regionalization, one or more powerful countries often play a crucial role. An important purpose of the U.S. initiating the trade war is to free the U.S. from its past dependence on China's supply chain and seek imports from other countries. Besides China, the U.S. needs at least one or more supply chain providers.

Based on these factors, I am cautious about the development prospects of U.S.-China trade in the next decade.