Qiu Dongxiao | The Sino-US trade friction will exist for a long time and requires a third - party ba

On the afternoon of December 7, 2019, Qiu Dongxiao, Vice Dean of the Faculty of Economics and Business Administration of the University of Hong Kong and Chung Han Tak (Economic Development) Foundation Professor, attended the "2019 International Trade Relations and Globalization Restructuring" academic seminar jointly organized by the Center for International Finance and Economics Research (CIFER) of the National Institute of Financial Research of Tsinghua University and the Center for Cross-border Digital Capital Research (IDC) of the Institute of Fintech Research of Tsinghua University at the Centennial Auditorium of Tsinghua University, and participated in the roundtable discussion on "China-US Trade Dispute and World Order".

(Professor Qiu Dongxiao's speech)

Professor Qiu Dongxiao believes that the Sino-US trade dispute will be protracted, inevitable, and extremely difficult to resolve. While the two economies are roughly equal in strength, significant differences exist in their ideologies, such as political systems, legal systems, and cultures, which ultimately manifest in economic matters. To resolve the contest between two powerful nations and avoid a lose-lose situation, a stronger third party is needed to mediate. However, such a mediator does not currently exist, and the WTO cannot fulfill this role. For a long-term solution to the Sino-US trade dispute, in addition to bilateral communication and agreement, third-party supervision and enforcement are also necessary to maintain long-term stability.

The following is a transcript of Professor Qiu Dongxiao's speech at the roundtable forum:

(Professor Qiu Dongxiao's speech)

Thank you very much for this opportunity to share such an important issue with you. What makes me different from other teachers is that I come from Hong Kong. You may want to ask me questions about Hong Kong, which may be related to the US-China trade issue, but we will not talk about Hong Kong today.

Because these teachers have a very deep understanding and research on the domestic economy, we often say that we can't see the true face of Mount Lu. I would like to look at this issue from a place next to Mount Lu.

Professor Zhou just emphasized that the Sino-US trade dispute will last for a very long time, and I completely agree. However, my view is that Sino-US trade friction is inevitable and very difficult to resolve.

What I want to talk about now is a lecture I attended in Hong Kong in 1995 by Paul Krugman, a very famous international trade scholar. He was at MIT at the time, and he won the Nobel Prize in 2008. I remember him saying something like, "We've all given many speeches, and if someone remembers one of your speeches 10 years from now, that's truly remarkable."

He said that a very important global issue in the next century would be the conflict between China and the United States. At the time, no one believed him because at the end of the last century, Sino-US relations were very good (e.g., economic and political relations). Why would there be such a big conflict in the next century? He couldn't explain the specifics of the conflict, but he said it was inevitable. No one believed him because at that time, the United States was the most powerful country—economically, militarily, and in every other way. No country could rival it. In that situation, there was no conflict. When there is only one dominant figure in society, there is no conflict; everyone listens to him.

However, by the next century, based on China's economic development level and speed, it will certainly be comparable to the US economy. At that time, China will be very powerful, not only in terms of total economic output, but also in terms of military and other high technologies, which will be able to rival the US.

However, there's no problem when there are two economies in the world with very similar strengths. The problem arises when these two economies are roughly equal in strength but have very different ideologies, and thus cannot become friends. In the next century, the US and Chinese economies will be roughly equal, but they will still have many differences, such as political systems, legal systems, and cultures, which will lead to many conflicts, and these conflicts will ultimately be reflected in the economy.

In fact, what we're seeing now has confirmed this prediction. So how do we solve it? I won't go into specifics now, because if we get into specifics, we'll be overwhelmed by them. I'll look at this issue without considering the US-China relationship, and use an analogy: if two people are fighting, how do you resolve it? There are three possibilities.

If both of them are weak, it doesn't matter; let them fight it out. Or, if a stronger person comes along and tells them to stop causing trouble, the matter will easily be resolved.

The second possibility is that two people are fighting, one is very strong and the other is very weak. In either case, it's a quick resolution, or it might not even happen at all. This is because the weaker person wouldn't dare challenge the stronger one; if they overestimate themselves and go into battle, they'll likely lose quickly.

The third scenario is when both sides are very strong. What then? If a war breaks out, both sides will suffer heavy losses. How can this be resolved? It's very difficult to resolve unless an even stronger power intervenes, or a neutral third party intervenes. Currently, there is no stronger power than these two countries to intervene. The WTO is there, but it can't play its role, so there's no way to resolve the issue. Therefore, I am very pessimistic about the third scenario.

The following is a transcript of Professor Qiu answering questions from the audience:

QuestionProfessor Qiu Dongxiao raised a point that the core of the current Sino-US conflict lies in the clash of viewpoints between the two countries. In your speech, you mentioned that China advocates for joint construction, consultation, and shared benefits in the global economy, while the US maintains its hegemonic and stability-oriented stance. My question is, under the current circumstances, how can we make the US realize, or rather, agree with, our idea of ​​joint construction and consultation, and work together to promote the future economic development of the world?

answer:I don't have a specific solution to this problem yet. Let's go back to the original comparison: when two very strong people are fighting, what are some ways to reconcile them? Without a third party to stop them, they'll only stop fighting when both are injured. But after a while, if their opinions differ, and they start fighting again when they've recovered their energy, they'll start fighting again.

Anyone who has studied economics or game theory knows that the relationship between China and the US is not just about trade; it involves many other disputes, which can be understood as a prisoner's dilemma: if everyone fights, it's bad for everyone; if everyone stays at peace and coexists, it's good for everyone. But how can we achieve the second win-win outcome? The only way is through communication and negotiation to reach an agreement. However, negotiation alone is not enough. There also needs to be a mechanism to implement the agreement. Regarding the current negotiations in the China-US trade negotiations, we shouldn't have too high expectations. Whether an agreement will be reached this year, or whether there will be any results next year, is not important.

Even if an agreement is reached, the question remains how it will be implemented. If we return to reality, we need more communication between China and the US to understand each other's interests and disadvantages. After an agreement is reached, a third party is needed to implement it, but there isn't one right now. Even if an agreement is reached, it won't be effective; it will only provide temporary relief.

What we should have hoped for was the WTO, but as I just mentioned, the WTO is essentially dead. Even if it weren't, it wouldn't be of any use. Let's think about it: before 1995, there was the General Agreement on Tariffs and Trade (GATT). The only difference between the WTO and the GATT is that it added an institution similar to a tribunal on the basis of the GATT. That's the difference between the WTO and the GATT.

So now everyone recognizes the importance of this issue. But even if the WTO still exists, it cannot solve the problem of Sino-US trade. In the past, the WTO could play a little role and could only solve single problems, such as the dumping of Chinese bicycles or color TVs in the United States. The WTO could solve these problems, but it would take several years.

However, the current trade issues between China and the US cannot be resolved by the WTO because they are not isolated problems. It's impossible to solve them solely through the WTO; even if you did, it would take eight to ten years to resolve them. This is my reason for pessimism. Therefore, governance is crucial; simply signing an agreement is useless. The North American Free Trade Agreement (NAFTA) is a good example. This agreement has existed for a long time, and everyone believes it is very effective. However, we see that it is still very fragile because it lacks a regulatory and enforcement mechanism, thus failing to achieve stability. This is my view.