"There will be sporadic trade frictions between China and US"

The relationship between the United States and China is at a bittersweet stage since the last few months. Last week, the US imposed tariffs on imported Chinese-made solar panels and washing machines. In his speech at the World Economic Forum (WEF) in Davos, US President Donald Trump said: “The US will no longer turn a blind eye to unfair economic practices including massive intellectual property theft, industrial subsidies and pervasive state-led economic planning. These and other predatory behaviours are distorting the global markets and harming businesses and workers not just in the US but around the globe.”

The measures and positions, especially in terms of protectionism, adopted by the US make the relationship between the two countries “very challenging”, according to Xu Sitao, Chief Economist & Partner at Deloitte China. He was invited by the CFA Society of Mauritius (CFASM), last Friday, to deliver a presentation on ‘The Elephant and the Dragon: Changing Dynamics that affect Asia and Beyond’.

The speaker talked about China’s economic model, growth, geopolitics and the relationship between China and India; and the United States.

According to him, China is five times India, accounts for 50% of the global market and depends on external demand. Growth has been very fast and high but, he pointed out, at some point, debt can grow no more. It’s in 2001 that China started benefitting from globalization and international trade. However, trade frictions with the US were already visible. “2018 will be a very challenging year for China-US. The latter is of view that China has been cheating. But both countries are economically complementary. It will be difficult for China to be soft to US, but we should just play ignorant for the time being,” he added.

As concerns India, he is of view that for the Chinese economy to grow at 6% right now is difficult; however it is easier for India to grow at 7% this year. He lauded Narendra Modi’s, India’s Prime Minister, reforms which “are very impressive so far.”

Regarding China, he is of opinion that China’s growth model has changed, and “losers will be countries selling hard products to China”. China is likely to move into a slower growth trajectory, however, the economic transition will benefit those who can take advantage of China’s consumption upgrade




>> Can we say that there is a rivalry between China and India?

I wouldn’t say it’s a rivalry. Both countries can learn from each other. In fact, China can learn a lot from India. First of all, I think, India has a very good financial system, that is a capital market and banks which allow the financial system to allocate resources more efficiently. Secondly, I think the Indian system can prevent major risks. If we study China’s recent history from the 1950s, those kind of things won’t take place in India because of its system. However, India can also learn from China. For example, China really puts a lot of emphasis on infrastructure. It also has an unwavering commitment for opening up the economy. The bilateral relationship is very important, of course. There is a big imbalance favouring China which can also mean, potentially, that China can import more from India, like pharmaceutical or agricultural products. China is the biggest supplier of chemical goods, machinery and electronic products. India is having difficulty in selling to China. More Chinese investments can be made in India. These two countries have a lot to learn from each other.

>> You said during the presentation that the two countries do not know each other too well. Yet, The Economist and Time depicted them as ‘China and India – A tale of two vulnerable economies’, ‘How India’s growth will outpace China’s’, ‘India vs. China’…. Why is this so?

I think because in ten or fifteen years, there will be more Indians and Chinese in terms of population. And the Indian population will exceed the Chinese population. Secondly, when you look at China-India, people tend to compare the two systems. Also, it’s always interesting to see whether developing countries with massive population can evolve into a fully developed country. So, you have the experiment being made within both countries. That’s why this comparison is being made constantly. And of course, the reason I have taken the covers from The Economist magazine is because I used to work there before, and I think they have good covers in terms of sensational and catchy phrases.

>> Globalisation and protectionism have been at the centre of the debate at the World Economic Forum being held [Ndlr: last week] in Davos, mostly because of the United States’ position on protectionism. However, some people tend to think that China will be able to spread its reach better in the global economy if the US closes on itself. Do you think this can actually happen?

If you look at the so-called defenders to international trade, China is more vulnerable because when you look at exports and imports, in relation to Gross Domestic Product (GDP), that ratio is much higher in China than in the United States. So, international trade will help China, or will hurt China, one way or the other. From that perspective, China is perhaps more vulnerable. That’s just a fact. The US is more about domestic and continental economy. But I would not say the trade war will hurt US less. When you look at the very complicated supply chain, I would say these two countries are depending upon each other. It’s like you have two legs. I think the best way for China to mitigate such protectionism is to open up the market further.

>> You said that this year will be very challenging for the United States and China relationship. What do you foresee as challenges?

Clearly, there will be sporadic trade frictions. That’s one challenge. Also, previously there was a very good dialogue mechanism between China and the US called the Strategic Economic Dialogue (SED). It was initiated by the previous US Trade Secretary Hank Paulson in 2006. That mechanism, in my view, has become less robust. In the past, the hosting of the annual strategic dialogue between China and the United States would alternate between the two countries, and very candid discussions would take place. Now, I think not only the mechanism is less robust, we may also say that in the US Department of State, many posts have not been filled. You may also argue that some of the newly appointed technocrats are less informed about Asia. It’s true that Asia is always complicated because of the diversity and history. I forgot the exact number, but some of the positions in the Department are not being filled.

>> Can the US-China relationship impact the rest of the world?

Of course. The underline message is we need to recognize the core interests of both countries. That’s China’s position. In the United States, they probably still assume what has been created after World War II should stay the same. This is a long debate. When you look at international organizations like World Bank, the International Monetary Fund, they are all dominated by the US. In the medium term, perhaps the US can accommodate China more.

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