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JOHN MASON: China and The Future

Former Federal Reserve Sr. Economist John Mason urges pragmatism over protectionism toward China

Summary
  • President Trump is pushing forward on more and more "punitive measures" against the Chinese as more and more concern is raised about such actions.
  • Much of the argument against Mr. Trump's moves centers on the fact that they are short-sighted and do not take into account longer-term issues, something particularly important to the Chinese.
  • And, although there may be some merit in taking a tougher line against the Chinese, the argument is that one needs to be a little more pragmatic in responding.

AUTHOR: John Mason

A lot of attention is being given to China these days, and rightfully so. China role in the world is important and its importance seems to be growing daily.

China has President Trump’s attention and according to Bob Davis in the Wall Street Journal “The (Trump) administration plans to release on Thursday a package of proposed punitive measures aimed at China that include tariffs on imports worth at least $30 billion.”

But, China is not going to go away. In fact, Mr. Trump, in a sense, opened a door for Chinese President Xi Jinping in January 2017, just before Mr. Trump’s inauguration. As the United States seemed to indicate that it was backing off world trade, Mr. Xi stepped up at a meeting of the World Economic Forum at Davos, Switzerland and declared that China would move into the space being vacated by President Trump on world trade and take on the role as the leader of trade globalization.

China has pushed forward on the goal at every chance since that time.

Mr. Xi reinforced the role he saw China playing in the world yesterday at the close of the meeting of the National People’s Congress.

In a press conference after Mr. Xi’s speech, Premier Li Kequiang addressed the concern over possible US tariffs. He “criticized the US perception of Beijing as a threat to Washington’s standing in the world, saying that China did not wish to ‘displace’ any other country.’”

The editorial writers for the Wall Street Journal advocated another way in its opinion piece “Tackling China's Protectionism.”

In respect to Mr. Trump’s proposed “punitive measures” the editorial piece argues that China must accept part of the blame for any backlash that might be forthcoming. “China’s increasingly predatory behavior, especially intellectual-property theft, poses a particular problem to a sustainable trading system.”

“The question is how to respond in a way that encourages better Chinese behavior without harming the global economy and American companies and workers.”

”It isn’t clear that the Trump Administration has given this much careful thought, and the danger is a tariff tit-for-tat that harms everyone.”

Shawn Donnan goes even further in the Financial Times: “While there is a broad consensus that the US needs a more muscular response to a rising China, there is concern the Trump administration appears to lack a strategy for ending the war it is about to start.”

The Wall Street Journal editorial closes with “The Trump administration is right to take a tougher line, but it also needs a smarter approach than its new steel and aluminum tariffs. The Chinese think strategically for the long term, and so should the US.”

And, this was exactly the point I was trying to make in the piece I posted yesterday. United States leaders need to take notice of and appreciate some of the moves that China has been making.

Yes, President Xi has taken on more powers and has overseen the granting of him “power for life,” but there are other things going on as well. This concerns me and I don’t fully understand the need for this assumption of greater power.

However, I want to be clear, in response to someone who commented on my post: I am not one who “really loves totalitarian dictators.”

The reality of the situation is that the US has to work with a leader that has more power than we approve or , or, that we believe is needed. Yet, that is the situation that we have to work with and, therefore, we need to be pragmatic about how we go about our business.

And, as I attempted to explain in the post, we need to proceed with a county, China, that “wants market liberalization” but with “Chinese characteristics.” We perceived that as China became more and more a part of world markets, it would open up more and more on to a more democratic society. In this, Americans were perhaps too optimistic believing that greater democracy always followed free trade.

This is where, I believe, that we need to move forward and work with the assumptions that China’s leaders truly do want to be a bigger player in world markets and that they firmly believe that they will have to open up to more capitalistic markets. However, I also believe, and the Wall Street Journal editorial seems to support, “The Chinese think strategically for the longer term.”

In working for this “longer term,” as I mentioned in yesterday’s post, Chinese leaders are paranoid about losing control. They observed the problems the Russians got into in their efforts to “open up” their society and their markets in the 1990s and do not want to suffer the same consequences.

I also tried to point out in my post the positive aspects connected with two of his top appointments,: Liu He, who has become a vice premier, "allowing him to take the role of 'economic tsar', and Yi Gang, who has been named as governor of the People's Bank of China, the Chinese central bank.

Both of these individuals have a long association with the United States, have studied in the United States and have worked within the Chinese government to open up markets and make trade more of a reality. I think that the appointment of these two people should give us hope of what Mr. Xi and China are planning for the “longer term.”

Hopefully, we can work with them and move into a future, where, as the Wall Street Journal editorial suggests, we both think “strategically for the long term.”

The situation, itself, is like the Game Theory model called a Prisoner’s Dilemma. If a player only thinks about his or her next move, the results default to the worst possible situation. The result is a negative-sum result.

One must look at playing the game over the longer-run, a series of repeated plays. The results of the extended play Prisoner’s Dilemma game tend to be a positive-sum, with better outcomes for both of the players.

The fear of a world trade war is already frightening markets. This is a part of the current "unease" permeating financial markets.

As Akane Ortani makes clear in her story “Investors Haven't Been This Worried About Trade Wars in a While.” She writes, “Some 30 percent of fund managers around the world say a trade war poses the greatest risk to markets….”

Going further, she argues that “in the past few months stocks have struggled for traction, pressured by renewed uncertainty over the course of interest rates, inflation, and volatility. Investors say that has made the market particularly vulnerable to pullbacks…” relating to President Trump’s actions.

And, China is at the center of all this commotion.

NOTE: This column originally appeared on SeekingAlpha.com

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