Andy Xie: China Better Open Up Its Economy Fast, Else An Obama Trade War Will Crush It

Andy Xie

Andy Xie issues a stark warning for China in a latest Caing opinion piece.Essentially, America’s major hope for recovery and job growth right now lies in growing its exports since the Fed can’t slash rates much lower, and American government is completely grid-locked by politics (thus can’t do much for the domestic economy).

Thus he expects an increasingly aggressive stance from the Obama administration on U.S. – China trade.

While China has gotten away with pretty favourable trade terms for years, via a relatively more closed domestic market plus an under-valued yaun, this time the U.S. won’t simply roll over, according to Mr. Xie.

This time the U.S. will be very aggressive, and if China doesn’t start opening up in order to help balance U.S. – China trade, then a nasty trade war will erupt, which will be economically disastrous for both sides.


However, it would be unwise not to respond to U.S. pressure constructively. Without benefiting from China’s growth, the United States lacks incentive to be China’s biggest export market. So to pressure China, I expect many more U.S. protectionist measures this year. Before the November mid-term election, Congress could pass a bill that calls for a 30 per cent tariff on all Chinese products unless China appreciates its currency by the same amount.

China’s best reaction would be a proactive policy that benefits the United States and China’s economy at the same time. First and foremost, as China’s competitive advantage has shifted from cheap labour to cheap capital, it could open its capital markets to U.S. companies, thus decreasing bubble pressure at home and giving the U.S. economy a lift during a troubled time for its financial system. This would give Chinese investors more choices and a chance to benefit from the success of multinationals in China.

Second, China should lower tariffs on some imports that benefit the U.S. economy. For example, China has the largest and fastest growing auto market, and the government has been using the market’s attraction to lure international companies to produce in China. But the tariff and tax structure prevents foreign production from benefiting. If China opens its auto market, U.S. labour unions might shift their position and support trade with China, giving Obama an incentive not to push for a doubling of China’s currency value.

Third, the U.S. agriculture sector has a disproportionate influence over its political system, so it would be wise for China to open its agricultural market. This may exert more pressure on China’s rural sector, but any negative effect could be offset by more fiscal support. China’s rural problem is tied to a low labour-to-land ratio and the way out is urbanization, which could be accelerated by reforming the household registration system and letting farmers own their land.

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