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US-CHINA ECONOMIC RELATIONS : THE HOBSON’S CHOICE

Sandeep Jain writes: For China also a slowdown of economic relations with USA comes at a cost. The Chinese economy runs the risk of stagnating unless it can quickly find new avenues of revenue in other countries. OBOR is a step in that direction.

With the elevation of Donald Trump and his public pronouncement of rescinding the TPP, US –China economic relations have again reached an interesting phase. Over the last three to four decades the two countries had formed a symbiotic relationship. The relationship was largely orchestrated by USA in the hope that they will be the larger beneficiaries. While no doubt that US economy benefitted, the Chinese also gained significantly.

The fact that China is now posing a geostrategic challenge to USA has upset the applecart. USA would want to continue all the economic benefits without China gaining in stature. TPP was a brilliant strategy to achieve just that wherein, US multinationals would have shifted their manufacturing bases from China to the other underdeveloped countries of the TPP pact. TPP ensured that the rights of the multinationals remained protected. In fact the lessons learnt from trade with China were duly incorporated in the text of TPP including aspects like intellectual property rights (IPR). China had taken significant advantage of this lacuna by virtually stealing IPR from many global multinationals earlier, when they had shifted their manufacturing bases to China.

Donald Trump does not want to continue the reliance of US economy on cheap manufacturing in China. He also does not want TPP as also he wants job creation in US. These are desirable and laudable objectives. How they will manifest is an entirely different matter.

The first part of reducing manufacturing dependence on China is easy as the labour costs are rising in China also. In fact the Chinese companies are now keen to invest in other poorer nations to take advantage of cheaper labour costs there. Thus it was only a matter of time that further US investment in China reduced on their own.  China may continue to devalue its currency, it still cannot escape the fact that manufacturing costs in China would rise. China in fact will follow the trajectory taken by Japan wherein, while remaining a big economy, the growth will slow down.

The second part is the real challenge for USA wherein, Trump envisages changing the economic architecture of his country by relocating the manufacturing back to US soil. High labour costs in USA makes this prospect unviable. USA has been the largest beneficiary of global trade. By being protectionist, it will suffer in the long run. Trump has also been talking of a stimulus to infrastructure spending which can only come at the cost of even more foreign borrowings.

Trump probably knows all these challenges but has a political compulsion to move in a particular direction at least for the time being when his election promises are fresh in the minds of people. Once the dust settles down, Trump will probably still have many bilateral trade pacts with suitable countries thereby having a TPP in a disguised form. He is advantaged by the fact that his is a single term presidency. He can therefore afford to ramp up borrowings for infrastructure leaving the next administration to deal with the effects.

For China also a slowdown of economic relations with USA comes at a cost. The Chinese economy runs the risk of stagnating unless it can quickly find new avenues of revenue in other countries. OBOR is a step in that direction. However, China can succeed only in case it is able to have continued geostrategic ascension. This will further bring it in conflict with USA which is clearly unwilling to cede the geostrategic space and the attendant geo-economic benefits to China.

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