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Prof. David Kotz argues that the trade war is counter-productive for everyone, including the US, because it does not include a plan for an industrial policy. The conflict foreshadows increasing unresolvable tensions between the two powers

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GREG WILPERT: It’s The Real News Network and I’m Greg Wilpert, coming to you from Baltimore.

Economic data that was released this month shows that China’s GDP growth is slowing down. China’s nominal GDP growth rate for 2017 was 6.9 percent, much higher than any other developing country. However, recent data shows that the growth rate expected for 2018 will be 6.5 percent and then 6.3 percent the following two years. The slowdown of growth has drawn a great deal of media attention. It is attributed mostly to the new tariffs President Trump has imposed on China and to the so-called “trade war” that has emerged between the U.S. and China, as well as between the U.S. and the rest of the rest of the world.

One of the excuses Trump has used for imposing tariffs on China is that it is engaging in currency manipulation. However, a U.S. Treasury report published recently found no evidence that China is engaging in such manipulation. Meanwhile, close allies of the U.S., such as Singapore, India and Thailand, are apparently engaging in more intensive currency manipulation than China. Chinese President Xi Jinping just announced that his government will give financial aid and tax cuts to struggling businesses in China in order to deal with the slowing economic growth. Last week, while he was touring the Quinhai district, Xi Jingping expressed optimism about the future of Chinese trade.

XI JINPING: The development is fast, and the changes are tremendous. I feel so happy to see it, though it is within our expectations. The place was desolate in the past. It shows that our Qinghai model is practical.

GREG WILPERT: Joining me now to analyze what is happening with China’s economic development is David Kotz. He is a professor of economics at the University of Massachusetts Amherst and the author of the book, The Rise and Fall of Neoliberal Capitalism. Thanks for joining us today, David.

DAVID KOTZ: Glad to be with you, Greg.

GREG WILPERT: So the last time we had you on The Real News, you mentioned that unlike the U.S., China has an industrial policy that gives it an advantage as a rising global trade power. Would you say that Trump’s tariffs is the start of a U.S. industrial policy that is successfully challenging Chinese industrial growth?

DAVID KOTZ: No. I don’t see it that way. Trump’s tariff war, I think, is really counterproductive. relative to any possible benefit that might result. It will just hurt both the U.S. economy and it will cause some harm for the Chinese economy. The U.S. government is not following industrial policy at this point. And I think the real concern of the Trump administration, and one that is shared by much of American business, is not currency manipulation by China but a concern that China is advancing very rapidly and is within sight, in a decade or two, of becoming the economic equal of the U.S. It’s China’s rise that is really what is bothering, I think, the U.S. government and the policy analysts and so forth.

GREG WILPERT: Now, business media such as Bloomberg and Forbes are talking about a decline in the power of the Chinese economy, which they are basing on a decline in the GDP growth rate. Is this a measurement that you would use to compare the economic strength of the two different countries, and if not, is there an alternative form of measurement you would use to compare the two countries?

DAVID KOTZ: Well, I think the growth data are being hyped. After all, if you read what the Bloomberg reports have said, the government’s target growth rate for this year is 6.5 percent, so they hit their targets. For several years now, the Chinese officials have had a strategy of slowing the growth rate, which had been at breakneck speed for many decades, about 10 percent a year. And at a certain point, that was no longer desirable. The environmental costs of such rapid growth were mounting, it’s hard to maintain product quality when you’re growing so fast, so there was a policy decision to slow to the six to seven and a half percent range with the aim of improving environmental quality and product quality.

By the way, let me just give you some numbers. If they grow at 6.5 percent, their GDP will double in 11 years. That’s quite dramatic. The U.S. economy in recent years has been growing at 2.2 percent a year. In 11 years, at that rate, our GDP would increase by 27 percent while theirs would double. So I don’t see the current growth numbers as being a problem for China. Six and a half percent per year is a very rapid growth rate for a country like China, which is now no longer a poor country but is in a mid-level of development and ascending fast.

GREG WILPERT: You mentioned earlier that the trade wars of the Trump administration is having a certain impact on the Chinese economy. But just how dependent is the Chinese economy on the U.S. as its main trading partner? Couldn’t China just increase trade with other countries instead?

DAVID KOTZ: Well, it won’t be easy. The U.S. market has been a major market for China’s growth. Now, China has a mixed system. They have a lot of state-owned enterprises and they have some elements of a planned economy. But fundamentally, their economy is now market economy, and that means they always have a problem of growing demand if they’re going to have economic growth and development. And the U.S. market had been a big source of growing demand. They’ve understood for some time that they can’t continue to grow at rapid rates with the U.S. market playing a major role because the U.S. economy is only growing at under two and a half percent a year.

[00:06:32] So they’ve been trying to diversify away from that. But it’s not so easy. What China really needs is to grow more based on their domestic markets rather than on foreign markets. In the early to mid 2000s, their growth was very dependent on growing exports which rose to 39 percent of GDP on the eve of the financial crisis in 2008. They can no longer go that way. They need to have a domestic market-based growth, and so while there will be some bumps in dealing with the sudden tariffs from the Trump administration, that will only push them in the direction that they should go, of more domestic market-oriented growth.

GREG WILPERT: I want to turn to that question, actually, in a moment. But first I want to ask another question about the role of Chinese ownership of U.S. debt in the form of U.S. Treasury bills. Does this ownership create leverage for the Chinese government in its trade negotiations with the U.S. or is it actually the other way around, Chinese ownership of Treasury bonds forced China to worry about the U.S. economy and the dollar?

DAVID KOTZ: [00:07:44] Both. On the one hand, the fact that the Chinese central bank has continued to buy U.S. debt securities has been very helpful for the U.S. economy. On the other hand, China has a certain dependence now on the U.S. as a result of holding so much U.S. debt. Some people think, ” My god, China has really got its claws around the neck of the U.S. economy, what if they suddenly started selling all their bonds? It would drive down their prices, drive up interest rates in the U.S.” But that’s not a possible policy for China because the U.S. could retaliate. I mean, a trade war is one thing, but a war over the debt it’s held under the securities held by China, that would be very dangerous for China.

Since China is the creditor and the U.S. is the debtor, in an extreme conflict, one could imagine the U.S. Congress passing a measure to cancel the debt held by China. I’m not saying it’s likely, but I don’t think China wants to get into a head to head battle over these U.S. securities that it holds. So I don’t think that will be a big factor in the rising conflict between the U.S. government and China.

GREG WILPERT: So now I want to turn back to the question of how China might be able to develop its own internal economy, its internal market, I mean. And I’m wondering if inequality might be a problem. The UBS Bank recently released a study showing that China had a larger increase in the number of billionaires than any other country in the world over the past decade. There are also economic studies, more generally, that argue that economic growth is hindered by rising inequality. Could it be that China’s economic growth is also slowing down because inequality in China is growing? That is, in other words, that the domestic market, as you suggest, isn’t growing fast enough in order to buy all the stuff that China is producing?

DAVID KOTZ: Exactly. China shares this problem with the U.S.A. U.S. economic growth is being held back by a high and growing degree of inequality and the same thing is happening in China, based on my analysis. And China is a huge country, like the U.S., in that regard. And historically, the long term economic development of such large countries is primarily based on their domestic market. China was a very unusual case because a large country growing rapidly over several decades with a growing and quite substantial role for exports in their growth. But to transition to growth based on the domestic market, they’ve got to bring down the degree of inequality. But it’s more than that. Chinese households save a huge percentage of their income, and this is primarily because of their insecurity, economic insecurity.

Housing is extremely expensive, and households have to save to be able to afford a place to live. Education is expensive. They don’t have retirement security. Healthcare is expensive. And all of these fears that people have in China lead them to save a lot and that limits the domestic market. So I think a program of much more generous social programs, provision of health care, free education, secure retirement, along with higher wages for workers would be the path that could continue China’s ascent on the economic ladder. They can’t compete based on low wages anymore. There are poorer countries than China where wages are lower. Their advance depends on improving technology, more high scale product and so forth. That’s their move upward at this point.

GREG WILPERT: So David, just before we go, I just want to know what are your thoughts on the role of the U.S. tariffs in trying to prevent China’s economic policies? How big of an impact will that have on China from here on out, what effect will it have?

DAVID KOTZ: Well, my real concern here, Greg, is that while the Trump administration’s tariff policy against the EU, Canada and Mexico has the Trump administration, I mean American businesses is opposed to this, Trump’s attempt to put pressure on China to change its ways has not isolated the Trump administration. In fact, it is supported by American business. While they don’t like the tariffs policy, they agree that China should be pressured to give up its industrial policy and to privatize its state-owned enterprises, which they fear as competitors. And this is, I think, an unresolvable conflict through negotiations because China’s continuing rise depends on continuing an industrial policy and continuing with a sizable role for state-owned enterprises, many of which are high-tech companies that are playing a key role in China’s advance.

So this, I’m afraid, is the traditional fear on the part of the dominant capitalist power in the world, the U.S.A., when it sees another country rising, potentially to become its equal. And in a few decades, China could become the economic equal of the U.S. And this suggests the danger of a pre-World War I scenario. We’ve seen where this kind of conflict has led in the past, when rising tensions among powers have led to major wars. We have to hope it does not have that outcome in this case.

GREG WILPERT: We’re going to have to leave it there for now. I was speaking to David Kotz, professor of economics at the University of Massachusetts Amherst. Thanks again, David, for having joined us today.

DAVID KOTZ: Thanks for inviting me.

GREG WILPERT: And thank you for joining The Real News Network.

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Gregory Wilpert is Managing Editor at TRNN. He is a German-American sociologist who earned a Ph.D. in sociology from Brandeis University in 1994. Between 2000 and 2008 he lived in Venezuela, where he first taught sociology at the Central University of Venezuela and then worked as a freelance journalist, writing on Venezuelan politics for a wide range of publications and also founded, an English-langugage website about Venezuela. In 2007 he published the book, Changing Venezuela by Taking Power: The History and Policies of the Chavez Government (Verso Books). In 2014 he moved to Quito, Ecuador, to help launch teleSUR English. In early 2016 he began working for The Real News Network as host, researcher, and producer. Since September 2018 he has been working as Managing Editor at The Real News. Gregory's wife worked as a Venezuelan diplomat since 2008 and from January 2015 until October 2018 she was Venezuela's Ambassador to Ecuador.