Philippe Waechter, Chief Economist with French Company Ostrum Asset Management, published on May 17 last year an interesting analysis of the current tensions between China and the United States.

The French expert explains that Donald Trump’s tweets of May 5 increased tension between Washington and Beijing and re-launched new discussions on the terms of a trade agreement between the two powers.

Chinese retaliation against US imports in response to the new U.S. tariffs calls into question the lengthy period of calm begun after the G20 meeting on December 1st last year.

Trump’s desire to impose new restrictions on China reflects his desire to repatriate jobs, especially in the manufacturing sector, and also to reduce US dependence on China.

In 2018, the U.S. external trade balance with China showed a more than $400 billion deficit.

The counterpart of this Chinese surplus with the United States reflected Chinese financing of the U.S. economy through the purchase of U.S. federal bonds. The logic was that the Chinese products in the U.S. market financed the U.S. economy to compensate for the lack of savings there.

The functioning of the Chinese-American trade was on the basis of complement, but this balance is now changing in nature because China’s weight in financing the US economy has been declining.

In March 2019, the weight of U.S. financial assets in the hands of China as part of the total U.S. foreign funding had fallen to the low level observed in June 2006.

The balance of the relationship between the two countries is changing and the United States no longer has the capacity to influence China as it did in the past. China now has more autonomy, says Waechter.

The White House is impatient over Chinese unwillingness to respond to its requests. By taxing Chinese imports, Washington wants to influence Beijing’s economy by creating strong social tension there that would force the hand of the Chinese authorities who do not wish to take this social risk.

The slow pace of Chinese activity indicators since the beginning of the year could validate Washington’s analysis and encourage it to further harden its commercial tone.

At the beginning of 2019, the weight of the United States in Chinese exports slowed significantly. China’s dependence on the United States is being reversed and, at the same time, the Chinese are re-launching the New Silk Road initiative, whose objective is, among others, to further diversify Chinese markets.

China is now expanding market opportunities and effectively limiting the influence of the U.S. on its internal economic situation.

The other major point of disagreement between Washington and Beijing concerns technology. “It seems to me that this is the main point of the differences between the two countries,” says Waechter.

The Chinese have updated technologically very quickly in the last twenty years. This has been the case both in technology transfers as in resources to facilitate it. And this has worked so well that the Chinese are now considerably ahead of the U.S. in 5G and Artificial Intelligence, among other significant developments.

In this question of technological supremacy, there is a radical change because the Chinese have the means to develop these technologies without American support.

This situation could have arisen with Japan a few years ago, but the Japanese always opted for remaining in the US fold, which is not the case in Beijing –says Waechter– because China has a very large internal market and this enables them to create conditions for autonomous technological dynamics.

The stakes are simple: whoever sets the standards for these new technologies will have a considerable comparative advantage. It will be easier to develop innovations using these technologies. That’s why this is where the negotiations get stuck.

The Chinese have devoted significant resources to achieving this technological advantage and will not fall naively under U.S. control.

This technological stagnation will not be resolved spontaneously, and the possibility of an agreement between the two countries seems unlikely.

“The dynamics of the world economy are changing. This is the first time in modern history that a situation occurs that makes it likely that the world economy moves to a new region due to criteria related to technological innovation.”

When the core of the world economy moved from the United Kingdom to the United States, there was a continuity that does not exist in the current situation. This will alter the dynamics of the world economy and will inevitably redistribute the cards among the regions of the world,” concludes Philippe Waechter.

May 22, 2019.

Translated and edited by Walter Lippmann.

This article may be reproduced by quoting the newspaper POR ESTO as the source.