Nudging China towards more liberal, rule-based economic policies is well worth the anxiety-inducing trade brinkmanship.
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The strategic game between the U. S. and China will shape the future global economic and geopolitical environment; it poses a major danger to the near-term economic outlook, but the stakes are worth the risks. This complex game has raised non-trivial economic policy questions, generating a deep debate with thoughtful contributions by Harvard’s Larry Summers and Stanford’s John Cochrane, among others.
Summers argues that even if China “had been fully compliant with every trade and investment rule and had been as open to the world as the most open countries at its income level”, its economy would have expanded at roughly the same fast pace; and that China’s unfair trade practices have had a negligible impact on U. S. growth—no more than 0.1%.
Cochrane adds that even the emphasis on China’s violations of Intellectual Property (IP) is overdone: U. S. companies decided that giving their IP away was a price worth paying to access the Chinese market; and since ideas are “non-rival”, meaning that they can be used by different people at the same time, by stealing U. S. technology China can grow faster without causing the U. S. to slow. The U. S. should focus on fostering investment, innovation and competition at home, as these are the key drivers of long-term growth; China’s interventionist policies will only hurt China, holding back its long-term potential.
China could overtake the U. S. as the world’s largest economy by 2030, according to the IMF; China’s population is about four times that of the U. S., so its economy will become larger even with per capita income just above one-quarter of the U.
