VIEW U.S.-China trade dispute, evaluation and Korea's choice
By Lim Ho-yeol
Lim Ho-yeol
After the U.S. raised the tariff rate on Chinese products worth $200 billion to 25 percent, China responded with a counter-punch, imposing retaliatory tariffs up to 25 percent on $60 billion of U.S. products.
As the U.S. surpassed the tipping point, China declared it would fight against the U.S., saying on state-run media CCTV: "To the Chinese people who have endured 5,000 years of heavy wind and rain, there is no hardship they cannot face."
Due to the trade war between the two superpowers, world trade is sharply declining and the economy is showing signs of a steep downturn. Some even predict that the nightmare of the 1930s, which led to the Great Depression, may return.
This year marks the 40th anniversary of diplomatic relations between the U.S. and China. When China joined the World Trade Organization (WTO) in 2001, it entered the global supply chain cautiously, like a Chinese woman with bound feet. Since then, China has faithfully adapted to U.S. platforms such as Windows and Android, emerging as a production powerhouse that covers a quarter of the world's manufacturing output ― all in less than two decades.
These days, China has grown into a manufacturing global value chain (GVC) hub, larger than the U.S. and Germany. This is clearly different from other emerging economies' participation in the Western-led GVC. For the U.S., which prides itself as a leading player in the global economy, it would not want to tolerate and rely on the presence of GVCs led by China. However, it is undeniable that the U.S. is already relying on the China-led GVC: it is China's biggest importer.
Looking back, China completed its catch-up strategy in pursuit of industrialization by imitating the technology of advanced countries in the early stage of opening up, and has now begun implementing the so-called "leapfrogging strategy," a dynamic comparative advantage strategy that overtook advanced countries.
A case in point is the “Made in China 2025” strategy for industrial advancement, which sparked trade disputes in the high-tech industry, the basis of U.S. national power. Competition for future technology over the economic hegemony has been created.
From such a perspective, even if the current U.S.-China trade dispute is settled, it is obvious that disputes will recur. The latest U.S.-China trade war may be nothing more than a local battle in the early stages of a decades-long economic war.
China is no longer locked into a U.S.-designed platform and is creating its own China standard. For example, Chinese-type platforms and technical standards are emerging, such as the open-source mobile ecosystem Alipay, DJI's technical standards that control 70 percent of the world's civilian drone market, Huawei's 5G, and the Compass satellite navigation system that responds to America's GPS.
The results are also formidable. QR code payments have quickly lifted China from a financially underdeveloped country to an advanced fintech country, and Huawei's telecommunications equipment dominates the global market.
The miniaturization of drones is also evolving into a technology that tracks and captures moving objects while converging with unmanned technologies. China, which has the world's largest delivery market, is upgrading drones to remote robots in agriculture and disaster areas. It is creating new technology standards and ecosystems as its seamless communications technology, recognition and control sensors and the cloud system of Alibaba, the world's fifth-largest, converge.
The economic potential of China is also growing. China is stepping up efforts to localize technologies to break through the U.S.-China trade dispute, indicating the possibility of a new phase in development. According to patent application records (KISTA, 2005-17), China ranks first in the world in four of the five key areas of the Fourth Industrial Revolution, i.e. internet of things (IOT), big data, 3D printing and intelligent robots, excluding AI.
China had called for the re-establishment of financial order in the Bretton Woods system designed by Anglo-Saxon countries based on the rapid growth of manufacturing industry. China launched a new financial order called the Asian Infrastructure Investment Bank (AIIB) in 2016 after the IMF and World Bank failed to respond to changes. The Asian Development Bank (ADB), founded in 1966, has only 68 member countries, but the AIIB has gained 97 members in its first three years. Also, sources say the investment volume reached $10 billion by end of April 2019.
What is the impact of the U.S.-China conflict on Korean national interests? First of all, if the U.S. presses China further, China's exports to the U.S. will shrink and Korea's exports ― which account for 78 percent of its exports of intermediate goods to China ― will face a severe negative impact. Of course, some items, such as mobile phones, TVs and electronics, which are highly competitive with China, may benefit in exports to the U.S.
Industrial competition between Korea and China is also likely to intensify. This is because the world factory will move from China to Vietnam or India faster. China will try to reorganize its industries with a high value-added focus like Korea's. Korea needs to speed up the development of new technologies before China catches up.
Our choice is also becoming more difficult even in the international trade order. Some argue that Korea should walk on an agile rope, choosing sides case-by-case between the U.S. and China. In my opinion, Korea should join the CATPP trade agreement before it's too late, as costs of joining will rise significantly when the U.S. returns to negotiations. In the future, the world will see a recruiting competition between the two superpowers, and nations will split and join according to national interests. Korea should tread with caution so as not to be drawn into this competition and be practical in its decisions.
Dr. Lim Ho-yeol has been a Professor of Kyonggi University since 2018. He worked at the Bank of Korea for 35 years and the Korea Institute for International Economic Policy (KIEP). He has research experience on money and banking and the Chinese economy. At KIEP, he served as the vice president. In the bank, he was the chief representative of the China office, deputy director-general of the research department and economist of the New York office. He is now vice chairman of the Northeast Asian Economic Association. He has an MBA from Yonsei University and received his Ph.D. in economics from Hanyang University.