The ongoing trade war cannot achieve the outcomes that President Donald Trump desires and it could be avoided by resolving the structural trade imbalances and undertaking enduring and effective strategic communications. First, the trade war cannot significantly reduce or eliminate the current account deficit1 of the US. The capital account can drive the current account, and the US capital account surpluses persist due to the country’s sublime capital markets and inflows of foreign excess savings. Second, it is almost impossible to impede China’s technological advancement. Technology development can increase China’s gross output, especially the wages of skilled laborers, which is essential for China’s much-needed consumption-driven economy. This, in turn, is crucial for reducing China’s excess savings. The Chinese government possesses an unyielding determination and capacity to advance technologies. It is worth noting that stifling China’s technological advancement will likely be detrimental to the aim of trade rebalancing. Pursuing the goals simultaneously – fixing the trade imbalances and halting China’s technological advancement – will be challenging as they are counteractive.
Surely, the trade war strikes the vulnerable Chinese economy. In order to fix the trade imbalances as well as to end and avoid the war, China must step up economic reforms. In the immediate run, it needs to prevent the further devaluation of China’s renminbi (RMB) and raise its interest rate. The US might need to reduce the capital account surpluses by allowing and encouraging foreign central banks to accumulate a synthetic currency instead of the US dollar. It is also imperative that both countries return to the negotiating table. Both countries need to accurately communicate their “bottom lines” and correctly interpret each other’s signals.
This research article went through a rigorous peer-review process and was published by the Indian Journal of Asian Affairs in 2018.