Editor's Note: Recently, Trump has launched a "tariff war" that has shaken the world. After initially announcing "reciprocal tariffs" on all other countries globally and raising the tariff rate for Chinese goods entering the U.S. by 145%, the Trump administration announced late at night on the 12th that it would exempt "reciprocal tariffs" on certain products, including Chinese electronics. The Ministry of Commerce of China responded that this was a small step forward by the U.S. side.
However, shortly after, U.S. President Trump posted on Twitter on the 13th stating that the U.S. government had not announced any tariff "exemptions," and that related products had merely been transferred to another tariff category. U.S. Commerce Secretary Raimondo also stated that the tariff exemptions for some electronic products were only "temporary." Trump and Raimondo's latest remarks have further complicated the tariff policies of the Trump administration.
In response to the impact of Trump's chaotic tariff war on China, on April 11, Fudan University's School of Economics held a salon with the theme "Possible Impacts of Trump's Reciprocal Tariff Policy." Observer Network, with authorization from Fudan University's School of Economics, has fully reprinted the speech given by Professor Zhang Jun of the School of Economics.
[Text by Observer Network columnist Zhang Jun, compiled by Tang Xiaofu]
I think today's salon has achieved its preset effect and has been very impressive. A few days ago, I suggested holding this salon because Fudan University's School of Economics has many people conducting research in trade, as well as studies in industrial policy, industrial economics, and macroeconomics. I believe that discussions about trade wars and reciprocal tariffs are very common, and we should participate and contribute.
There were nine formal speakers tonight. In fact, everyone here has something to say, but if everyone did, we wouldn't stop discussing until midnight.
Overall, I think the discussion tonight was very impressive. It provided an understanding of the background behind the proposal of reciprocal tariffs and also shed light on the political ecology in the U.S., touching upon the root causes of the imbalance in Sino-U.S. trade, among other things. It also allowed everyone to gain a deeper understanding of China's position in the global trade and investment landscape over the past few years. Although each person's speaking time was short, the content was quite profound, and I personally learned a lot.
The imbalance in Sino-U.S. trade is a very old topic. I remember when Premier Zhu Rongji visited the U.S. in 1999 and gave a speech at MIT. During his speech, he focused on addressing the issue of the U.S.-China trade deficit that concerned Americans. At that time, Professor Liu Zhiyue from Stanford University was present. When Premier Zhu saw Professor Liu sitting in the audience during his speech, he mentioned a study conducted by Professor Liu's team regarding the U.S.-China trade deficit.
Screenshot of Premier Zhu Rongji's speech at MIT during his visit to the U.S. in 1999
At that time, the trade deficit numbers for the U.S. weren't as large as they are now, but due to Hong Kong's re-export trade, the trade deficit statistics published by the U.S. were much larger than those published by us. Therefore, the main debate centered around the statistical scope of the trade deficit. Later, this issue continued to escalate, and several U.S. administrations viewed it as a very important issue. When George W. Bush was in power, he was very sensitive to this issue, and it remained a very sensitive issue during Obama's presidency. The two countries also conducted joint research on the trade deficit issue under the framework of the U.S.-China Joint Commission on Commerce and Trade.
Samuelson (who won the second Nobel Prize in Economics in 1970) wrote an article in the 2003 edition of the Journal of Economic Perspectives before he passed away. The theme of the article was whether outsourcing production would harm the U.S. His answer was that outsourcing at least harmed American employment.
He used an example of a bank in North Carolina outsourcing its customer service center to India, resulting in unemployment for the original employees who handled calls in the bank. After losing their jobs, these individuals might find work locally, but their wages would certainly be lower. This was Samuelson's basic view.
But Samuelson had a student studying trade, also an MIT graduate named Bhagwati, who wrote an article refuting his teacher's view. He discussed a simple model in the same way. He argued that after outsourcing the customer service center, the bank's costs would decrease. Lower costs could allow the bank to serve more customers and reduce the cost for clients. His conclusion was that outsourcing production in the U.S. would bring more economic growth, which could be understood as an increase in U.S. welfare, making it worthwhile. Later, he wrote a book called "In Defense of Globalization."
Paul Krugman (who won the Nobel Prize in Economics in 2008) was Bhagwati's student, making him effectively Samuelson's third-generation student. Initially, Krugman supported his teacher Bhagwati and was less supportive of his teacher's teacher, Samuelson.
But last May, Krugman wrote an article in The New York Times titled "Prepare for China's Second Impact." In this article, he reflected on his previous views and felt that the current situation indicated that his grandfather, Samuelson, was right.
If you go to any place in the world today and talk about China, I believe most people will express some concern about China's momentum in expanding its manufacturing sector. The Biden administration is also very worried about this issue. Yellen mentioned this issue publicly during her press conference in Beijing.
Last year, when I went to Brussels, the European Chamber of Commerce was also concerned about this issue. Later, when I went to Finland, the Federation of Finnish Industries invited me to give a speech, and the former Prime Minister of Finland and other high-ranking officials were present, all very concerned about China's expansion of production capacity.
Returning to the issue of reciprocal tariffs. Why does Trump impose tariffs on the entire world? What exactly is he trying to do?
After World War II, there was the General Agreement on Tariffs and Trade (GATT), initiated by the Americans, but it was not passed. Looking back at history, what Trump is doing now is somewhat similar to the Americans' earlier push for GATT; he intends to reconsider global trade rules. However, these rules are clearly centered around American interests and ultimately aim to confront China, as China accounts for about one-third of America's global trade deficit.
Professor Zhang Jun's speech
Considering that Chinese capital is rapidly investing and expanding overseas in places like Vietnam, Southeast Asia, Mexico, Brazil, and India, we can imagine that in twenty or thirty years, almost every country in the world will be dominated by Chinese capital in trade.
By then, it would no longer make sense for the U.S. and China to engage in a trade war. In Zhi Kuo's slides, we see that China's share of global direct investment is still relatively small. I once saw data from Singapore; such a small country has nearly 14 times the per capita ODI (Overseas Direct Investment) of China. Based on per capita levels, China's future outward investment momentum and potential are quite significant.
So, how should we view the current trade imbalance between China and the U.S.? In my opinion, this imbalance does not represent a win or loss on the trade arena but reflects the enormous differences between the two countries in many aspects. The U.S. cannot compete with China, Japan, and South Korea in manufacturing because the latter are more hardworking and frugal, rooted in natural endowments, cultural genes, and historical differences.
However, the U.S. has long been at the forefront in other areas, possessing world-class universities and financial institutions as well as the most advanced technology globally. In many ways, Americans consume more extravagantly than Chinese, which is indeed true. Moreover, it is precisely this trade imbalance that has maintained the U.S.'s monetary and financial hegemony for half a century. In other words, the trade imbalance itself is not a problem but an answer.
Chinese people, and even people across East Asia, are more willing to work hard, be frugal, and save. As a result, more surplus appears in the global trade landscape in East Asia, which is not simply a trade policy issue but rather a structural issue of high savings and low consumption within these countries, just as Yongqin mentioned earlier.
If the trade deficit were really a problem, how do we explain the U.S.'s prolonged dominance in currency, finance, and technology? Xi Xican said that the Republican Party doesn't think this way, and the benefits the U.S. gains are national benefits, not party benefits, which is possible. But if Trump really doesn't want to stand on the moral high ground or continue to lead the world, would Americans really agree to pay such a price? I don't think Americans would be willing to bear these costs.
The same applies to East Asia, especially China's unique role in the global production system, which cannot be easily changed in the short to medium term. The world has become economically integrated, and many things cannot be unilaterally changed by a single country.
In fact, as Bhagwati pointed out, the U.S.'s problem is not about the trade deficit. During globalization, it has clearly benefited from overall welfare increases. However, the U.S. has not handled well the welfare of its lower-level citizens; its protection is not as good as Europe's. This is the real issue for the U.S.
The trade imbalance may actually be the real issue facing China and East Asia. From the perspective of the evolution of the global production system, it seems that it was only after the rise of East Asia, particularly the development of China, the "big player," that a highly competitive production method and system emerged.
This is very interesting. You can see it in technological progress. Early technological advancements in developed countries were largely based on fundamental research, whereas technological progress in East Asia was mainly driven by manufacturing, pushing technological advancement through production. This is completely different from Europe and America.
In East Asia, engineering is the most important field. Why is that? Because of the fundamental differences in national interests. East Asia has been deeply influenced by traditional state influences. This is where East Asia differs completely from Europe and America, especially from the Anglo-Saxon model.
There are many Chinese engineering students in Europe and America
A strong sense of national identity makes it easier for countries to adopt a nation-building model based on manufacturing. We are all working hard to manufacture and produce, but we do not have the same level of high consumption as Americans because our incomes are not high. As Wang Yongqin mentioned, why are incomes low? Because wages are low, and why are wages low? Because you need to produce more, while the financial sector is not well-developed, and companies need to maintain lower wages to ensure sufficient financial surpluses. This is an interlinked equilibrium that is not easy to break.
In East Asia, including China, Japan, and South Korea, although rapid expansion in manufacturing can help catch up faster with Western developed countries, it will eventually slow down, as Xi Xican mentioned earlier, because domestic demand will become the biggest constraint to development.
Japan was the closest to the U.S. in per capita income, reaching over 70% of the U.S. level in the 1970s, but later stopped growing and is now only about half of the U.S. GDP per capita; South Korea has not caught up to Japan's level. Both Japan and South Korea face problems in handling domestic demand.
China is a country with 1.4 billion people, and its per capita GDP is still less than a quarter of the U.S. level, and issues of domestic demand have already surfaced. Unlike other economies in East Asia, China's scale is much larger, so it should have more opportunities to address demand issues. As everyone mentioned, we have been diversifying our export markets in recent years and accelerating the output of capital overseas to promote exports through direct foreign investment.
We must also maximize the release of potential domestic consumer demand. In 2020, we proposed the "dual circulation" strategy. The dual circulation strategy actually emphasizes internal circulation, but how to form total demand to support internal circulation? First, we need to ensure that enterprises and investors have predictable stable rates of return and profitability in the domestic market.
This afternoon, I attended an event where we discussed a particular matter. Now, we have many enterprises developing excellent technologies, but they dare not produce. Because once they start production, other participants will flood into the market, quickly dispersing profits.
Such a fiercely competitive market cannot accommodate more enterprises in the internal circulation. How can we ensure that enterprises investing domestically have sufficient returns and profitability? Including how to solve the problem of excess capacity? How can intellectual property rights be better protected? These all require careful consideration by the government.
The venue was packed
This brings us back to our fundamental supply and demand issues. For example, we are now seeing overcapacity in new energy vehicles, which makes investments in this area less rewarding. However, due to local government support and subsidies, the expansion of production capacity has been very rapid.
Even though local governments are currently in poor financial conditions, they are still willing to invest substantial funds to support the entry and expansion of new technology enterprises, including those in the new energy vehicle sector. I heard that many third- and fourth-tier cities are enthusiastic about developing new energy vehicles, which is driven by government incentives. This involves the incentive orientation of the entire government system, and these issues have become increasingly important. In a sense, local governments in China are being too generous to enterprises.
I would suggest that if money were given directly to households, it could provide more transfer payments, better income support, and more subsidies for education, pensions, and medical expenses, which might yield better results. Meanwhile, the government needs to ensure proper protection of intellectual property rights, providing enterprises with sufficient profit margins, which is more important than simply subsidizing investments.
Now is actually a good time to make these changes. We are different from Westerners, whose thinking is straightforward and linear. Chinese thinking is dialectical, believing that bad things often turn into good ones. Trump's tariff war may give us an opportunity to make a firm decision to truly change and address the bottlenecks in expanding domestic demand.
On one hand, we need to respond to Trump's impact and see it through. But most importantly, we need to focus on doing our own things well. This cannot just be lip service; we need to address the pain points faced by private enterprises and better constrain the behavior of local governments. Our efforts should be placed on protecting intellectual property rights and the rights of entrepreneurs. We need to truly transform and expand domestic total demand. China cannot become the U.S., but we can avoid repeating Japan's mistakes.
Finally, I believe today's discussion can provoke some deep thoughts on the prospects of China's economic development, which is very important. Thank you all, and that concludes my summary.
Questions from the Audience
Question 1: The U.S. dollar's hegemony is maintained on the basis of a global trade deficit for the U.S. Now Trump faces great challenges and difficulties. Should he prioritize a surplus or the dollar? How do you see the future trend of the U.S. dollar? If he continues to push for a trade war, how will the U.S. dollar's status change? Can it really reduce the trade deficit?
Zhang Jun: This is his dilemma of wanting everything. If he continues to impose tariffs, it doesn't make logical sense. Everyone knows that the U.S. trade deficit is over a trillion dollars. If this happens, the status of the U.S. dollar will certainly be weakened. The U.S. relies on becoming a huge trade deficit country to have its currency accepted by sellers worldwide.
I remember many years ago, Professor Mundell once spoke here, saying that if China wanted to internationalize the renminbi, it might need to prepare psychologically to become a trade deficit country. Only by becoming a trade deficit country could the renminbi possibly be internationalized.
Think about it, if you depend on exports for a long time, accumulating foreign exchange, the renminbi cannot circulate abroad. For the U.S., if you want trade balance today, you will lose more and pay a higher price. But I don't believe Americans are really willing to pay this price. But Trump's claim that these dominant positions are not important to him and that he hopes to bring more job opportunities back to the U.S. is naive.
Americans will not willingly change their status, as can be seen from recent fluctuations in financial markets and the U.S. dollar index. This would only disrupt the existing order, leading to increased chaos and uncertainty, which has already interfered with the U.S. dollar exchange rate.
By the way, many economists are also discussing whether China should cut interest rates to counteract the U.S. tariff war. Cutting interest rates certainly aligns with China's current macroeconomic policy logic, but the central bank has been relatively restrained in recent years. I believe it has considered other factors. There isn't time today to elaborate further, but mainly, exchange rates are not currently the top priority, and the approach of significantly devaluing the renminbi is likely to do more harm than good.
Question 2: Professor Zhang Jun, how do you view the matter of the Mar-a-Lago agreement? Will the U.S. choose to implement the Mar-a-Lago agreement after the tariff war to let the whole world help the U.S. reduce debt?
Zhang Jun: I believe China will definitely not commit to paying for the U.S., this is certain. We see that China's reaction this time has been very strong, and the stronger wording was not communicated through the Ministry of Commerce or the Foreign Ministry but was conveyed through a statement issued by the Office of the Commissioner of the People's Republic of China in Hong Kong in the South China Morning Post, both in Chinese and English. The wording was very stern, and the other side was referred to as barbarians.
Summary of the Mar-a-Lago agreement by foreign media
Even if there is an opportunity for negotiations in the near future, I believe we will still insist on not compromising on certain things. Because China is a major country, as I mentioned earlier, you know, major countries do not back down. I believe it will definitely be this way.
Question 3: Hello, I would like to ask Teacher Wang Yongqin. Judging from the recent situation in the capital market, especially the stock prices of the past few days, which have been relatively stable. Major listed companies, mainly state-owned enterprises such as China Pacific Insurance and Guotai Securities, have carried out stock repurchases to stabilize prices. I would like to ask, from the perspective of the financial market, what kind of changes do you expect in the future?
Wang Yongqin: Let me briefly mention a point. The trade war is bad news for the world economy, with declines everywhere. The U.S. fell more than China. Recently, the national team has learned from the experiences of other countries and regions and established a government stabilization fund, which has been quite effective. In extreme cases, the stabilization fund serves as the marginal buyer, stabilizing the market, and domestic financial conditions will stabilize.
Zhang Jun: If you look back to September 24 last year, a considerable portion of our ultra-long-term bonds was actually set aside for banks to use as capital. In a sense, this was anticipated for today's situation. In the long run, we need non-bank financial institutions to hold more stocks and repurchase them, but this poses a risk accumulation for banks. So they need to prepare many government bonds to replenish the capital of the four major commercial banks.
These macroeconomic policies we have implemented in recent years have generally helped us meet today's challenge of reciprocal tariffs. Does it seem coincidental? Actually, it is not. This is a natural logical extension of our policy thinking.
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