The China shockwave

Yi Jung-jae
The author is a columnist of the JoongAng Ilbo.

Kim Dong-won is a guest professor in the economics department of Korea University. Although unfamiliar with trade or China as he mostly served in the finance sector, he took an interest in the trade war between the United States and China four months ago. Having been in charge of a semester course on Korean economy, he began to look deeply into the manufacturing sector. The more he looked, the more he worried. Its heart rate was alarmingly weak and in serious need of a transplant. But before it could schedule an operation, it seized up with a heart attack from the ongoing trade war between two of its biggest export markets.

He began to look into the situation before it dealt a fatal blow to Korea Inc. He pored over files from home institutions and others, including the U.S. Trade Representative, the World Trade Organization, the World Bank, the International Monetary Fund, and People.com — a website run by China’s state-run People’s Daily. He examined and compared the data, numbers, and files and reached three conclusions, which he expounded on in a forum sponsored by JoongAng Group. Coincidentally, on the same day, the Donald Trump administration ratcheted up the trade war by announcing new 10-percent tariffs on $200 billion worth of Chinese goods.

First, Kim predicted the trade war would be a lengthy one. This fight goes beyond trade as hegemony in the global economic order is at stake. Trump claimed “if not now, never” to show the U.S. determination. America has the strength and the ammunition. Its economy is stronger than ever. Washington can elevate and widen the tariff weaponry, block any technology transfers, and even go into a currency war. China can hardly back down. It threatened retaliatory tariffs on $60 billion worth of U.S. goods. But China will have to come up with other strategies to prepare for a prolonged battle. It will have to resort to non-tariff barriers and restrictions on strategic goods. The Financial Times predicted the Sino-U.S. trade war to last beyond Trump’s term — and become a new normal.

Second, the clash between the two largest economies will likely change the rules of the international economy. Trump wants to keep U.S. hegemony over the global value chain. He cannot tolerate China getting more global wealth than the U.S. He also wants to shake China’s dominance in the global manufacturing front. He blames China for losses of U.S. jobs and industrial cities turning into one vast rust belt. Trump’s message is simple and clear. Any enterprise investing in China won’t be able to sell its products in the U.S. He is coercing global companies to pull out of China and instead build factories in the U.S. and hire Americans. This poses an existential problem for Korea, which has put a lot of money and technology into China.

Third, the war can cause bloody casualties in Korea. A second shockwave from China could hit Korea. Unlike the first shockwave in 2012, the next could be lengthy and even deadly. The country’s economic future is at stake.

Prof. Kim backs his findings with statistics. He is not a typical scholar. He was an editorial writer for four years, a vice president of a bank for three years, and an assistant deputy governor at the Financial Supervisory Service for two years. His diverse career has sharpened his insights. Choi Byung-il, a trade expert and professor at Ewha Womans University, completely agrees. He recently predicted a protracted war between the U.S. and China that could reshape the global economy and wipe out Korea.

Can the worst be avoided? Kim is pessimistic. Korea must immediately redress the state industrial outline and reinvigorate exports, large companies and the manufacturing industry. But the government is entirely engrossed with boosting domestic demand. A 10-magnitue earthquake is in the making, but Korea is busy with other things. “We will know what hit us when it does. But by then, it will be too late to do anything,” Kim said. “Politics can be revolutionized but the economy cannot. It is a pity our politicians do not know that simple wisdom.”

JoongAng Ilbo, Sept. 20, Page 30