AJISS-Commentary
The Association of Japanese Institutes of Strategic Studies
NPIRIPS

Nakasone Yasuhiro

The Japan Institute of

Research Institute for

Peace InstituteInternational Affairs

Peace and Security

Editorial Advisory Board:

No. 279

Akio Watanabe (Chair)
Ichiro Fujisaki
Masashi Nishihara
Kenichiro Sasae

28 October 2019

Editorial Committee:
Tsutomu Kikuchi
Fumiaki Kubo
Tsuyoshi Sunohara
Shujiro Urata andYasunori Nakayama
Editor & Online Publisher:
Kenichiro Sasae
President, JIIA

THE IMPACT OF THE US-CHINACONFRONTATION ON THE WORLD
Toshiya Tsugami
・ In addition to the US-China trade war, the Chinese
economy faces serious domestic problems,
including balance sheet adjustments after theinvestment bubble and structural discrimination
against private companies. The government's
strong grip on the economy will hold it up for thetime being, but maintaining growth in old-fashioned
ways will make the future even more difficult.
・ The United States is engaged in two wars against
China: a trade war and a high-tech cold war. Bothhave negative impacts on the international trading
system that the United States has built andmaintained, and will harm the national interests ofthe United States.
・ It is wrong to justify China's industrial policy with“other countries are also doing it” because of
China’s enormous economic power. Now that China
has become a major power, it should graduate fromthe traditional mentality of “catch-up”. If the Chinese
government continues to lead the country with thismentality, it could adversely affect the international
order in the long-run.
The views expressed in this piece are the author’s own and should
not be attributed to The Association of Japanese Institutes ofStrategic Studies.

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The Association of Japanese Institutes of Strategic Studies

China’s economy continues to slow, but the US-China trade war is only one of
the causes of the slowdown. There are two other reasons that are internal and more
important.
First, the balance sheet recession that followed the investment bubble iscoming to China.
In the 10 years from 2009 to 2018 after the collapse of Lehman Brothers, China
invested an excessive amount of 446 trillion yuan (≒70 trillion USD) in fixed assets.
This overstretch has resulted in a decline in investment efficiency and a deterioration inits balance sheet. This is the root cause of the recent rapid debt increase. Balance sheet
deterioration must be contained, but restrained investment will further slow growth. Thisdifficult paradox will continue for a long time.
The second challenge is the plight of private companies.
The private sector, which is the main driver of the new economy, is highly
efficient and already plays a majority role in the flow of the economy, such as added
value production and employment. On the other hand, the government and thestate-owned sector, which represent the old economy, account for more than half of thewealth in terms of ownership and distribution of wealth despite their low efficiency.
Without correcting this asymmetry, China will not be able to sustain its growth, but its
vested interests are preventing reform.
The trade war between the United States and China unfortunately came in the
midst of the economic downturn after the above two chronic diseases afflicting theChinese economy.
The United States is waging two wars: a trade war led by President Trump anda high-tech cold war by a bipartisan China-hawk-led Congress.
On the trade war front, the United States and China, which account for nearly
40% of the world’s gross domestic product, are imposing tariffs of more than 20% on themajority of bilateral trade, reminiscent of the Smoot-Hawley Act of the 1930s.
On the high-tech cold war front, a trade ban based on the idea of “don’t sell or
buy in China.” is increasingly preventing technology outflow and decoupling thehigh-tech economies of the US and China, disrupting the global supply chain of the ICTindustry.
The confrontation between the United States and China will be a war without awinner, as the textbook says.
The long-term future of the Chinese economy is not bright at all, but the strong
economic power of the Chinese government, especially the customarily hidden
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The Association of Japanese Institutes of Strategic Studies

government guarantees, can sustain it for the time being. In addition, President Trump’s
spectacular performance has mitigated the responsibility of the Chinese government,
which is not managing the economy well in China, and helped strengthen national unity.
However, the more China maintains its old ways, the more serious the twochronic diseases become.
The world is also not entitled to criticize China for its excessive credit
expansion. Declining demand in China, fears of a trade war and supply chain
disruptions have made the world economy increasingly uncertain, and moves toforestall new business and investment are spreading around the world. While the real
economy thus continues to deteriorate, the global financial market remains calm as
monetary easing continues. It seems to be a critical patient who is escaping pain
through large doses of sedatives.
The United States is shaking the international trading system that it hasestablished. At the end of this year, the WTO Appellate Body in charge of resolving thedispute will cease to function due to US sabotage. Although the United States’ security
concerns about the ICT industry are widely shared, the policies that are being planned
and implemented now are all moves that run counter to economic principles and will
hurt its own interests.
China also has problems.
First, the Chinese government often argues that it is unfair to only criticize
Chinese industrial policy while other countries are also implementing industrial policies,
but it forgets that its economic power is incomparably stronger than that of othergovernments.
Second, even though China is now the world’s second-largest economy andhas grown to become a major power that threatens the status of the United States, it still
maintains a strong “catch-up” mentality with which a lagging developing country is
typically occupied. If Beijing continues to drive its people and economy toward catch-up
goals with its powerful economy, advanced countries including the United States will beless willing to support the current international trading system. Such a move is about tobegin with the collapse of the international trading system, and it could adversely affectthe entire international order in the long-run. If China does not correct its excessive
catch-up mentality, it will be seen as an accomplice that helped bring about the collapseof the international order.
What should Japan do? For Japan, which is in a security alliance with theUnited States but whose economic ties with China are crucial, it would be a disaster tohttp://www.jiia.or.jp/en/commentary3AJISS-Commentary
The Association of Japanese Institutes of Strategic Studies

be forced to make a choice between the two countries due to the escalating conflict.
The situation will be similar for many countries in East Asia.
No country other than the United States and China themselves can change
their course, but Japan should make it clear to the United States that “decoupling” fromthe Chinese economy would seriously affect the Asian, including Japan’s, economicecosystem. It should also tell China that maintaining its current national goals will makethe world unhappy. Japan should keep its position firmly in keeping its principles clear
and pointing where the world should return after the upheaval.

Toshiya Tsugami is Visiting Research Fellow at the Japan Institute of International Affairs.

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