Special Interview
Interview with Dr. Junhua Wu, Research Director & Chief Senior Economist of the Japan ResearchInstitute

Struggle for Global Hegemony— Real Implications of the China-US Trade War
By Japan SPOTLIGHT
When China joined the World Trade Organization (WTO) in 2001, it was a symbolic development
signifying a change in the progress of globalization. The perceived decline in US global leadership and therising power of China are now in collision in the form of a trade war. This is a geopolitical crisis rather thanan economic crisis, since a political and ideological confrontation from rivalry to be the largest
superpower in the world lies behind the trade war. Therefore, conventional economic theory advocating
for free trade and a market economy will not work well as a remedy. Both nations have their own structural
backgrounds that have led to this stage and thus this trade war should be examined from a broader andhistorical perspective. In other words, it would be wrong to consider the US-China trade war as atransitory phenomenon.
We had a chance to interview an expert on China-US relations, Dr. Junhua Wu, research director andchief senior economist at the Japan Research Institute, a Tokyo-based think tank. She provided us with astructural and long-term perspective on this issue.
(Interviewed on Sept. 12, 2018)

Introduction
JS: Could you please introduce

yourself briefly, and in particular
your specialty?

financial crisis, the relationship with the
US developed into a crucial factor for
China, and eventually US-China relations
became one of my subjects.

Assessment of the Impact

Wu: I joined the Japan Research Instituteof Trade War Between
in 1990 after finishing my studies at a
China & US
graduate school. Then I was stationed
JS: As an expert on US-China
overseas from 1995 until 2016, first in
relations, how do you assess
Hong Kong, then Shanghai andthe global impact of the current
Washington, DC. In 2016, I came back to
US-China trade war as well as
the headquarters in Tokyo. I started myits impact upon both nations?
professional career as an economist
specializing in the Chinese economy, but
Wu: The current US-China trade war is notsince 2005 I have been looking at China
only the result of economic friction but
from a wider perspective, including
can also be interpreted as the two nations’political aspects apart from economic
Dr. Junhua Wu
struggle for hegemony in the world, whichaspects, and gradually expanding my
I called the Cold-Peace War. While there are certain similarities
interest towards the relationship between the United States andbetween the Cold-Peace War and the Cold War between the US andChina. At this moment, my main focus is US-China relations.
Soviet Union, it’s not a simple copy of the Cold War. As we all know,
The reason that I expanded my interests is that figuring out theduring the Cold War era the two opposing sides were completely
direction of China has been my ultimate goal. I started my career as
separated from each other — not only militarily but also politicallya China watcher right after the Tiananmen Square incident tookand economically. Thus their interests did not overlap. By contrast,
place. At that time, I believed that the economy would be the key
China and the US share common interests in many areas now andfactor determining the future of China. That’s why I became anthat makes the competition between the two countries much more
economist. However, around 2005, I found that domestic politics
complicated. That’s why I put the word “peace” after “cold” towould have more impact on China’s future than the economy. So
describe this feature of the current relationship of the US and China.
I expanded my interest to politics. Then, in the wake of the global
https://www.jef.or.jp/journal/

Japan SPOTLIGHT • November / December 201845

Special Interview

In 2015, when I was still in Washington, DC, I saw a significant
momentum that transformed the people’s recognition of China.
Seeing China as a strategic rival to the US became not only the viewof the so-called Dragon-Slayers but also many of the so-called
Panda-Huggers. Although there have been growing economic andgeopolitical interests between the US and China, many Americans
realized that it’s highly unlikely that a transformation of the politicalsystem will happen in China along with economic growth.
Moreover, as a result of engagement policy, which has been
implemented for decades, China has developed to be the biggest if
not the only challenger to US global hegemony, not only
economically but also militarily and ideologically. Thus, I believe thetrade war was not started because of the protectionist attitude of thecurrent administration and President Donald Trump. It seems that it’s
the inevitable result of the manner of China’s rising.
On the assumption that the above judgement is correct, it might
be considered that starting such competition in the domain of theeconomy would be rational since a comprehensive ideological andmilitary struggle for hegemony would cost much more for bothnations and the rest of the world.
As the Chinese economy is a principal part of the global supply
chain, it is certain that this trade war will have a significant impact on
the global economy, including the Japanese economy. Given that the
Chinese economy is currently not in perfect health, the negative
impact of the trade war will be more significant from now on andhave longer-term effects.
JS: There is a view of that there would be no

significant impact from the trade war, such as a
drastic decline in GDP growth. But you believe thata trade war will have significant negative impacts on
the economy.

Wu: Yes, I believe a trade war with the US would cause China
fundamental damage to its economy because its large trade surplus
with the US has been built on the Chinese economic growth formula.
It is indeed true that raising tariffs may not help the US economically.
It is also true, however, that raising tariffs is a method that is most
likely to function effectively, if not the only method for the US to
make China listen to it, though I am not sure whether Trump himself
is aware of it or not. In other words, in terms of competition for
global hegemony, the current US trade policy may work incountervailing China because China’s emerging has been particularly
backed by its fast-growing economy.
There are two growing concerns about China. One is the way ofChina’s economic development, which is widely called “party-state
46 Japan SPOTLIGHT • November / December 2018

capitalism”. Some even worry if “market capitalism” can remaincompatible with it. The other is the geopolitical impact of China’s
economic diplomacy, such as the “One Belt, One Road” initiative, theAIIB and significant aid provided to developing nations. Throughthese kinds of policy approaches China has enhanced its global
influence. As is well known, China has been taking advantage of the
WTO and gaining a huge trade surplus under the free trade regime
supported by the WTO. This surplus is the source of the increased
money supply that has enabled the Chinese government to enhance
its investment for building up its infrastructures and eventually
making its economy grow.
For decades, especially in the past 10 years, the trade surplus has
played a major role in China’s monetary easing. In China all foreign
currency amounts must be converted into Chinese yuan. The trade
surplus, which is the main source of capital inflows, has contributed
to an increase of base money in the shape of “funds outstanding forforeign exchange” and most of China’s trade surplus is with the US.
For instance, this year, from January to August, the ratio of the trade
surplus with the US to China’s total trade surplus was 97%.
The Chinese trade surplus with the US is also a key to China’s
foreign currency reserves. Its cumulated trade surplus in goods andservices with the US from 2001 until 2017 was $4.1 trillion, while
China’s foreign currency reserves at maximum were $3.9 trillion andare now $3.1 trillion. Thus it is not too much to say that China’s trade
surplus with the US has made it possible for China to achieve
investment-led economic growth and economic diplomacy.
There is a saying that there is no winner in a trade war. Probably,
it’s true. But it is also true that raising tariffs might be an effective
lever to move the relationship between the US and China since thetrade surplus with the US really matters to China’s economy.
There is some concern that as a retaliatory measure China may
sell US Treasuries. Yes, it might happen. For China, however, it’s adouble-edged sword because declines in US Treasury prices may
also hurt China.
As I mentioned before, a trade war is only the first battle ofcomprehensive competition between the US and China. We are now
standing at a critical historical turning point and thus we should lookat the issue from a much broader and deeper perspective. The
debate on the trade war and its possible economic consequences
seems to be based upon a rather myopic viewpoint and too muchengaged with only short-term aspects.

Special Interview

Possible Consequences of US-China
Confrontation for North Korea
JS: This question might also be too myopic, but the

US seems to be taking advantage of China’s
influence on North Korea to solve the issue of North
Korea’s denuclearization. Would this affect the
US-China rivalry?

Wu: No, I don’t think so. It’s unlikely that the US would modify its
tough policy against China for the sake of the complete
denuclearization of North Korea. The issue of North Korea is certainly
an important one for the peace of the Korean Peninsula, but it is of adifferent nature from the US-China competition. The two issues
should not to be compared.
JS: Will there be any compromises in the trade war

between the two nations?

Wu: China probably will offer more promises, such as protectingIntellectual Property Rights, reducing tariffs, and so on. But I am not
so optimistic that the dispute between the two nations can be solvedby those kinds of compromise.

A Transitory Period of Capitalism
JS: Are we living in a completely new age where“state capitalism” represented by China and“market capitalism” represented by the US are now
in friction?

Wu: I am not sure if “state capitalism” is the best term to describe
the state of the Chinese economy. We are facing an unprecedented
situation in many senses due to the manner of China’s emergence. I
cannot find yet the best terminology for the Chinese way ofdeveloping and governing the economy. About 10 years ago, I
created the term “bureaucratic-made capitalism” to describe theprocess of China’s economic development since 1978 but have toadmit that is not the perfect expression. The reason is “bureaucraticmade capitalism” may well describe the manner of China’s economic
development, but it covers neither its outcome nor its ambition. A
mixed approach of market function and absolute party control makes
China different from other economies. It’s difficult for a conventional
approach based on market capitalism and the rule of law to compete.
So, from the point of view of traditional economic theory, what thecurrent US administration is doing is not correct but might be useful.

JS: Do you think this Chinese approach and thecommon capitalism approach could converge
eventually?

Wu: Unfortunately, I don’t think so.
JS: How can we build an ideal world, then, where

China and all other nations can collaborate and live
together safely?

Wu: I wish we could, but wonder if the idea of building an ideal worldis realistic.

Global Governance in a New Age
JS: Under current international politics where US

leadership in global governance is less expected,
how do you think East Asian countries cancontribute to global governance?

Wu: Before I answer your question, I would like to say that I am notso confident in the argument that the decline of US leadership willcontinue. But whether the decline of US leadership will continue ornot, it is a reality that the US is no longer able to bear alone the costs
for global governance. Given that, it’s time for East Asian countries torealize that there is no free ride anymore. Two choices remain: one isto share a certain burden of the costs which have been mostly borneby the US, and the other is to collaborate with China, if they believe
they can go along with it well.
JS: What do you think about the role of APEC in

achieving better global governance?

Wu: I am not an expert on APEC but believe that any effort for betterglobal governance is worth it.
JS: What if East Asian countries take advantage ofChinese initiatives such as the AIIB and “One Belt,
One Road”, which are part of China’s attempts tocontribute to global governance? They could exploit
natural resources in cooperation with China for
infrastructure projects in resource-rich countries inCentral Asia, and could also meet the growing needfor infrastructure in Asia not only by ADB financebut also by AIIB finance.

Japan SPOTLIGHT • November / December 201847

Special Interview

Wu: If East Asian countries are certain that the AIIB and “One Belt,
One Road” are win-win games, then do it.

Questions of Trade & Trade Policy
JS: On the issue of trade policy, how do you think we

can avoid serious outcomes from the trade war?
Would the WTO or TPP11 work to mitigate trade
friction in the short term?

Wu: I am not optimistic about the future of the WTO. It should havebeen reformed long ago. As I just mentioned when we talked about
APEC, however, any effort for a better world is worth making. I really
hope that the US, Japan and the European Union’s agreement on
WTO reform can achieve certain results, though I wonder if any
meaningful reform can be made under the WTO’s current“consensus” decision-making regime.
JS: How about the role of regional FTAs in mitigating

trade friction? If the TPP11, RCEP, China-JapanKorea FTA or EU-Japan FTA all work well inpromoting free trade, the US would have toreconsider its trade policies, since US companies
would lose the benefits of trade by being outside ofthose FTAs.

Wu: If those FTAs could work well without the US, all those member
nations would probably not mind if the US joins them or not. They
could enjoy the benefits of free trade without the US. The problem is,however, it’s still hard to image that all those free trade frameworks
can make real sense without the US.
The nature of globalization was changed along with the ending of
the Cold War. During the Cold War era, globalization could only bepromoted partially, among countries such as the G7 nations. In otherwords, at that time globalization was promoted by countries sharing
the same values, democracy, rule of law and of course, market
capitalism. After the Cold War, however, globalization has been
expanded to countries that include those who don’t share thesevalues.
This is one of the most important reasons why the WTO disputesettlement mechanism has not worked well since this disputesettlement mechanism functions on the premise of belief in the ruleof law. Now you can see why the credibility of the WTO has fallen in
the past two decades. It is because, as a result of the expansion of
globalization during the post-Cold War era, the precondition of the
WTO dispute settlement mechanism practically collapsed. It takes a
48 Japan SPOTLIGHT • November / December 2018

long time for the WTO to reach a consensus in making a decisionand in addition, the WTO has no certain effective methods to force allmembers, including members who don’t share these values, tocomply with the rules.
Another notable consequence of post-Cold War globalization is thereversion of capitalism. For a long time, I thought that “capitalism”
was not the proper word to describe the developed economies
because capitalism had been evaluated on the basis of criticism by
Karl Marx. I didn’t ask why but just took it for granted. Now I realizethat the evaluation of capitalism during the Cold War era was a resultof the progress of liberal democracy. In a world that was divided into
East and West, the Western corporates had no choice but to adjust
their management compliance with the progress of liberal
democracy, such as protecting labor rights, environment friendly
management, and so on, because it was impossible for them tomove out from the West.
But in the post-Cold War era, corporates could move anywhere in
the world seeking profits mainly based on so-called comparativeadvantage. As a result, local communities such as the “Rust Belt”
region in the US began to collapse.
From the viewpoint of economic rationality, we must say that whatthese corporates have done is to respond appropriately toincreasingly intense competition. In fact, as an economist, until
recently I was a story advocate of globalization. Nonetheless, in theface of the degradation of local communities in the developed world
and the reality that China, as the biggest beneficiary of post-Cold
War globalization, has emerged to be a major challenger todemocracy and the market economy, my confidence in globalization
has been upset. A simple question is this: is profit all the value ofcorporate existence, especially at a time that we are approaching ahistoric turning point?
There is a phenomenon that any argument or policy that isdifferent from or against what the corporates and people did during
the post-Cold War era is protectionism or populism. Is this right?
Ignoring fundamental changes in the undercurrent of globalization
during the post-Cold War era and then advocating globalization as an
absolute good is at least a kind of negligence of thinking.
Yes, our democracy is facing a crisis but we also must remember
that, in a democracy, the common people’s views must be respected.
It’s certain that democracy needs to be reformed. Nonetheless, wehave no choice but to overcome all the distortions and problems of
democracy because “Democracy is (still) the worst form ofgovernment, except for all the others.”

Written with the assistance of TapeRewrite Corporation.