Ning Gaoning on the Eight Puzzles Faced by Chinese Enterprises Since the U.S.-China Trade War Began

Release Date:

2019-09-10

On September 6, Ning Gaoning, Chairman of Sinochem Group, attended a special seminar at the 2019 China Development Forum in Beijing and delivered a speech as a panelist at the plenary session. The event was guided by the Development Research Center of the State Council and organized by the China Development Research Foundation, with the theme “Trade, Openness, and Shared Prosperity.”

Ning Gaoning has identified eight key dilemmas confronting Chinese enterprises since the onset of the U.S.-China trade war, spanning such areas as global integration, the wealth gap, trade surpluses and deficits, the RMB exchange rate, the WTO framework, GDP growth, and trade supply chains, and offers corporate‑level insights to address them. These “eight interconnected questions” are: Is global economic integration a good thing? Who benefits from global economic integration? Has global integration driven some people in developed countries into absolute poverty? Does a trade surplus amount to taking advantage of others? Will the RMB appreciate if China reduces its intervention? Should we continue to abide by WTO rules? And among GDP, GNP, and per capita income, which measure truly matters most? Can a trade war actually increase a country’s wealth?

Since the U.S.-China trade war began, Chinese enterprises have faced considerable conceptual confusion. From a corporate perspective, Ning Gaoning addressed the challenges confronting Chinese companies and the clarifications they seek.

First, in the past we championed global economic integration. But is global economic integration still a good thing today? Do we still want it? From a corporate perspective, whether viewed through the lens of comparative advantage in trade or as an exchange of trade and investment, or as the free movement of people, history has shown that over the past three decades, economic integration has brought prosperity to the global economy. Take APEC as an example: over the same period, member economies have posted GDP growth rates nearly two percentage points higher than the world average, while firms in integrated economies have exhibited stronger growth prospects and higher returns compared with those in non‑integrated regions.

Second, who has benefited from global economic integration? Developing countries have indeed integrated into the global market and achieved development. However, developed countries have reaped even greater benefits: they have upgraded their industries to higher‑end sectors, increased value added, adjusted their economic structures, reduced energy intensity per unit of GDP, improved the environment, and relocated low‑end industries abroad. In particular, firms from developed countries have expanded globally—another advantage of economic integration—and it is fair to say that the gains have been shared.

Third, has global economic integration driven certain individuals in developed countries into absolute poverty? In fact, absolute poverty does not exist. In developed countries, per capita resource consumption—whether in food, energy, or housing space—is far higher than in developing nations. The widening income gap in these advanced economies stems not only from trade and economic integration but also from industrial automation, artificial intelligence, education, as well as racial discrimination and policy factors.

Fourth, does a trade surplus mean we’re taking advantage of others? Whenever people talk about a trade surplus, they feel uneasy, as if it were some kind of advantage. In reality, whether a surplus or a deficit is “good” or “bad” depends on the context. A trade surplus, on the one hand, supplies more goods to other countries, but at the same time it consumes domestic resources, labor, and the environment, creating conditions for others to consume while also helping to curb inflation in those economies. Thus, a trade surplus does not represent an easy gain, nor does it mean that a larger surplus simply amounts to taking money from others. We should recognize that, once a surplus accumulates, the resulting foreign-exchange reserves are often used to purchase U.S. Treasury bonds, thereby lowering U.S. interest rates—so in this sense, the net profit may even be negative. For this reason, I would actually prefer China to run a trade deficit: Chinese households and firms would borrow heavily, and the global economy would rely on Chinese currency to balance trade. Seen in this light, a trade surplus merely grants the right to employ labor; I do not believe it constitutes a real advantage, nor is it sustainable.

Fifth, will the renminbi appreciate if China reduces its intervention? As everyone knows, that certainly won’t happen. Recently, the renminbi depreciated due to trade tensions; in fact, this depreciation—through the currency’s own adjustment—helped rebalance China’s trade position, reflecting a process of market equilibrium.

Sixth, should WTO rules still be observed? At present, the trade rules—especially those that businesses are required to comply with—are shaped by the WTO. But do we still need WTO rules, multilateral trade rules, and rules governing trade among countries at different stages of development? And should the concept of coordinated development among nations remain relevant? These questions are of great importance to businesses as well.

Seventh, which concept—GDP, GNP, or per capita income—is ultimately more important? Nowadays, everyone talks about how fast GDP is growing. From a GDP perspective, China’s growth does appear quite rapid; but when you look at GNP, the figure shrinks considerably, because a substantial portion of China’s GDP stems from foreign investment and investments by companies from other countries. And when you calculate per capita GDP, the number becomes even smaller. I believe we should revise our statistical conventions: China ought to emphasize GNP, highlight per capita figures, and underscore the extent of resources—such as food, housing, education, and healthcare—that China consumes on the global stage. Moreover, the standard of living in China still lags far behind that of developed nations, and this reality must be continually brought to the public’s attention.

Eighth, can a trade war increase a country’s wealth? The answer is: No. Yesterday in Shanghai, I heard that some U.S. companies have relocated to China because of the U.S.-China trade war—and there are several more. Why? Because U.S. firms are determined to capture the Chinese market; they won’t stay in the United States—they’ll move to China. Think about it: who pays the tariffs imposed by the trade war? Who bears the burden? Who creates value? Isn’t it precisely the trade war that has prompted companies to shift their production bases overseas? So far, this kind of large-scale relocation hasn’t yet become widespread—though it has happened in the past. Back then, as costs rose, so did China’s overall cost structure, which was a natural process. Today, for example, Sinochem Group’s exports have, to date, incurred very little in tariffs. Why? Because its supply chain is inseparable and irreplaceable. Conversely, you can export your products to Europe or ship European goods to the United States, but that won’t resolve trade disputes—especially not by simply moving industries back home. In short, trade conflicts cannot be settled through a lose-lose scenario, nor by determining who suffers more.

Note: The above content is based on the remarks delivered by Chairman Ning Gaoning at the Special Symposium of the 2019 China Development Forum. (Compiled from the audio recording,未经本人审核)

Source: Sinochem Group

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