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A new take on China

Andreas Becker Davos
January 24, 2019

How quickly can the trade spat between the United States and China be resolved? At the World Economic Forum in Davos, Switzerland, some believe it could take years before a sustainable settlement is agreed.

Flags of USA and China with the words Trade War
Image: imago/C. Ohde

For about a year now, people around the globe have followed the escalating trade conflict between the United States and China with bated breath. The world's two largest economies are currently negotiating a solution, and there had been some hope for a high-level bilateral meeting in Davos to help defuse the spat.

But nothing came of it as US President Donald Trump and his state secretaries canceled their trips at short notice, citing the problems around the US shutdown.

By contrast, China is here in Davos with the biggest delegation ever since it first attended the World Economic Forum 40 years ago. The China delegation is headed by Vice President Wang Quishan (pictured above), who used his address to the audience to reiterate his country's commitment to global trade, open markets and international cooperation.

"We should all work together to make the cake bigger and distribute the slices more evenly," Wang said about his future vision of global trade. "What we shouldn't do, though, is stop making cakes."

A persistent policy

Wang thus took up on what Chinese President Xi Jinping started in Davos two years ago when he came out in favor of free trade and multilateralism, earning him a lot of praise back then.

But a lot has happened since the trade conflict between the US and China took shape a year ago. The West's view on China's economic might has changed. We hear more and more people talking about Beijing's attempts to protect its own economy from foreign competition, for instance in the finance sector.

China's rising middle class has made the Asian nation more interesting for Western companies. German carmaker Volkswagen for instance sells every second car it produces on the Chinese market. For US firms it's no longer enough to produce cheaply in China for global markets, but they also want to get a foothold in the nation's huge market itself.

"These corporations now see China as a market they want to enter, and they feel China is erecting trade barriers against them — so some of the geopolitical tensions are based on tensions between companies," said economist Rhaguram Rajan from the Bank for International Settlements.

Rivalry growing

On top of that, many Chinese companies have turned into strong competitors. Take telecom equipment and smartphone giant Huawei, but also chemicals firm Sinochem led by Ning Gaoning. His company is to merge with Chemchina soon in a $120 billion (€105 billion) transaction.

A couple of years ago, Ning was able to acquire firms in the US, too, but today that wouldn't be plain sailing. "We all see what's happening at the moment," Ning said at Davos. "There will be less investment."

"The Chinese are getting quite confused," he said. "They thought they were welcome to invest in other countries, but now they realize they are not welcome all the time. That's OK — the Chinese economy has grown in recent decades by welcoming investment from all over the world. So their mindset is that investment should be welcome anywhere. That is not the case today."

The German government has introduced legislation that makes it easier to intervene and stop planned Chinese acquisitions in response to Chinese Midea Group's takeover of German robotics company Kuka in 2016.

Hurry up!

Europe as a whole fears it cannot keep abreast of developments in key technology areas. None of the 10 biggest tech companies are from Europe, the large platform companies from the US and China are dominating the market; and investments in artificial intelligence (AI) are very small in Europe, compared to the US and China," said the World Economic Forum's Martina Larkin while presenting a fresh report on Europe's competitiveness.

She said that particularly in the field of AI, Europeans had a lot of catching up to do, Larkin argued.

There's no time to waste as China is making huge strides in that area. "The venture business is exploding with growth," said Blackstone chief Stephan Schwarzman. "China also has greater data sets; it's the start of a revolution."

The political conflict involving China is one centered on technology, market power and well-being. While Europeans are still banking on dialogue, the US is having a go at confrontation.

"There will be adjustments of trade barriers, but how long this period of adjustment takes is tough to tell right now," Schwarzman said. "It'll take a while; it could take decades."