Justin YiFu Lin

The looming threat of a trade war between China and the U.S. is a “lose-lose” situation for both the economies, believes Justin Yifu Lin, dean at Peking University’s Institute of New Structural Economics.

“Regarding the current conflicts between China and the U.S. over the trade issue, it appears to be triggered by the large trade deficit between China and the U.S.” he said. “Before 1984, China had a deficit to the U.S. and since 1985 China enjoyed a trade surplus with the U.S.

“Last year, China had a surplus of 340 billion U.S. dollars with the U.S., representing 41 percent of the U.S. trade deficit, and that caused Mr. Trump to say it was because [China] utilized unfair practice to gain the advantage over the U.S. economy,” he continued. “However, we need to recognize that the U.S. started to have a deficit with East Asian economies in the Sixties. And the reason the U.S. had this kind of trade deficit with East Asian economies was because the U.S. is a high-income economy. The U.S. did not have competitive advantages in the labor-intensive type of production, and the East Asian economies, with the low income and their competitive advantages, was in the more labor-intensive type of productions.

“I hope that trade is always a win-win situation,” said Lin. “The U.S. certainly enjoys the advantage of exporting high value-added manufacturing and services to China, and I hope that economic rationality will prevail. But even if the trade conflict continues, as I mentioned, China is a large economy. China can rely on domestic sources for the growth. I am confident China will be able to grow economically.”

This year marks the 40th anniversary of China’s transition from a planned economy to a market-driven one. To say that the country has achieved a lot in the past four decades is an understatement; more than 700 million citizens rose above the poverty line and 300 million Chinese people joined the ranks of the middle class. But China still has a lot left to achieve, believes Lin.

He spoke about the more recent slowdown in the country’s breakneck speed of growth and the understanding by some economists that this marks China’s “return to normal.” “Since 2010, the growth rate in China has dropped year by year, and last year, the growth rate was 6.8 percent, which was the lowest since the Nineties. Some people believe that the growth rate in China is likely to drop continuously down to 4 percent or 3 percent,” he said.

This prediction is based on the notion that developed countries tend to have 3 to 4 percent growth, and China will eventually follow suit. This isn’t necessarily the case though, according to the economist. “A developing country has something called the latecomer’s advantage. We can borrow, we can learn, we can license new technologies from high-income countries. By that, the cost and the risk for technological innovation and industrial upgrading certainly would be lower than the high-income country. And with that mechanism, a developing country will have the potential to grow faster than high income countries.

“China has already used this latecomer advantage for 39 years. How much potential is there for the latecomer advantage? That depends on how much technological gap China still has with the high-income countries,” said Lin.

He believes that the best way to measure this technological gap is to look at the income level gap. By extrapolating historical per capita GDP by purchasing power parities data from other East Asian countries that began developing before China, and comparing it to U.S. data from the same time period, Lin predicts that China has the potential to achieve 8 percent growth for 20 years, beginning from 2008 onwards. “China has the potential to have 8 percent growth for the coming 10 years. Certainly, it only means potential. How much growth can be realized depends on the global economic situation and the domestic economic situation in China. But I am confident because China is a large economy, China has a lot of room to maneuver domestically. No matter what kind of global economic situation is likely, China will be able to achieve 6 percent or more growth rates in the coming decades.

“Currently, China’s GDP is already about 18 percent of the global GDP, and at even 6 percent of growth, China will contribute to about 1 percentage of growth to the world, and we know the global growth now is around 3 percent. That means, in the coming decades, each year China will contribute at least 30 percent to the global growth,” said Lin.

With continued growth in China, Lin predicts that by 2025 the country will cross the threshold of $12,700 in income per capita to become classified as a high-income country. Currently, only about 15 percent of the world’s population lives in high-income countries, according to Lin. However, if his prediction holds true, the global population that lives in a high-income country will increase from 15 percent to 34 percent in 2025.

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