Shang-Jin Wei Says More…

This week, Project Syndicate catches up with Shang-Jin Wei, a former chief economist at the Asian Development Bank.

 

Project Syndicate: Last August, you wrote that “paradoxically, a downturn in America could help to improve bilateral economic relations with China” – a prediction that, you noted, was grounded in recent history. And yet, now that a downturn has arrived, US President Donald Trump has arguably become even more antagonistic toward China, calling the COVID-19 coronavirus a “Chinese virus” and accusing the World Health Organization of promoting “Chinese disinformation” about the virus. Why is this downturn – a global crisis – so far not spurring bilateral cooperation? Do you see hope for a reversal?

Shang-Jin Wei: My statement last August is based on history: in the past, when the United States has faced economic or social difficulties – such as after the terrorist attacks of September 11, 2001 and the 2008 global financial crisis – its appetite for international cooperation has tended to rise.

Officials recognized that international coordination and cooperation can go a long way in supporting national recovery policies. That is why more than 90 US foreign-policy experts, including former high-ranking White House officials from Republican and Democratic administrations, recently issued a joint statement urging Trump to work with China to address the COVID-19 pandemic.

It is true, however, that since the 1990s, bilateral tensions have often risen in the runup to US elections, with political candidates from both parties competing over who is tougher on China. In the current election season, Trump has a particularly strong incentive to ratchet up the bilateral competition, in order to shift voters’ attention away from his administration’s failures in handling the pandemic. So we can expect more antagonism in the months ahead.

Project Syndicate: You’ve pointed out that “reducing tariffs and non-tariff trade barriers also can help to fight a pandemic-induced recession,” and yet “many countries maintain various trade barriers that both raise production costs and reduce domestic households’ real incomes.” What barriers should be eliminated most urgently, and by whom? Does the World Trade Organization have a role to play here, even with its dispute-settlement mechanism “functionally dead”?

Shang-Jin Wei: The US has launched aggressive fiscal and monetary measures to address the economic fallout of the COVID-19 outbreak. These are necessary, but insufficient. The US would also benefit from rolling back the barriers it has imposed on imports from China and elsewhere.

Until recently, the costs of Trump’s trade policies were partly offset by the sugar high produced by the 2017 tax cuts. But as the pandemic decimates economic output and causes unemployment to skyrocket, the US cannot afford trade policies that reduce households’ real purchasing power and raise production costs for firms. The same goes for other countries with high trade barriers, including China. Leaders must understand that reducing tariffs is not a favor to other countries; it is good for domestic households and firms.

In terms of priority, removing tariffs and non-tariff barriers on personal protective equipment (PPE) and medical supplies should be at the top of the list. Academic research suggests that making this action permanent would maximize the boost to supply by eliminating uncertainty, which discourages investment. This does not rule out additional measures to increase resilience, including cultivating suppliers in other countries.

International cooperation is also needed to address product quality issues. China is home to a very large number of medical-supply and PPE manufacturers, and the quality of their output varies widely. The Chinese government could publish a list of quality-certified manufacturers, from which foreign companies and governments could purchase reliably. Countries may also consider outsourcing procurement to foreign firms operating in China, which have the knowledge needed to find reliable local suppliers.

As for the WTO, the lack of a functioning dispute-settlement mechanism severely limits its potential. But it remains the international organization best suited to urge countries to resist the protectionist impulse and negotiate reciprocal trade reforms. Still, there is no getting around the fact that US trade leadership is both uncertain and crucial to progress.

Project Syndicate: You argue that limiting the pandemic’s economic fallout will require countries “to make the best (or better) use of digital technologies,” especially “robust online shopping.” For developing countries that lack the necessary digital infrastructure and logistical capacity, you advise “emergency service-sector reforms” that would allow internationally competitive firms to fill the gap. How could countries overcome barriers to procurement from foreign firms? Do you see a role for multilateral institutions in this process?

Shang-Jin Wei: In countries where the digital economy has already taken root, a number of activities, from shopping to education, were immediately moved online, drastically reducing the impact of closures. But this is not the case for many developing countries. Similarly, whereas countries like the US and China were able to expand their health-care capacity rapidly – whether by converting hotels or sports facilities into hospitals or by building entirely new ones – many developing countries do not have that option.

Part of the problem is that most countries heavily favor domestic firms when it comes to construction projects, undermining efficiency. If new health-care and digital infrastructure is needed to address the pandemic, the World Bank, the Asian Development Bank (ADB), and other international development institutions should not only mobilize financial resources quickly, but also simplify and accelerate the procurement processes for relevant service contracts. Whether or not the projects are funded by international organizations, governments should focus on finding the most cost-effective construction firms and service providers, regardless of where in the world they are based.

Project Syndicate: You have often challenged criticism of China – over, for example, its intellectual property protections and its subsidy policies and alleged dumping practices – based on its income level. Yet there are plenty of countries with similar per capita GDP that are not remotely comparable to China in terms of infrastructure, innovation, and economic might. Are income levels enough to tell us what to expect of an economy, especially one as anomalous as China’s? Are there other reasons to defend China’s performance in key areas like IP and dumping?

Shang-Jin Wei: To be clear, there is a lot of scope for China to strengthen its IP protections and reduce trade barriers in both goods and services. Doing so would benefit China and its trading partners.

But criticisms of China’s IP regime and trade practices must be grounded in reality. Ignoring the facts – as media reports and US government statements sometimes do – is a sure route to misguided policymaking.

Many of Trump’s trade-war tactics are counter-productive, hurting US consumers and businesses, without ensuring Chinese progress toward a more market-oriented growth model. In China, there are those who favor market-oriented reforms, and those who don’t. Trump’s trade tactics are not helping the pro-reform group’s case. Moreover, some of the Trump administration’s demands – such as the requirement that China purchase a certain amount of US products (which China would probably otherwise have imported from elsewhere) – are specifically intended to override market forces.

Designing better policies will require the US, Europe, and others to consider China’s record on trade and IP protections in context. While many factors shape a country’s behavior in these areas, experience from a large cross-section of countries suggests that per capita income is the best summary predictor. On average, richer countries tend to have lower trade barriers and stronger IP protections.

The data show that over the last 30 years, as China became richer, it has been liberalizing trade and strengthening IP protections (reflected in rising remittances of royalties and other payments to foreign IP holders). Yet China is still a middle-income country; half of its workers earn less than a minimum-wage US worker would.

We can ask China to do better. But we should evaluate it in the context of countries at a comparable stage of development.

 

BY THE WAY...

Project Syndicate: At this point in the crisis, what is your baseline scenario for China’s economy in 2020?

Shang-Jin Wei: China has more or less gotten the COVID-19 outbreak under control. How fast it can recover economically depends on whether it can avoid a second wave of infections domestically, and when its major trading partners contain the outbreak. If the pandemic is under control globally by the end of May, China may enjoy an economic rebound powerful enough to offset the very low growth of the first half of the year. In such a scenario, annual growth could reach 2-3%.

If, however, China faces a second wave of infections, or if major trading partners fail to contain the outbreak before September, annual growth could be close to zero or even negative.

Project Syndicate: The disruption of global supply chains and collapse in export markets would seem to make China’s broader structural-reform objectives more urgent than ever. How will the COVID-19 crisis affect domestic investment and household consumption, which are central to the growth model China’s leaders want to establish?

Shang-Jin Wei: China is very integrated into the world economy. Many Chinese firms depend on foreign markets, imported inputs, and external demand. China’s trade-to-GDP ratio is much higher than America’s, for example.

During the COVID-19 crisis, economic shutdowns have severely disrupted China’s access to foreign-made goods (especially intermediary parts and components) and decimated external demand, as household incomes and company revenues in major economies have plummeted. These shocks will undermine Chinese household incomes, especially in the coastal regions, and Chinese corporate income, especially among export-oriented companies.

But China’s leaders can soften the blow with policy reforms that improve resource allocation and firm productivity, as well as with demand-boosting measures. The government’s recently announced plans to reduce restrictions on internal migration, land transactions, and capital-market operations are promising steps in the right direction. We will see how fast they are translated into reality.

Project Syndicate: Assuming the US remains resistant to international cooperation, who should take the lead on a coordinated pandemic response? Do you see a larger role for regional development banks, such as the ADB, where you were chief economist?

Shang-Jin Wei: Whoever is willing to provide public goods is welcome. Greater international cooperation would surely help in the fight against COVID-19 and the economic recession it brings – especially if the US contributes.

Development banks such as the ADB and the World Bank can play an important role in highlighting the challenges faced by vulnerable developing countries – those with weak public-health systems and insufficient fiscal capacity to roll out large-scale assistance packages for households and businesses. Developed countries and large emerging economies must do far more to help, such as by implementing moratoriums on debt payments and delivering emergency supplies of PPE and medical supplies. This is not only the ethical thing to do; it is in their own interest.

Project Syndicate: As a US national born in China, what do you think Americans and Chinese are missing about each other?

Shang-Jin Wei: In both countries, a majority of people are kind, generous, and family-oriented. Yet in the news and on social media, there is a tendency to focus on differences, fueling mistrust. This creates fertile ground for certain interest groups to push narratives that vilify the other side, claiming that “they” are actively working to undermine “our” workers, businesses, and way of life. This may benefit the interest groups, but it hurts everyone else.

From COVID-19 medical research to climate-change mitigation, there are so many areas where the world needs the US and China to work together. One hopes that both societies and their political leaders find the courage and wisdom to do so.

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