China Has Much to Gain by Resolving Trade Issues With U.S.

Almost all economists agree that a full-blown trade war would leave both China and the U.S. worse off. A simple game theory framework shows that international trade is inherently a “cooperative game,” especially when consumption and production chains are tightly interconnected across borders. If the game is played uncooperatively, the hoped-for gains for specific activities and segments of the population would pale in comparison to the losses for big majorities in each country. That would be true even if the (few) winners from widespread protectionism tried to compensate the (many) losers.

For that reason alone, many expect China and the U.S. to find a solution that would result in fairer but still-free trade (similar to the hoped-for outcome in the negotiations to modernize the North American Free Trade Agreement between Canada, Mexico and the U.S.). This hope is enhanced by another argument that hasn’t received sufficient attention: By acceding to mounting external demands on intellectual property and excessive trade barriers, China would be accelerating three longer-term transitions that it has willingly embarked on or knows that it will be necessary to undertake.