US, China are fighting the 'wrong war' in their trade face-off

Key Points
  • Neither country will emerge victorious from the trade fight, said Victor Gao, vice president at the Center for China and Globalization, who was a former interpreter for late leader Deng Xiaoping. 
  • U.S. President Donald Trump on Tuesday threatened higher tariffs on Chinese goods if Beijing does not make a deal on trade.
  • Still, Gao pointed out that China will not escape unscathed. "China will pay a lot of collateral damages ... but given China's size and the magnitude, these disruptions, painful as they are, will not be the end of the world," he said.
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China and the United States are fighting the "wrong war" by imposing tariffs worth billions of dollars on each other, according to a senior executive at Beijing-based think tank.

Neither country will emerge victorious from the trade fight, said Victor Gao, vice president at the Center for China and Globalization, and a former translator for the late Chinese leader Deng Xiaoping.

"The trade war, or the tariff war, is the wrong war to fight," said Gao, who is also a regular commentator for state-owned China Global Television Network.

U.S. President Donald Trump on Tuesday threatened higher tariffs on Chinese goods if Beijing does not make a deal on trade. His comments came after both countries agreed to a "phase one" trade deal in October, but have sent mixed signals about how to move forward.

China will not surrender to the United States as far as the trade war is concerned.
Victor Gao
Center for China and Globalization

Expectations that Beijing will give in to all of Washington's demands, in exchange for the removal of U.S. tariffs on Chinese exports, was "indulging in fantasy," Gao told CNBC's Geoff Cutmore during a panel discussion at the East Tech West conference in the Nansha district of Guangzhou, China on Wednesday.

"China will not surrender to the United States as far as the trade war is concerned," Gao said, adding that tariffs are being paid by American consumers and businesses, which would ultimately drag down productivity in the U.S.

It doesn't mean China will escape unscathed.

"China will pay a lot of collateral damages — for example, forced closure of companies and relocation of some capacities out of China, but given China's size and the magnitude, these disruptions, painful as they are, will not be the end of the world," said Gao.

As part of the "phase one" trade deal, China is pushing for a removal of the additional duties imposed on each other's products in different stages. But Trump said he has not agreed to scrap tariffs on Chinese goods.

The U.S. has longstanding concerns over Beijing's trade practices, including theft of American intellectual property and forced technology transfers.

For his part, Gao said China is gradually opening up market access to foreign investors and companies, and likened the move to a "motion picture" instead of a static one. Acknowledging problems that persist in the Chinese market, he said solving them requires pooling together of various resources instead of threatening to "walk away from the China market."

"No company, in my best judgment, can survive if they walk away from the Chinese market. The Chinese consumers' market is already the largest market in the world," he said.

Looking ahead to 2020

When asked about what investors should take away as 2020 approaches, Gao said they should keep their faith in China. He explained that companies like Huawei and others are leading names globally in terms of their technological developments.

"Keep faith in China," as that will be "key for 2020," he said.

Gao also urged investors to be prudent, and pointed to the historical trend of a financial crisis hitting the world economy every decade. He said: "Given the increasingly complex and complicated geopolitical factors and others ... I think 2020 is the year to manage more risks and to be very prudent, and to focus on the megatrends."

Chinese technology companies such as Huawei have been subjected to tough restrictions from the U.S., mainly on national security grounds.

Over the medium-to-long term, global investors are still interested in investing in China, according to Adam Balukonis, executive director and head of Greater China Index for client coverage at MSCI, who shared the stage with Gao.

Balukonis said MSCI's clients are trying to create ways to differentiate their investments, in addition to taking on global core exposures.

"The trend is really towards creating more tailored types of investment vehicles and that's one of the areas where firms like MSCI have invested in greatly. It's the ability to create that level of customization."