If US president Donald Trump forces China to change its economic model, Brian Caplen says he will be doing the country a favour.

Things are now critical in the US-China trade war. US president Donald Trump’s announcement that he will impose tariffs on a further $200bn of Chinese exports would mean tariffs on more than half of Chinese exports to the US.

If China responds by putting tariffs on another $60bn-worth of US goods as threatened (on top of a previously announced $50bn), then nearly 85% of US exports to China will be impacted.

It is easy to see the Chinese problem – as they only import $130bn but export $500bn in the trade relationship they are quickly running out of goods to target. This is the logic behind Donald Trump’s tweets that “trade wars are good and easy to win” despite warnings from most economists that in trade wars everyone loses.

The difficulty for the Chinese in responding is that underlying the trade imbalances is a statist economic model, the reform of which could mean the ruling Communist Party losing both control and ultimately power. Under president Xi Jinping, instead of liberalising, China has been clamping down harder.

But herein lies the puzzle. The Trump administration fears China’s targeting of supremacy in industries such as robotics and artificial intelligence, using a model of state intervention, will result in it overtaking the US in technological prowess.

In grasping that the US is trying to undermine its Made in China 2025 goals, China is responding with tariffs. But if it really wants to win the technological and economic race with the US it would do better to look at how to reform its economic model by opening up the economy further and allowing in more competition – exactly what Donald Trump wants.

Some analysts such as private equity banker Fred Hu point out that China’s technological strength is grossly exaggerated, noting that China still imports 90% of its microchips, mostly from the US.

“Beijing should resist the prevalent yet ill-justified self-complacency and triumphalism that contributed to the fear in Washington in the first place, and it should make serious efforts to reform and open its domestic economy. Unless Beijing amends its heavy-handed statist approach to economic development, China’s potential as a leading nation in science and technology could be seriously curtailed,” he wrote in an article for The Washington Post.

So if Trump’s trade war persuades China to reform its economic model, he will be assisting the country's economic development not hindering it.

Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen

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