Despite the headwinds created by the trade frictions with the US, the country should continue to press ahead with structural reforms

Historically, it is not uncommon for a largescale economic crisis to be followed by growing tensions in international relations. Unfortunately, history is once again repeating itself with the recent trade frictions between the United States and China. There is no doubt that these headwinds, unprecedented since the end of the Cold War, seriously threaten the prosperity and stability of the global economy, for which both countries shoulder special responsibilities as the world's two largest economies.

In particular, as China becomes an increasingly important participant in the international division of labor, companies and consumers from this largest emerging market are suffering during this harsh time. Handling these quasi-comprehensive frictions, especially keeping them controllable, tops, of course, the current policy agendas of both sides. As Chinese people are reputed to have long-term vision and dialectical thinking, the negative impacts of this battle, if not a war, need not be exaggerated, as long as China sticks to its long-term road map, namely deepening structural reforms to achieve high-quality development. That is not to say that China can pretend it's a case of "business as usual", as if nothing has happened. The new international landscapes regarding many aspects including trade, investment, technology, and even soft power, definitely render the following package of structural reforms more exigent than ever.

First, more efforts should be made to proactively rebalance China's trade and let domestic consumption, especially that of households, play a more important role on the demand side of national economy. From a theoretical perspective, the accumulated trade surplus of China vis-a-vis the US is equivalent to the money borrowed by US consumers to finance their spending, and thus cannot persist over the long run due to the inter-temporal budgetary constraints (namely, the condition that one should return the money back he/she borrowed). This simple, but not simplistic logic, implies that any country in the world cannot depend upon external demands or financing over the long term, and thus trade rebalancing is merely a return to the normal state of affairs. In this regard, it should be noted that China's multilateral trade surplus is already down to 0.7 percent of its GDP in 2018, a figure substantially lower than those of Germany and Japan. In the meantime, the contribution of domestic consumption to growth in China has increased to nearly 78 percent in the same year. Further focus may be put upon bilateral balancing with the US, especially through facilitating the imports of the US products and services that contribute more directly to upgrading China's household consumption, and to improving the accumulation of human capital.

Second, there is a growing need for China to accelerate its industrial upgrading and indigenous innovations. Although this emphasis is not something new, the ongoing conflict in particular, and the increasingly intense international competition in general, make it more necessary than ever. In fact, there is no denying that some notable achievements have been made in recent years. For example, according to the author's calculations based upon the World Bank's World Development Indicators, since the new millennium, China has been spending more on research and development than other major economies including the US, and as a result, its share in the world total has increased, almost continuously, from 1.6 percent to 13.9 percent from 2000 to 2016. Nevertheless, today's China is still far from being an innovative economy. For example, research shows that innovation, measured by total factor productivity, has accounted for only about 10 percent to 20 percent of China's economic growth over recent years, and thus it casts worries about the sustainability of the country's long-term development. To address this challenge, perhaps the most essential task lies in establishing a market-based national innovation system, which should especially facilitate the positive interaction between the producer of knowledge(mainly research institutions and universities) and the user of that knowledge (mainly companies). Moreover, as another key to promoting innovations, further attention should be given to the protection of intellectual property, regardless of whether it belongs to Chinese or foreigners. This naturally leads to our next point.

Third and last, it is crucial that China continue to improve its market institutions and promote greater openness. Importantly, it is worth stressing that ensuring the competitive neutrality among public, private, and foreign companies is an intrinsic component of China's market-oriented reforms that began 40 years ago. In this regard, alongside the continuing reforms of State-owned enterprises, the newly passed Foreign Investment Law is clearly a welcome step toward achieving fair and full competition, which will not only improve the micro-efficiency of both Chinese and foreign economic agents, but also help deal with the recent concerns over the market distortions in China such as over-leveraging and the so-called zombie enterprises. In short, the principle of competitive neutrality will ultimately be beneficial for all but the inefficient players. Furthermore, as shown by China's own experiences, the marketization process can only be successfully undertaken in parallel with enlarging openness to the world. More important, among many other things, China's service sector, including financial institutions, will also gain substantially from further introducing foreign competitors and applying high international standards.

To conclude, the fundamental way for China to deal with the current trade frictions, although they may have quite limited impact on the country's overall economic performance, is to further deepen and accelerate its structural reforms, especially those stated above. Eventually, looking at the big picture, although it is still hard to say that "winter is coming", now the globalization is surely experiencing rainy days, and unfortunately, the rule of jungle is looming large. Thus, the courage, patience, and wisdom of China and other responsible members of international community are being put to the test.