Contemporary Chinese Political Economy and Strategic Relations: An International Journal (Dec 2019)
Toward an Explanation of U.S.-China Trade Disputes: Entrepreneurial Innovation, Protectionism and the Struggle for Hegemony in the Global Economy
Abstract
The paper puts forward an international development model based on entrepreneurial innovation and learning to explain the origin of recent U.S.-China Trade disputes. It argues that Schumpeterian innovation initiates a wave of “creative response” in an economy and widens income and productivity gaps between this economy and the rest of the world. Equipped with advanced military weapons and technological skills, the advanced nation (first mover) calls for free trade with an attempt to enter overseas markets. Preventing the collapse of their economies, governments of developing economies (latecomers) imposes tariff and other means to limit import of foreign goods. This is the beginning of international conflict. Taking the advantages of cheap labor and resources in developing areas, transnational corporations from the advanced nation enter developing economies in the form of foreign direct investment. They soon penetrate and destroy traditional industries of developing economies. Being weak in technologies and resources, developing economies have no choice but to follow the leader and are content to be a follower. Hence, the world enters into a state of cooperation and harmony. At the same time, foreign direct investment entering developing areas provides opportunities for latecomer firms to learn and catch up. Through learning and imitation from transnational firms, latecomer firms are able to produce and sell imitative and improved products at lower prices. As international markets are flooded with cheap and improved goods, profit margins in the international market decline. Seeing that latecomer economies are able to catch up and threaten its supreme global position, the advanced nation reverts its free trade strategies and calls for trade protection. The tension between two economic camps (the first mover and latecomer economies) increases. This dilemma will not be resolved until another wave of Schumpeterian innovation emerges to redefine the international division of labor and world economic order. This model is illustrated by US-China trade relationship since 1979 and allows us to understand the recent US-China trade disputes.
