Backstab [By Jiao Haiyang/China.org.cn]

There are signs recently of escalating trade tensions between the US and China.

The rows between the world's No.1 and No.2 economies, if not handled well, will do incalculable harm to a still-sluggish world economy.

In the short run, trade protectionism is expected to rise, and measures that nominally redress global imbalances will shrink the world economy and increase the regulatory costs of nations to ride out the financial crisis. In the long run, a potential trade war will disrupt allocation of national resources and undermine global growth achieved on the back of comparative advantage.

The US has reneged on the vaunted free trade principles and waged a trade war in an attempt to maintain and seize unilateral gains from globalization. There are many reasons for its action.

First, the American economy is beset by unemployment. The 2008 financial crisis has plunged the country into a prolonged period of restructuring after the Great Depression. Although signs of a recovery have emerged and unemployment has slightly fallen, the legion of unskilled labor continues to grow.

This results from many factors, like the widening income gap, private schools' pro-rich bias, assimilation and recruitment policies governing immigrants, and the fact that US competitiveness is not predicated on labor-intensive industry.

On the contrary, US competitiveness will wither badly if its technological and financial professionals are not well paid. This makes it all the harder for unskilled workers to find jobs in hard times like now.

Yet in a year of presidential election, they've staged protests (the Occupy movement is a case in point.) to air frustrations with the Obama administration. These protests have influenced Obama's re-election campaign strategy, which now includes a proposal of "reindustrializing" - a byword to some extent for playing the China-bashing card and luring back low-end jobs to please voters.

Second, a trade war is also an important way of managing Sino-US economic struggles. In the wake of the financial debacle, the US economic and financial system is in a state of "slumber" to dispose of its bad assets. Meanwhile, China, the US's biggest creditor, is consolidating its rightful place in the world economic arena. Calls for reforming the global monetary system and the yuan's ascent increasingly challenge a debt-ridden, less-creditworthy US. Thus, it becomes a top priority for it to narrow its trade deficits with China and arrest the continued decline of a flat dollar. And to prevent the deficits getting bigger is to contain China's threat to US dominance in a globalized economy.

Ganging up

Third, in a US-led world economy, a Sino-US trade war, once initiated, will prompt many countries that run deficits with China to gang up on it. Since surplus in trade is crucial to job creation, countries in the black will be haunted by unemployment and have little leeway to regulate tax burdens. And in the short term, all this will reduce the room for maneuver in political wrangling over trade woes.

Today we ought to notice that the trade war with China is not fought by the US alone; it has involved many stakeholders that either run deficits with China or have a similar trade structure.

They jump on the bandwagon of meting out harsh trade penalties to China, and these punishments are reciprocally intensifying. They cast a pall over the still-fragile world economy.

Despite this acrimonious atmosphere, China should stick to the free trade principles in navigating ever more complex trade disputes. In so doing it will win the time necessary for conditions to become ripe for domestic demand to fuel growth.

In the meantime, while policy makers still value trade and investment - two pillars of growth - at China's current phase of development, they need also assume an open mentality and consider improving policy coordination at an international level, for instance, cooperating with other nations and international organizations to import more from deficit countries such as the US

In this way we will avoid politicizing the Sino-US trade frictions, and China won't be solely blamed for causing global imbalances. Beijing might even lead surplus nations in, say, cutting tariffs on American imports, to help create jobs in the US. What it should not tolerate is Washington's habitual implementation of quantitative easing to generate jobs at others' expense.

Of course, on the issue of Sino-US trade spats, we have to remain sensible. At present, any idealistic adventures - industrial overhaul and upgrade or income hikes to stimulate consumption - that disregard China's current conditions will only be counterproductive.

So even though trade tensions between China and the US may have eased a little, the hollowing out of China's industry is becoming worse. Due to deficiencies in education, research and development, and in supporting institutions, the majority of Chinese enterprises cannot compete with US firms on a level playing field.

Under government pressure to upgrade their operations, they are forced to quit what they are doing and venture into the virtual economy, where money comes fast. This will result in serious long-term misallocation and waste of resources.

In the future, even when world economy is on a firmer ground, China's industrial hollowing out will doom it to asset bubbles amid sloshing liquidity and global prosperity, in very much the same way Japan foundered and is still foundering after the Plaza Agreement, which saw the yen's steep appreciation and subsequent exodus of Japan's manufacturing sector.

The author is executive vice dean of the School of Economics at Fudan University. Shanghai Daily staff writer Ni Tao translated and edited his article from Chinese.