INSIGHTS: TRUMP’S TRADE POLICY IS A DISASTER, BUT POSTPONING THE CHINA TRADE WAR WAS SMART
By Guest Columnist Daniel J. Ikenson:
Director of Cato’s Herbert A. Stiefel Center for Trade Policy Studies
Reprinted with permission from Cato
Reactions in the United States to the Trump administration’s announcement on Saturday that it would refrain from imposing new tariffs on imports from China for the time being have been decidedly negative. One would expect criticism from the unions, the steel producers, and old economy manufacturing trade associations. After all, many seemed not the least bit concerned about burdening the economy with 25 percent duties on $50-$150 billion of Chinese imports and retaliation of similar scale against U.S. exports, as long as they secured for themselves a small bag of booty in the process. Trump’s “America-First” brand of economic nationalism was everything they had ever hoped for—and now it may be in retreat.
Likewise, one can understand why the administration’s decision to reconsider its approach to Chinese technology companies and Chinese technology transgressions makes the security hawks unhappy. Many of them have been peddling a self-perpetuating narrative that is one part fact to three parts innuendo, hearsay, and speculation that war (and not just the trade kind) between the United States and China is inevitable, and that there is very little scope for further cooperation. Why, they wonder, would Trump squander the leverage to compel real Chinese reform that was afforded by the results of the Section 301 investigation and ZTE’s existential predicament?
But I am most disappointed by those who present themselves as pro-trade, internationalist, cosmopolitan, and informed, but who seem strangely disappointed that the administration stepped back from the abyss. There was a point when these folks warned about the perils of Trump’s protectionist path, and screamed from the hilltops about how Trump’s unilateralism would kill the World Trade Organization. On Twitter, they goad Trump: “Trump blinked.” “Xi schooled Trump.” “U.S. credibility has been squandered” (as if it was somehow squandered THAT moment). For some of these people, disdain for Trump or the desire to be perceived as the most offended by his behavior is more important than supporting one of his rare decisions to do the right thing.
This weekend’s announcement, arguably, was the first piece of good trade policy news the Trump administration has delivered during its tumultuous 16-month reign. Yes, the administration’s trade policy has been a comedy of errors from the outset. Trump’s America First policies have betrayed his administration’s utter ignorance of the interdependence of the global economy, divided the country, and strained long-standing relationships with governments, businesses, and people on every continent. Had the president been remotely informed about international trade before taking office—instead of taking his primer courses on our time and on our dime—we might have been spared 16 months of wrenching policy mistakes.
The big takeaway from this weekend’s stand down is that the United States got taken by the Chinese, who’ve offered mere promises to purchase all sorts of U.S. exports and that the Trump administration has made fools of themselves in this process. Well, the Trump administration was always going to look foolish in this process. After all, who doesn’t look foolish pursuing nonsensical objectives, such as achieving bilateral trade balance, while breaking rules and strong-arming trade partners to get there? All Americans should be embarrassed by U.S. trade policy nowadays, but with respect to developments with China there is a better headline. Lost in an environment that is heavy on snark and light on measured analysis is that the worst of all outcomes—a deleterious trade war—has been avoided for now. Postponing a trade war is far superior to waging one, so as we spend the present lamenting the precarious near future, let’s also consider how we might make enduring trade peace more likely.
There is plenty of blame to go around for the deteriorating state of affairs, but let’s not forget that it is nearly a $750 billion relationship. It can’t be all bad. But despite that interdependence—or perhaps because of it—there are numerous sources of friction. The U.S. list of gripes famously includes subsidization of industry, the continued prominence of state-owned enterprises, currency manipulation, dumping, discrimination against U.S. companies, limited investment opportunities, closed services markets, relatively high tariffs, unfair labor practices, intellectual property theft, indigenous innovation policies, joint venture requirements, forced technology transfers, and many other allegations. These have been characterized as the vestiges of China’s incomplete transition to a market economy and there is definitely truth to it.
Chinese gripes are less familiar to Americans’ ears, but include the adverse treatment of China as a non-market economy in antidumping cases, an allegedly over-inclusive list of products subject to U.S. export controls, a crackdown on Chinese investment in the United States, U.S. blacklisting of Chinese information and communications technology firms, and other market access restrictions.
Surely—and especially if the alternative is a ruinous trade war—many of these issues can be resolved. Washington and Beijing should go to the negotiating table, exchange wish lists, identify priorities, and put in writing an agreement that more fully opens both markets to trade in goods, services, and cross-border investment, and weeds out discriminatory innovation policies. Meanwhile, both governments should commit in that agreement to adopt less invasive, yet far more comprehensive, statistically valid approaches to screening technology products for cyber risks without compelling the sharing of source code or trade secrets (as described in this paper about cybersecurity and protectionism).
ON THE ECONOMY: DEAL
By John Dunham:
Managing Partner, John Dunham & Associates
Since it costs a lot to win, and even more to lose, you and me bound to spend some time wondering what to choose. Goes to show, you don’t ever know, watch each card you play and play it slow. Wait until that deal come round. Don’t you let that deal go down. Thus begins the song Deal, written by Robert Hunter and Jerry Garcia. The song opened Mr. Garcia’s 1972 solo album Garcia.
I received my MBA from Columbia University, and by far the most valuable class I took was a seminar on negotiation given by Professor Stuart Diamond. Yes this is a pitch because negotiating skills are just so important.
About a month ago, the President and his economically challenged Trade Representative, Peter Navarro, unveiled a package of tariffs that the Administration planned to impose on a hodge-podge of Chinese products. Then, just two weeks ago, both the Secretary of the Treasury and the Secretary of Commerce announced, We’re putting the trade war on hold.
A framework had been reached in negotiations with the Chinese government that would minimize some of that country’s most brazen practices related to intellectual property concerns, and increase Chinese imports of American products.
The financial markets responded with the S&P 500 jumping by 1.2% percent that day. Then, three days later, the US Trade Representative, Robert Lighthizer released a statement on the talks saying that real work still needs to be done to achieve changes in a Chinese system that facilitates forced technology transfers in order to do business in China and the theft of our companies’ intellectual property and business know how. Seeing a disconnect, markets fell back by 0.8 percent.
I have suggested to a number of different groups that even though there is a lot of smoke coming out of the White House in relation to trade, there really is not much fire. So far, the following trade related initiatives have come out – mainly via executive orders:
- An executive order setting up bonding requirements for importers bringing in goods subject to antidumping and countervailing duties;
- An executive order requiring a study of trade deficits;
- An executive order requiring agencies to abide by domestic preference laws and rules;
- An executive order requiring a review of all trade agreements;
- An executive order establishing an Office of Trade and Manufacturing Policy in the White House (basically giving Navarro a job);
- An executive order requiring an analysis of critical defense related manufacturing and raw materials production industries;
- A proposal for 25 percent import tariffs on certain Steel and Aluminum imports;
- A proposal for a 25 percent import tariff on a myriad of products from China;
- A Presidential Memorandum removing the United States from the Trans-Pacific Partnership negotiations;
- An order to the US Trade Representative to open negotiations on amending the NAFTA trade agreement.
While this all may look like a lot, most of it is bluster. The only real action taken so far by the Administration is pulling the United States out of negotiations for the Trans-Pacific Partnership, a potential trade agreement that neither Democrats or Republicans were particularly fond of, and that would have been rejected by Congress anyway.
The proposed tariffs on steel and aluminum imports are (at least as of the day of this writing) on hold, and the proposed tariffs against China are only strawman proposals.
While trade negotiators are hard at work on the minutiae of NAFTA nothing has changed, and while the President has threatened to withdraw from the Treaty, this is also more smoke than fire. The President cannot scrap major parts of NAFTA without the consent of Congress. While the tariff provisions of the agreement would end, the other aspects of NAFTA related to government procurement, labor, the environment, services trade, and arbitration proceedings would all remain in effect. And even if the tariffs were put back they would be at low most-favored-nation levels under the WTO.
I have argued that this bluster is part of a much larger negotiation between China and the Administration, a process that involves much more than trade.
Let’s get back to Professor Diamond. One of the key takeaways from his research is that negotiations work best when everyone feels good about them. There should be no winners and losers in a negotiation. And in a good negotiation everything should be on the table. For example, if I want a second piece of pie, rather than arguing about calories, my wife could throw mowing the law into the deal. She gets the lawn mowed and my calories reduced, and I get the two pieces of pie.
This is likely what is going on with the Administration’s trade policy. The Administration clearly has three goals in mind:
- Keeping promises – Particularly promises to voters in the key midwestern battleground states that helped get the President elected and are needed to hold Republican majorities. They have been hard hit by de-industrialization, and voters blame China and Mexico.
- Strengthening National Security – Trade is a way to align American’s security interests with those of the next most important world power, The People’s Republic of China (PRC), and is probably one reason why the PRC has “encouraged” the North Koreans to back off of their development of weapons that threaten the United States.
- Reducing the Trade Deficit – This is where economists differ from the Trump world view. In our mind, the trade deficit is not an important measurement, but rather the reality that exists due to low savings rates in the US and higher savings rates abroad. This is reflected in the terms of trade between countries and is why goods from China or Korea are relatively inexpensive and why Americans purchase so many of them. It’s not a score in a football game.
Looking at China, the three most important goals are:
- Maintaining Internal Stability – The Chinese Government owes its legitimacy to its ability to maintain a growing living standard, particularly for its massive rural population. In spite of recent growth, China is still a very poor country (2016 per capita income is $8,123 well below world average of $10,192) and the country is very dependent on exports.
- Ensuring Access to Raw Materials – Chinese remember history, and how prior regimes were subjugated by European Countries and Japan as a source of raw materials. The Chinese government uses similar principles to maintain virtual colonial control of raw materials.
- Ensuring Regional Dominance – Back to history. The Chinese have been invaded by the Japanese, the Koreans, the Vietnamese as well as every European power. Those in charge believe that the greatness of China was destroyed by these invasions. The government will use everything in its power to ensure hegemony over the countries on its border.
In order to reach its three goals, China must ensure access to the US market. The United States is China’s largest customer by far – accounting for about half of all exports. China cannot continue to grow its economy and win a trade war with the US. On the other hand, the United States cannot continue to allow the Chinese to flaunt WTO rules on intellectual property.
For the US, the trade deficit with China is not really important – but the security provisions are. While China itself is not a threat to the United States, North Korea is. It is also part of the region that China wants to lay dominance over.
So, there are synergies between the American and Chinese positions. Through negotiations, trade relations can be maintained, military threats reduced, Chinese policing powers increased, and all can fall under agreed upon WTO rules.
Jerry Garcia may have been onto something oh those many years ago. Negotiations will be tough, and it might cost a lot to win, and even more to lose. Its going to be up to the negotiators to watch each card they play, but in the end, this Deal may be one of the best things to happen for the world in some time.
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