On Winning the ‘Trade War’ with China

According to The Trump Administration, America is winning the trade war with China.

However, the Middle Kingdom’s economic machine may be slowing, but President Xi Jinping is unlikely to sue for peace anytime soon, at least not on terms acceptable to American interests.

China’s economic system is antithetical to American democratic capitalism. Its buccaneer commercial policies flaunt the World Trade Organization’s (WTO) rules and other Western norms.

For example, Beijing promotes private theft of intellectual property and steals jobs by requiring foreign firms to produce in China, through joint ventures with Chinese firms, to access its markets.

Beijing uses the technology and wealth gained to build a modern navy and promote its Belt and Road initiatives. Together those threaten security in the Pacific, undermine democratic values in developing nations, and support authoritarian regimes in places like the Philippines and Venezuela.

President Donald Trump aims to convince or compel Beijing to stop commercial tactics that undermine American prosperity and global geopolitical interests. And that requires systemic changes in China’s socialist-market economy.

Not ready to make nice

Little evidence has emerged that China is ready to capitulate.

President Xi sits atop a communist oligarchy with a long history of breaking its word and has exhibited no intention of negotiating in good faith. On several occasions, he has persuaded President Trump to postpone tariffs to initiate yet another round of protracted talks that end with the Chinese offering little.

We are at a stalemate, and the lesson for President Trump should be clear – incrementalism does not work. Threats followed by postponed actions and raising tariffs on selective portions of Chinese exports and in steps are a fool’s journey. Similarly, announcing sweeping sanctions against ZTE and Huawei followed by some easing back.

It’s aggrandizement at the White House to attribute the slowing the Chinese economy to those limited measures and to claim Americans are not paying the tariffs.

China’s economic model was hitting barriers even before President Trump joined the war. It lacks sufficient overseas markets to sell all the stuff its subsidized factories crank out, and President Xi’s efforts to shift leadership to state enterprises from private businesses impose terrible inefficiencies.

Neither the Chinese nor Americans pay all the costs of the tariffs. Anyone who has taken Principles of Economics knows that taxes are partially borne by producers, they accept some price cuts, and by consumers they pay the differences between the tariffs and those price reductions. Anti-Trump economists who state otherwise should be defrocked.

Moving supply chains

Foreign investors are moving supply chains out of China to avoid the uncertainty of American ire. The next President, like Presidents Trump, Obama and Bush, will face the same economic and geopolitical challenges posed by Beijing’s obsession with creating an Imperial China on the global stage, 1 that makes the rules and reduces other governments to supplicants.

Contrary to the promises of White House trade adviser Peter Navarro, factories leaving China are not moving to America but to other Asian locations. Chinese wages and bureaucratic risks are now too high even without The Trump’s Tariffs, and his trade war is accelerating a trend not instigating it.

American farmers are getting hammered by Chinese targeted retaliation. Beijing is a lot smarter about how it turns the screws than a divided White House with doves like Secretary Stephen Mnuchin preaching appeasement and undercutting Trade Representative Robert Lighthizer. Designating China a currency manipulator is largely a symbolic gesture.

China has enormous wealth and staying power and a stubborn oligarchy that will hold President Xi’s feet to the fire. Meanwhile, opportunist Democratic presidential hopefuls-like Joe Biden and Kamala Harris-offer the prospects of a softened US posture if elected.

Hit him harder

President Xi sees this, and President Trump will have to hit him a lot harder to get results.

President Trump could do the following:

  1. impose a system of mandatory import licenses that ends the $320-B bilateral trade imbalance.
  2. Issue US exporters resalable licenses to purchase goods from China in proportion to their sales there. The more China buys in America, the more it can sell here but if it retaliates against American farmers, then it must sell less here, and
  3. Implement tough financial sanctions against technology pirates like Huawei and their banks.

A few skirmishes a victory does not make, and it is hard to have confidence in a divided White House that does not know fact from fiction or have the stomach to act decisively.

By Peter Morici

Paul Ebeling, Editor

Editor’s Note: Peter Morici is an economist and business professor at the University of Maryland.

America First!