President Donald Trump seeks to upend the international economic order. The trade rules of that order were painstakingly constructed, agreement-by-agreement, over seven decades after the end of the Second World War. Trump evidently seeks to create a new order to his liking.
Defying several of these rules, Trump has imposed 25% tariffs on $50 billion of U.S. imports from China, starting July 6, 2018. In turn, and likewise ignoring the rules, China invoked tit-for-tat tariffs on an equivalent amount of imports from the United States.
The United States said Tuesday it will impose 10% tariffs on an additional $200 billion in Chinese imports as soon as September, a move that would escalate a trade dispute between the world's two largest economies.
An all-out trade war could spark a Cold War that cuts across every economic and political front between China and the United States. Cooperation on North Korea would vanish as the first of many casualties.
With respect to China, Trump has four core complaints, three justified, one not. The first justified complaint is that China does not protect intellectual property rights. Chinese firms notoriously pirate videos, films, software, and trademarked products. State-owned enterprises (SOEs) practice cyber and human espionage against foreign firms. Most importantly, China forces foreign firms to transfer their technology to Chinese joint venture partners, as the price of doing business in China.
The second justified complaint is that China does not give foreign firms "national treatment." Foreign firms confront hurdles that Chinese firms easily leap over. Antimonopoly regulations and penalties are enforced against foreign firms, not against Chinese firms. Environmental requirements are stiffer. Foreign firms face red tape when they import needed inputs. Often, they are prevented from doing business in areas related to their core competence, such as branch banking or delivering express parcels between Chinese cities.
The third justified complaint is that China heavily subsidizes its SOEs, not only "old" industries exemplified by steel, but also upcoming industries identified in the Made in China 2025 project -- biotech, electric cars, telecom, and much else. Subsidies come in the form of easy bank credit, low taxes, cheap land, and other government favors.
(Gary Clyde Hufbauer)
The one unjustified complaint is that China persistently runs a large bilateral trade surplus with the United States, about $390 billion in 2018. Trump believes that China will suffer more heavily in a trade war, and he thinks a trade war will curb the U.S. trade deficit. Most damaging to the international economic order is Trump's resort to "self-help," in the form of tariffs, without waiting for WTO adjudication.
Foremost the bilateral trade deficit reflects China's position as a "global assembly factory," importing raw materials and components from multiple sources and exporting finished products to the United States.
Trump is right that a trade war will do more damage to China in economic terms, but in political terms the United States will suffer most. The reason is simple. China is an autocratic society and the government is already telling citizens that it is their patriotic duty to stand up to America. Nearly all Chinese are prepared for battle. But American farmers who lose sales and American workers who lose jobs will never agree that it is their patriotic duty to suffer because of Trump's trade war.
Trump is not a president who takes advice from critics, but if he listened to economists outside his own echo chamber he would change tactics. He would direct the Central Intelligence Agency to identify Chinese companies -- both private and SOEs -- that benefit from intellectual property theft and forced acquisition, or from government subsidies, and he would direct Trade Ambassador Robert Lighthizer to devise creative measures to make life difficult for these companies, not only in the U.S. market but in the markets of U.S. allies, such as Japan, Germany, France and the United Kingdom. The measures would include both trade and financial penalties.
To address the absence of national treatment for foreign firms doing business in China, Trump should direct Treasury Secretary Steven Mnuchin to seek a pact with U.S. allies: tit-for-tat denial of national treatment for a Chinese firm doing business abroad for each documented case of denial to a foreign firm operating in China.
These are targeted measures, designed to inflict pain where it counts. By contrast, blunderbuss tactics contemplated by Trump, starting with 25% tariffs on $50 billion imports from China, will disrupt the international economy, inflict collateral damage on Asian suppliers to China, hurt American farmers and workers as retaliatory tariffs take hold, and send a shock wave through global stock markets. An all-out trade war could easily trigger a global recession -- for which President Trump, not President Xi Jinping, will be blamed.
(Gary Clyde Hufbauer is a nonresident senior fellow at the Peterson Institute for International Economics, Washington. He served as deputy assistant secretary for international trade and investment policy at the U.S. Treasury Department from 1977 to 1979.)