Trump Isn't Wrong About China And Trade, But His Methods Won't Work

It appears the president’s capacity to scramble good ideas up with bad ones knows no bounds, as is evidenced by his ham-fisted attempts to drive a harder bargain with China on trade.

Citing the $375 billion trade deficit that China currently runs with the United States – which he routinely rounds up to $500 billion - he has proposed the implementation of tariffs which will total $50 billion on imported Chinese goods. These tariffs would see a flat 25% fee imposed on nearly 1300 products imported to the U.S. which include aerospace parts, high definition monitors, electromagnets and textile processing machinery.

The proposed tariffs run the gamut of products and are designed to curb China’s increasing technological prowess and aspirations to lead the world in high-tech industry. According to Trump, China is a force that must be stopped.

He might not be wrong.

China has been accused of mercantilist policy by both the European Union and Japan, who agree with America that China should stop policies which enable cyber-theft, compel companies to share technology and use state resources to acquire publicly traded tech companies. It’s shady stuff, and America could well be leading the charge against them on behalf of free markets.

Except that Trump is the most ill-equipped charge leader around and is going about this all wrong.

He keeps emphasizing the size of the Chinese deficit to the U.S. as if trade deficits account for actual money and jobs lost – which most experts agree they don’t. In fact, the deficit that China runs with America has the opposite effect, allowing money to flow back into the American economy and keeping interest rates low across the board.

What the trade deficit does represent is a huge amount of leverage that America could be leaning on to affect trade policy with China. Because of the $375 billion disparity, China depends on American consumption and could reasonably be persuaded to change some policies in light of that.

However, the tariffing system is an ineffective way to lean on that lever.

Tariffs imposed with so little subtlety and negotiation are tantamount to starting a trade war – one which Beijing has openly said it will win. The Chinese government has already drawn up its own counter-tariffs totaling around $50 billion, which target American agriculture and auto manufacturers. Soybeans have become the poster product for this threat, representing 12% of American exports to China and happening to coincide with areas of the country which voted for Trump in 2016.

While these are the same folks that Trump promised to be tough on China with, I doubt they had their own livelihoods in mind.

This is one advantage that China enjoys in a prospective trade war. Though the U.S. has a wider swath of imports to tax, China enjoys a freedom of behavior afforded by their one-party system. While Trump and the White House are beholden to an electorate, Xi Jinping and the Communist Party control state media and enterprise. They can spin this trade war any way they want, and whatever economic effects might be felt by the imposition of American tariffs can be compensated from other areas of the economy or the state-run banks. The U.S. has no such option to be protectionist.

China is also free from the threat of lobbyists and trade organization changing their party affiliations before a significant mid-term. It is no coincidence that they have proposed to attack American agriculture, an industry with ample representation on Capitol Hill.

There is also the question of whether these tariffing programs would even be effective in curbing Chinese growth. One research firm pegged the total loss to Chinese enterprise at a 0.1% of total growth, hardly enough to make Beijing cry uncle and reverse their policies.

So, the whole thing is a bungle. It now looks like this will be all bluster and no substance, with Trump revisiting the familiar ground of wild statements and threats, followed by immediate and significant backpedaling.

A much better strategy would have been to enlist the help of concerned trade allies around the world to apply slow pressure on China to change their policies and participate more conventionally in the global economy. Remember the European Union and Japan? They would make ideal economic bedfellows if one’s goal were to coerce China into a change.

Oh, wait. That’s the same European Union and Japan that Trump threatened with steel and aluminum tariffs earlier this year. Man, just when you think it’s safe to start a trade war.

And so it goes again with this administration – a not-terrible idea followed by the worst execution imaginable. Which leaves American economic relations with China in a tight spot, because the President is not wrong about the need for change. Now it just seems even further out of reach.

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