America Will Win the Trade War with China

For over a decade there has been a trade war between China and America, with America playing the role of passive victim. China has required American firms investing in its country to take on a Chinese partner and turn over their technology, which it agreed not to do when it joined the World Trade Organization. It has stolen American intellectual property, imposed heavy duties on imported vehicles, subsidized its exports, and manipulated its currency. Successive American administrations, prisoner to the idea that a richer China would become a more open China-and willing to play by the rules of international trade and resolve international disputes peacefully-have allowed China’s annual trade surplus in goods with the United States to balloon to $375 billion last year. Which is 10 percent higher in the first quarter of this year compared with last year and more than two-thirds of the total U.S. goods deficit with the entire world.

Then two things changed. Donald Trump, promising to Make America Great Again, was elected president of the United States, and Xi Jinping, promising to make China great again, became president-for-life of his communist country. Trump promised to put an end to China’s trade practices just as Xi promised to intensify them to enable China to dominate the industries of the future.

Trump holds the stronger hand. Hoover Institute scholars Niall Ferguson and Xiang Xu point out that America’s imports from China account for 4 percent of China’s GDP, while Chinese imports from America account for less than 1 percent of America’s GDP. And add to that disparity, China’s limited ability to retaliate.

Yes, China can put duties on bourbon to embarrass Senate majority leader Mitch McConnell in his home state of Kentucky. Or on Boeing airplanes in order to hurt the economies of Washington state (which Trump has no chance of carrying) and South Carolina (which Trump could not lose if he tried). And on soybeans in order to embarrass Trump with his farm-state supporters. But if China loses its place on Boeing’s order-book it has nowhere to turn for aircraft, as Airbus’s capacity is booked for the next five years. And analysts say there are few alternative sources China can tap for the large supplies of soybeans it needs to feed its pigs. And also, our farmers might be protected: plans are already afoot to give them financial support should a Chinese boycott cut into their sales.

Still, like all winners of all wars, America will not escape unscathed. Global supply chains are complicated and many American firms-from auto manufacturers to Apple-are highly dependent on their smooth functioning.

Others find even limited access to China’s market profitable or potentially so. During Trump’s visit in November, China signed a deal to buy 300 Boeing planes at a list price of $37 billion. Even if this total is inflated by the inclusion of deals already made, it is a big number. Starbucks, which has closed some underperforming stores in the States, plans to open a new store in China every 15 hours says its China CEO Belinda Wong. Which would bring its total there to over 5,000 outlets by 2021. Companies such as these, and many farm groups, do not want to be the collateral damage of a “win” for America in a full-scale trade war. And have teams of lobbyists and contributors to the Trump and Republican campaigns are making their voices heard. “China is counting on the American political system to do the work” of weakening Trump’s position says Wang Yong, professor of economics at Peking University.

* * *

Neither party to this clash of the titans can retreat from his position, at least not just yet, and not visibly. Both men are politicians. According to one county-by-county study, a one-percentage point increase in import competition from China was associated with a 2.9 percent increase in voter support for Trump. The president might not be one for such academic studies, but his gut is telling him the same thing.

Meanwhile, on the other side of the battlefront, Xi is likely to lose more than face if he agrees to some of Trump’s most outrageous demands to eliminate “all market-distorting subsidies”-which are the very tools he is counting on to propel China to world dominance in key technologies and, not incidentally, modernize his military.

America will win this war, with “winning” meaning getting more than it gives. And China knows it. China might not agree to the demand that it reduce its trade deficit by $200 billion by June of 2020. But it will take steps it can argue will bring the deficit down. Xi has already promised to “significantly lower” its 25 percent tariff on American cars-America’s tariff is 2 percent, which it can raise when China starts seriously marketing its cars in the U.S. next year. China also has agreed to ease its quota on imported films and allow financial firms and auto manufacturers operating in China to be majority-owned by Americans-but only if their Chinese partners agree. Not good enough, announced the American delegation to Beijing as it returned to Washington earlier this week.

Xi is enough of a realist to know that he will have to give still more ground. He announced that he favors “dialogue rather than confrontation”-as any weaker party would. Rather than break off negotiations he has ordered his top economic aide to Washington, probably next week. Harvard-educated Vice Premier Liu He is charged with preventing the present skirmish from becoming more than that. Liu is undoubtedly aware that Trump’s tactic has always been to stake out a negotiating position so extreme yet so credible that it gets the attention of those who dismissed America as a toothless tiger, while leaving himself room to retreat, claiming victory. So Liu will come with a shopping list designed to increase purchases of American goods and lower America’s trade deficit-a route China prefers to reducing its exports.

As Ferguson and Xu conclude, “A new balance . . . can be achieved only if China gives ground. . . . If that seems unpalatable to Beijing’s negotiators, they should consider the alternatives.”

As for relations in a post-trade-war world, worry not. Trump says that he and Xi “will always be friends no matter what happens with our dispute over trade.”