From Victim to Participant: The Trade War With China

“U.S. Renews Trade War Against China,” headlines the New York Times. “U.S. Continues Response To China’s Trade War Against America” would have been more accurate.

Those who accuse President Trump of starting a trade war with China had better think again. For decades China has been waging a trade war against the United States, repeatedly ignoring the trading rules followed by most nations. It has manipulated its currency; stolen billions of dollars of our intellectual property; refused to allow American firms access to its markets while pouring its products into this country at the expense of unskilled American workers. The result has been hollowed-out American communities and a great leap forward by China’s economy that has funded a re-tooled military challenging U.S. access to a trade route through which 40% of the world’s commerce passes, and support for Iran and other nations hostile to America.

All the while, the American government, whether controlled by Democrats or Republicans, has chosen to play the role of punching bag rather than counter-puncher. Trump ended that when he forced China to the negotiating table by levying tariffs that threaten the People’s Republic with a brake on its growth or, better still from his perspective, a recession. And now he is ramping up the pressure because China, famous for reneging on agreements shortly after the ink is dry on their signature, for the first time China reneged on a deal even before it was signed.

Which should not have come as a surprise. China was admitted to the World Trade Organization when it promised to open its economy to trade. It immediately reneged, and continued the mercantilist practices it has pledged to abandon. China was an enthusiastic signatory of the Paris climate-change accord, claimed to have replace America as the leader in the fight against global warming, and proceeded to finance the construction of 700 coal-fired generating stations around the world. No less a commanding figure than Xi Jingping – the man who will sign any trade agreement – made a public commitment not to militarize the artificial islands China was building in the South China Sea. With Barack Obama at his side at a White House news conference, he said, “China does not intend to pursue militarization.” Whether Obama accepted this as an indication of peace in our time in the South China Sea we do not know. We do know that no action to prevent the militarization was ever taken.

Now, it made several concessions to the American team during protracted negotiations for a trade deal, only to rescind them at the last minute. Reports are that Xi Jinping, ruler-for-life and author of the plan to make China dominant in the industries of the future by protecting Chinese companies from foreign competition and subsidizing their assault on world markets, stepped in to order a stop to these promises. He is said to have believed that, by tweeting of progress in negotiations and an impending Xi-Trump summit, Trump had created a situation in which he would have no choice to sign a deal, any deal, and soon, lest he look foolish. Xi read the tweet leaves wrong. Whatever else might be said about the President, he knows what reneging looks like, and knows that it can be part of the art of the deal in the hands of unscrupulous negotiators.

To use a phrase that is popular these days, we are where we are. Trump has responded to Xi’s miscalculation by raising tariffs on billions of Chinese imports, and threatening more of the same in weeks to come. An “about time” can be heard from both sides of the aisle. But, not for the first time, Trump has failed to lay out for American consumers what lies ahead, and what metrics should be used to measure the success or failure, and the cost, of the belated flexing of America’s economic muscle.

The President says that one goal is to reduce the bilateral trade imbalance with China. That would not be a bad thing — unless it comes at the cost of making our economy less efficient. We can improve our trade balance by levying tariffs on, for example, steel and aluminum, but there is a price to be paid in higher costs for metal-using industries. To pretend otherwise is to set one’s self up for a fall when consumers begin to see the higher prices of the goods that face retaliation from our trading partners. Trump’s insistence that tariffs are profitable because China will pay for them is either a reflection of the President’s ignorance, or what our British friends call his “economy with the truth” – lying, to less prissy critics. In this instance, lying is the lesser of the two evils. Steel bought overseas by, say Ford, arrives at American ports, customs officials slap on a tariff, collect it from Ford on behalf of the Treasury, and Ford either raises the price of its cars or suffers a loss of profits. American consumers and shareholders bear the cost, not the Chinese or other exporters. Yes, American steel producers might benefit, but only by living under an umbrella that allows them to charge higher prices than their foreign competitors demand. There’s more to this than what is laid out above, but you get the idea.

What the President should tell the American people, clearly and unadorned with promises that this will be a costless war, is that we are in a struggle with China for geopolitical and economic primacy in this and the next century. That China, free to pillage our intellectual property, capture markets that we would capture were China forbidden from massively subsidizing its exports, and inflict losses on America that we would not have to bear if it played by the rules, must be contained. And access to our massive market for goods and services is the weapon we can deploy to meet the onslaught. If we have to pay more for hundreds of items, from dog collars to backpacks to toilet paper and, yes, anvils, so be it. Lyndon Johnson refused to tell the American people the cost of the Vietnam War, preferring a policy of guns and butter, and we paid a terrible price in inflation and lost support for the war when its costs became apparent. Trump should not lull Americans to sleep with the sweet promise of a costless trade war, which they will very soon discover is not true, and let them know that there is indeed a cost, and that the cost is worth bearing, given the stakes.

Truth-telling is not Trump’s greatest strength, although his critics over-estimate his lack of fidelity to facts and under-estimate his tendency to fantasize, believing things to be so that are not so. But he has finally got trade policy, or most it, broadly right, and entered a war being waged against an America until now unwilling to transform itself from passive victim to that of active participant. Yes, it was a tactical error to for him to announce his plans publicly, rather than in a private call with Xi, making it more difficult for the Chinese to concede what they must concede if America is to win a trade war not of its making. But better a President whose itchy tweet finger makes him prone to such errors, than one who might miss this long-deferred opportunity to meet the challenge posed by a nation that is using trade as a weapon of considerable destructive power. With the American economy performing as well as it is, and China’s overly indebted, centrally directed economy in some difficulty, the odds favor America.

If the free-trade purists who got us to where we are object, the President can whip out his well-worn copy of The Wealth of Nations, and cite Adam Smith’s advice, “The case in which it may sometimes be a matter of deliberation how far it is proper to continue the free importation certain foreign goods, is, when some foreign nation restrains by high duties or prohibitions the importation of some of our manufactures into their country. Revenge in this case naturally dictates retaliation … when there is a probability that they will procure the retail of the high duties or prohibitions complained of. The recovery of a great foreign market will generally more than compensate the transitory inconveniency if paying dearer during a short time for some sorts of goods. To judge whether such retaliations are likely to produce such an effect … [requires] the skill of that insidious and crafty animal, vulgarly called a statesman or politician…”

No one ever accused the Great Scot of being a protectionist.