Vanquish the Bully: Confront China on Trade and Win
Even before the United States starts a trade war with China, some have declared that China has won and President Trump has lost.
Keith Richburg, director of the University of Hong Kong’s Journalism and Media Studies Center, argues it is too late for the U.S. to fight back on trade.
He contends that China has waged a trade war on the United States for 40 years. The tactics of the Chinese government include forcing American companies to transfer technology to domestic partners, restricting foreign ownership in the financial sector, establishing market entry barriers, and blocking foreign IT companies using the Great Firewall. The U.S. government, he says, simply ignored China’s aggressive behavior.
Rich Lowry of the National Review, a Never Trumper of the right, argues in Politico that tariffs serve only to scratch Trump’s protectionist itch and won’t hurt China at all. He believes the United States needs to “muster an alliance of truly free-trade partners” to pressure Beijing. He concedes China’s practices have clearly harmed the U.S. manufacturing sector, but insists the United States should not abandon free trade.
Part of Richburg’s arguments is valid, but I do not share is his pessimism. It is true that China has been in an economic war with the West since the 1980s. From the United States alone, China has siphoned off $3.5 trillion in trade surplus since its accession to the World Trade Organization. But China’s economy is developing and is heavily dependent on exports. Consequently, China needs the United States more than the United States needs China. It is not too late to fix the structural imbalance in U.S.-China trade.
Lowry’s points, however, are totally pollyannaish. If “an alliance of truly free-trade partners” could render Beijing reasonable on trade, we would not have problems with China now. Does Lowry know there is an organization called WTO where countries could supposedly settle their disputes like gentlemen? How does that work for us? China is a bully. It should not be in the WTO in the first place.
If protectionism doesn’t work, how did China become the second largest economy in the world? It’s largely because China refused to open its domestic markets to foreign competitors. Pursuing “free trade” with China means only one thing: wealth transfer from the United States to China. We as a nation would slowly bleed to death.
The U.S.-China trade relationship needs a reset. I believe now is a good time for two reasons.
Under Trump, the U.S. economy is booming. Small business optimism, tracked by the National Federation of Independent Business, is at an all-time high. Business investment as a percentage of gross domestic product is near its highest marks since the recession. The labor market is near full employment, with brisk job creation. A robust economy is a necessary condition for fighting a trade war.
In the meantime, there are signs that China’s economy is much softer than it would admit. According to Bloomberg, GDP figures at the provincial level were consistently exaggerated between 2011 and 2015 in China, resulting in its growth rate overstated by “a couple of percentage points.”
Additionally, domestic consumption in China has slowed down in recent months, leaving the GDP growth more heavily dependent on exports. It is estimated that China’s real growth rate of 6.8 percent in the last quarter of 2017 would have been below 5 percent without help from exports. China can’t afford trade spats with the United States, not to mention an all-out trade war. This partially explains Beijing’s relatively muted response to Trump’s tariff proposals.
A strategy is of vital importance to fight the bully. So far, the trade measures Trump has proposed seemed to be well considered.
First, he slapped tariffs on steel and aluminum imports. Some argued that steel was just a small portion of American imports from China. That’s not entirely true. The fact is China’s state-owned steelmakers, with heavy government subsidies, have flooded the world market with cheap steel, bankrupting competitors in other countries. Once everyone else is priced out, the Chinese steelmakers will dominate the market.
Many technologically more advanced countries also import cheap steel from China and then export value-added products to the United States. Trump’s metal tariffs are a two-birds-with-one-stone solution. The tariffs punish China’s steel dumping directly. They also send a clear message to our allies: either you are with us, or you are with China on trade. The United States won’t be fighting the trade war alone.
Next, the Trump administration is expected to roll out tariffs on $60 billion of annual Chinese imports that will target the technology and telecommunications sectors, according to Reuters. This is believed to counter a Chinese strategy known as the Made in China 2025 plan, an initiative to upgrade China’s industry in fields handpicked by the government. Machinery and electronics made up 48 percent of American imports from China in 2016. If metal tariffs don’t get China’s attention, this will.
There could be a third, and potentially most important, stage in the trade fight: the dispute surrounding the theft of intellectual property. China steals up to $5 trillion in value from the U.S. economy every year, according to an investigative series by The Epoch Times.
Trump promised he would act “swiftly” on intellectual property theft and once hinted he would impose a “big fine” on China. This is probably the most thorny issue between the United States and China. Yet any trade agreement would not be complete without it. We will almost certainly hear more on this subject from the administration in near future.
A few U.S. presidents tried to impose tariffs on imports from China. But their attempts were sporadic, insignificant, and often short-lived. To stop the bleeding, a system-wide reset of trade with China is imperative. It requires not only courage but also the ability of our leaders to effect real change. Trump has both. I believe the bully can be and will be vanquished. The days that China’s rule-breaking in international trade were tolerated and even awarded are numbered.