Are We Making the Right China Move?

Terry H. Schwadron

March 23, 2018

President Trump is making good on a campaign promise to hit back at China for what he describes as bad economic behavior that have cost the United States factory jobs. To do so, he has announced broadening tariffs on steel and aluminum to a much broader variety of Chinese imports — from electronics to clothing, 1,300 product lines in all — worth about up to $60 billion.

The move is definitely provocative and may backfire. The stock market’s first reaction was a 3% drop in value in one day over fears of a full-scale trade war.

Indeed, within hours, China struck back with tariffs of its own on an estimated 120 U.S. exports worth $3 billion, including 15% tariffs on fresh fruit and wine and 25% on pork and aluminum unless the United States and China can reach an understanding.

If Trump is right, we should see another boost for American manufacturing. If he is less than right, we can expect a welter of world reactions in raising tariffs on American products, we will see higher consumer prices in the United States, and the effects on jobs that depend on Chinese supply lines may well prove the opposite of the intended goal.

Years ago, thinking it through or not, we made a devil’s deal: We said we wanted lower prices more than we wanted to continue American factory jobs. Now, a couple decades later, Trump is not wrong to bring up the facts and figures of lost jobs. The issue, however, is that we must keep our eyes open as to effects from making a jolting change to protect American jobs — even if those jobs increasingly will be done by machines.

How much do you want to pay for blue jeans? Will you pay more for blue jeans if the result is more American steel orders?

Trade policy rarely is about prices alone, or even local jobs alone. Rather trade has this uncanny way of strengthening or weakening political alliances and standing in the world. The Trump policy is built on the signature economic nationalism banner — America First — that the administration made clear from its campaigning days.

The president also moved to exempt the European Union, Argentina, Australia, Brazil and South Korea. Canada and Mexico were earlier left off the list of countries subject to the tariffs to gain advantage in the NAFTA talks. Together, they account for a third of imported steel. The tariffs will affect Japan, however.

Trade is also a reflection of domestic politics. It is difficult to fight the urge to replace jobs lost to lower wages overseas by using tariffs to create a more level playing field, as the president outlines. Essentially, this play on trade and tariffs, particularly on China, is the heart of the Trump “populist” message. Fairer Trade policies or what emotional messages are attached are what brought building union support and disenchanted voters across the Rust Belt into the Trump column, even winning support from Sen. Chuck Schumer and other more liberal Democrats.

For openers, there seems little debate among the economic experts that China’s huge economic gains over the last couple of decades has been buoyed by practices that take advantage of gaps in international rules. And the government in China subsidizes key industries in its country while making it difficult for foreign competitors. Currency manipulation is just one tool that China is accused of using. Another is pressure on Western companies to share technology with Chinese competitors to gain entry to the Chinese market, only to face competition from exactly those with whom they had shared.

For sure, we have serious issues with China over intellectual capital and ownership rights.

So, the word from economists is that this will take the equivalent of the world’s economic village to address, not a set of tariffs from the United States alone. China’s economy is huge, its consumer market a must for export form other countries, and the maze of factories in scores of industries supply parts and pieces for goods that may be finished in countries like the United States. And the rest of the world may lack the political spine or interest in making that kind of multilateral commitment.

This is to say nothing of the fact that the United States specifically is standing up and proclaiming disdain for such multilateral agreements. That’s why Trump withdrew us from the Trans-Pacific Partnership, those a dozen other countries have moved ahead without American leadership. Likewise, the Trump administration has indicated that it has no interest in working through the World Trade Organization, another sign of rejection for multilateral approaches. U.S. Trade ambassador Robert E. Lightizer told the House Ways and Means Committee this week that the WTO is “wholly inadequate to deal with China’s version of a state-dominated economy that rejects market principles.”

Somehow the announcement of this anti-China policy is being depicted in the White House as if it is aimed domestically, a job boost for Americans who already are at low unemployment. There is no public recognition that China may well retaliate, or that other economies may prove more nimble than the American economy. There has been no public mention at all that China holds vast amounts of U.S. debt.

In other words, if China wants to consider this move threatening, they have a lot of tools on hand to make life more miserable for us.

As with the recent announcement about tariffs on steel and aluminum imports (which will not hit China very hard), the effects as charted by economists say the resulting price rises for U.S. consumers for retail goods will rise, that supply lines to U.S. companies that have become dependent on them will reduce employment, and that U.S. manufacturers will face eventually higher costs to export to China altogether.

It is not clear that any of this has been truly played out in predictive economic terms.

Then too, is Trump’s argument that these trade policies are as the result of national security concerns. You don’t have to be an economist to see that crimping the import of, say, South Korean steel at a time when we are at the brink with North Korea and its nuclear weapons program, the White House apparently did decide that the larger national security principle would be to keep South Korea close.

Carl Bildt, a former Swedish prime minister, argued in an op-ed in The Washington Post that China could well come out ahead as the United States presses for an upper hand in steel. His argument suggests that the issue is pretty pointless altogether, since steel manufacture is far less important in the current world than control over developing intelligence and skills in digital areas and in artificial intelligence. Essentially, he argues that steel and other goods manufacture is yesterday’s problem, not tomorrow’s.

Steel and coal have since long lost their hold on the geopolitics of Europe, he says, pointing to Israel as an example of a country that has focused on developing technology. “Efforts to harness control of digital technologies will be the new global race — and one that the West simply can’t afford to lose,” he said.

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