Find an intelligent way to deal with China and economy

Trade policy is a contentious issue in contemporary America. A common refrain in trade discussions is “all we want is a level playing field.” President Trump portrays his tough trade sanctions, especially against China, as a confrontation aimed at remedying decades of America being ripped off in the global marketplace.

This represents a major reversal in America’s China policy. Since President Nixon’s opening to China in 1971 and across eight subsequent administrations it was generally believed that engagement would induce China to work with the West and become a peace-loving democracy with no designs on regional or global power.

As a candidate, Trump stood out for his embrace of America-first policies and his promise to “Make America Great Again” by addressing the grievances of ordinary citizens who feel dispossessed. Once in office, Trump, a self-described deal maker, has not been fond of large multilateral deals. He was quick to withdraw from the Transpacific Partnership agreement. After first threatening to void the North American Free Trade Agreement by executive order, his administration renegotiated it.

Countries often use protectionism tools such as tariffs and quotas to support domestic industries until they are able to compete internationally. Tariffs are taxes imposed by a country that make imports more expensive. Quotas amount to quantitative restrictions on imports. It helps to keep in mind who loses and who gains from a tariff or quota. Domestic producers and employees gain and consumers lose. Governments also benefit from tariffs because they generate revenue, but tariff revenues are typically not a big consideration in developed countries.

Countries can also impose stringent quality and safety standards on foreign products. A country can tailor the standards to the product descriptions at home, thereby giving domestic producers an advantage. Consider the continuing debate over stricter standards for antibiotics in the European Union versus the United States. Are these measures of safety or a way to protect a domestic industry? Then there are all kinds of red tape that delay exporters from gaining access to a country’s market.

Still, there is another insidious tool that a country can use to promote its domestic industries. China and other countries build national champions with government funding of state-owned enterprises (SOEs). China is the world’s second largest economy, accounting for about 15 percent of global economic output. It has seen extraordinary economic expansion over an extended period, with double-digit growth for close to 30 years.

Its SOEs have facilitated that growth and are the backbone of the Chinese economy. The nation’s approximately 150,000 SOEs control around $16 trillion in assets, constitute about 40 percent of China’s gross domestic product and employ 35 million people in strategic industries such as energy, technology and telecom.

China’s government helped launch new and emerging industries by channeling capital into SOEs. For example, it flooded global markets, depressed prices, and literally shut down hundreds of U.S. solar-panel startups. China’s SOEs are front and center in implementing China’s One Belt One Road initiative, the nation’s vision for massive development of trade routes between Asia, Africa, and Europe.

These government subsidies stimulate excess production, depress market prices, and enable state-owned enterprises to capture market share. Closely related is the theft of intellectual property and forced technology transfers, often by SOEs, that highlight the need to constrain these enterprises. Countries such as China hesitate to allow state-owned enterprises to fail for fear that it would unleash a tidal wave of unemployment.

While trade talks between China and the United States may be productive in dealing with tariffs, the Trump administration should also address less traditional tactics that amount to cheating. They include China’s use of subsidies to key state-run companies to undercut their American competitors. What should be clearly understood here is that dealing with the Chinese is like engaging in unprotected sex.

Originally Published: January 27, 2019

The eye-for-an-eye approach to trade

On March 8, America’s populist-in-chief signed an executive order slapping a 25 percent tariff on steel imports and a 10 percent tariff on aluminum imports. President Trump said he did it to protect the nation’s economic and national security. It came a little over a month after Trump said he would impose tariffs and quotas on imported solar panels and washing machines.

The United States has had the world’s largest trade deficit ever since 1975. In 2017 imports were about $2.9 trillion and exports were just over $2.3 trillion, as Americans continue to consume more than we produce.

The steel and aluminum tariffs have aroused little enthusiasm and much criticism. Naysayers argue they will do nothing to strengthen America’s economy or national security, and spark a global trade war. They say the tariffs will result in higher prices as steel users pass costs onto consumers.

Supporters claim there already is a trade war underway and it is being waged by China. That country accounts for more than two-thirds of America’s current trade deficit. We import $506 billion – mainly consumer electronics, clothing, and machinery – from China, but export only about $131 billion in goods.

China has been blocking high-value exports from the United States. For example, it charges a 25 percent import duty on cars, 10 times the 2.5 percent levy the United States puts on imported vehicles.

China also imposes steep tariffs on imported automobile parts. As Elon Musk tweeted, “No US auto company is allowed to own even 50% of their own factory in China but there are five 100% China-owned EV auto companies in the US.” Obviously, engaging in tough trade talks with China is long overdue.

It will take years for the United States, China and the global trading system to work out imbalances on a wide range of goods. America’s prosperity depends on a robust approach to correct failed trade policies, with a focus on the industries of the future. It makes no sense for America to excel at innovation without securing the domestic and foreign markets for its products.

It merits mentioning that instances in which American companies ship raw materials to China for assembly at a lower cost, then sell the finished products count as imports. American multi-national companies are happy to hire foreign workers from emerging markets with lower standards of living to keep their labor costs low and profits high. They figured out that to make income redistribution work on a global scale: American workers have to be less welloff so their overseas counterparts can be less poor.

But the new tariff on steel imports will not impact China. The United States is the world’s biggest steel importer, buying 35.6 million tons in 2017. Nearly 17 percent come from Canada, 13.2 percent from Brazil, and 9.7 percent from South Korea. Unless the Chinese are routing their steel exports through American allies, the U.S only imports about 3 percent of its steel from China.

After pushback from Canada, wiser minds prevailed within the administration and tariff sanctions were suspended indefinitely pending renegotiation of the North American Free Trade Agreement.

The tariffs may trigger reprisals. The day after President Trump signed the tariff executive order, the European Union published a 10-page list of American products that would be targets for retaliation, including peanut butter, grains, and motorcycles.

While steel and aluminum account for only a small portion of trade, the President’s rhetoric indicates that this is just the opening salvo from the White House bunker after years of benign neglect. The primary target is China. Trump has already called its unfair trading practices “an assault on our country.”

As the head of the World Trade Organization, one of the guardians of the global trading system, noted after the tariffs were announced, “Once we start down this path it will be difficult to reverse direction. An eye for an eye will leave us all blind and the world in a deep recession.”


Originally Published: Mar 22, 2018