Trump Is Right on China Trade, Wrong on Tariffs
(Bloomberg) -- The U.S. and China continue to head toward a possible trade war, as negotiations to bridge the gap between the two countries last week ended inconclusively. Donald Trump’s administration has demanded far-reaching Chinese concessions to reduce the bilateral trade deficit, address Beijing’s mercantilist trade practices, and open up key sectors of the Chinese economy to greater foreign competition.
The White House has underscored its demands by applying sanctions on steel, aluminum and a host of other imports and restrictions on Chinese investment. Beijing has responded in kind, imposing tariffs on an array of American goods from frozen pork to aluminum scrap and offering only minimal concessions.
The consequences of a full-on confrontation between the world’s two largest national economies would be quite serious across the globe. But the Trump administration is not entirely wrong to be disrupting the U.S.-China trade relationship. Rather, the story here is a familiar one in the Trump era: The president is blending a halfway-sound insight on global affairs with deeply counterproductive execution.
The basic insight is Trump’s argument that unfettered economic integration with China isn’t necessarily a good thing. Since the end of the Cold War, U.S. officials have worked assiduously to deepen the economic ties between China, the U.S. and the broader world, on the theory that a richer China would eventually become a more democratic and peaceful China. “Trade freely with China,” George W. Bush once said, “and time is on our side.” Unfortunately, things haven’t quite worked out that way. China’s authoritarian rulers have used growing prosperity to buy off a growing middle class and avoid any meaningful political opening. And rather than becoming a satisfied member of the U.S.-led international system, Beijing has used its wealth to pay for a vast military buildup and a wide-ranging geopolitical offensive that is testing that order more and more strenuously.
Admittedly, China might well be a more disruptive actor were it not so involved in the international economy, but the loftier ambitions that accompanied its insertion into global commerce have not yet been realized.
Meanwhile, economic integration with China has had other problematic consequences. Beijing has aggressively targeted the U.S. manufacturing base as part of an effort to build its own domestic enterprises and establish a dominant position in a range of important industries, from steel to semiconductors and beyond.
It has used subsidies, tariffs, forced technology transfer and other protectionist approaches to reach for supremacy in high-technology sectors, including many with important national security and defense implications.
Likewise, China is expanding its control of critical infrastructure — from ports to telecommunications companies — around the world, as a way of strengthening both its geo-economic and its geopolitical position.
Not least, China has used the economic leverage provided by its wealth for political ends. Beijing has relied on the allure of Chinese commerce and capital to silence criticism of its human rights abuses in Europe and elsewhere. It has also sought to limit American criticism of China through strategic investments in American universities and think-tanks, and through the subtle coercion of U.S. corporations and news media.
China, in other words, is playing for keeps. It is using the fruits of economic integration with the U.S. and the broader world as a way of strengthening its ability to compete against America and its allies.
If the U.S. is going to hold its own against the Chinese challenge, it will have to take a harder-edged geo-economic approach. In particular, this means figuring out how to limit bilateral economic integration in key areas, or at least mitigating the vulnerabilities interdependence creates.
The U.S. government, in cooperation with American industry, will have to figure out how to shield particularly critical pieces of what has been called the “National Security Innovation Base” from predatory Chinese practices. Universities and think tanks — which are themselves critical intellectual components of the innovation base — will have to think hard about how reliant their business model should be on students and money from China. The U.S. and its allies will need to devise better procedures for protecting infrastructure that China may seek to control for geopolitical ends.
America doesn’t need to — and shouldn’t — make a clean economic break with China, but it certainly does need a more selective approach to openness.
Here is where Trump’s approach contains some value. Limiting U.S. economic integration with China will inevitably involve some near- and medium-term pain for the enterprises and consumers affected. Convincing voters to tolerate that pain — after nearly 30 years of U.S. presidents calling for ever-deeper economic ties with Beijing — will require initiating a serious public conservation about the more problematic aspects of the U.S.-China economic relationship.
Trump has at least started that conversation, albeit in his own provocative, idiosyncratic and sometimes misleading way, by raising the prospect of a future in which America and China are becoming less rather than more intertwined.
Yet the theme of this administration is so often “one step forward, two steps back,” and this case is no exception. For one thing, Trump’s obsession with the trade deficit tends to predispose him — if not necessarily the people who work for him — toward scattershot solutions rather than more targeted, strategic approaches. For another thing, his broader foreign economic policy, and his foreign policy writ large, are making it less likely that a tougher policy toward China will succeed.
Any program to manage interdependence with China will be effective only if Washington can gain the cooperation of its allies and partners in Europe as well as the Asia-Pacific.
In part, this is because China is adept at picking off stragglers through targeted trade and investment deals. Also in part, it is because the collective action dilemmas of managing interdependence with China become easier to manage if the U.S. can act in concert with its friends, and because the economic pain of doing so is lessened if collectively they can simultaneously deepen their economic integration with one another. Finally, Beijing represents a truly formidable geopolitical and geo-economic challenge, and so the strength that numbers provide will be critical in competing effectively.
Trump, unfortunately, seems set on fracturing the U.S.-led coalition. He has done so rhetorically from the outset, by voicing skepticism if not outright hostility toward many U.S. alliances and allies. He has also done it more concretely, by withdrawing from the Trans-Pacific Partnership, an initiative designed precisely to consolidate a U.S.-led economic community in the face of China’s rise, and by implementing trade sanctions on steel and aluminum in ways that seem likely to hurt Europe and Japan as much as they injure China.
This is a pity. The Trump administration deserves some credit for talking about the threat that China poses more honestly and openly than any administration in decades. The president himself is not wrong to force a discussion about how to manage interdependence with a country that is more rival than partner. But foreign policy is ultimately about execution, and as in so many cases, Trump’s policies seem likely to isolate America on a matter where unity and concerted action are essential.
©2018 Bloomberg L.P.