Trump’s Misguided Trade War
(The Bloomberg View) -- U.S. President Donald Trump may sincerely think he’s battling to win Americans a better deal on trade with China. In fact, he’s making a better deal harder to achieve — and threatening to inflict grave economic damage on the U.S. economy in the process.
In the past few days, Trump has dramatically cut the chances of a negotiated solution to the two countries’ various trade disputes. He announced a first set of tariffs on $50 billion worth of Chinese goods, prompting an entirely predictable Chinese vow to retaliate. Now he’s followed up with a new threat to impose tariffs on an additional $200 billion in Chinese imports (and possibly another $200 billion after that).
Even as he escalates the fight over tariffs, the president is trying to persuade Congress to go along with his decision to lighten penalties on Chinese telecommunications company ZTE Corp. That decision was questionable in its own right (because it harmed U.S. credibility in sanctions enforcement), but one possible justification is that it might have encouraged China to offer concessions on trade. The tariff fight has most likely canceled that opportunity, such as it was: No Chinese leader, least of all President Xi Jinping, could be seen to placate Trump under these circumstances.
Meanwhile, the president’s actions are increasingly hazardous to the U.S. economy’s health. If implemented, the tariffs — taxes paid in the end by U.S. consumers — would hurt American firms and households more than they’d hurt the Chinese. The latest ones would be applied in part to finished goods such as electronics and sneakers, directly raising prices for U.S. consumers (even before China’s government chose to retaliate, as it probably would).
Perhaps the administration thinks China’s ability to punch back is limited, since the country doesn’t import enough from the U.S. to penalize an equivalent $200 billion in goods. But China can retaliate in other ways — for example by obstructing U.S. companies operating on the mainland, promoting boycotts of U.S. goods, or throttling the flow of students and tourists to the U.S. And China’s ability to thwart the Trump administration’s geopolitical goals remains as potent as ever — witness North Korean dictator Kim Jong Un’s surprise visit to Beijing this week.
There’s no need for this reckless unilateralism. The Trump administration’s theory of trade is fundamentally wrong. It sees bilateral trade imbalances as evidence of unfair practices. In fact, in a world without tariffs or trade barriers of any kind, a roughly similar pattern of surpluses and deficits would still arise, as a result of macroeconomic imbalances and other factors. There’s no polite way to say this: Trump’s goal of smaller deficits through better deals is simply delusional.
Granted, the U.S. has valid grounds for complaint about specific trade practices. In remedying these through cooperation rather than trade war, it would have many potential allies. Other governments are aware of the difficulties their businesses face in China. There’s a consensus that its government pursues a legitimate aim — to move up the technology ladder — by sometimes improper or illegal means, including commercial espionage, heavy subsidies, and coerced transfer of technology.
It would be in China’s interests to do more than curb such abuses at the margin and make largely symbolic gestures on trade, as it has up to now. Substantive economic reforms — measures to liberalize finance, increase consumption, cut overcapacity, protect intellectual property and streamline state-owned businesses — would support better-balanced growth as well as answering the complaints of trading partners. But that doesn’t change the verdict on Trump. His clumsy machinations, which alienate allies while hardening China’s resistance to reform, do nothing to advance this prospect.
By all means let the U.S. identify specific instances of rule-breaking on trade and investment, and build a global coalition to persuade China to conform. By all means lead an effort, through new trade pacts, to strengthen the rules and the means of enforcing them, where that makes sense. But no good purpose can be served by taxing trade, rejecting cooperation and isolating the U.S. from its friends.
Just how much damage Trump might do is starting to dawn on financial markets. He’d be wise to change course before he’s forced to.
©2018 Bloomberg L.P.