Would A China-U.S. Trade War Be ‘Just’?

BloombergQuintOpinion

The ‘Just War Theory’ is invariably applied to military conflict. But, with fears rising of a Sino-American trade war that would cause global collateral damage, that theory should be applied to U.S. President Donald Trump’s decision to target China under Section 301 of the Trade Act of 1974.

Would it be ‘just’ for America to catalyse a trade war with China?

The answer is yes, partly so.

This question has not been asked, at least not with the Just War Theory in mind. Yet, the theory is a potent, qualitative tool to evaluate whether going to war is morally defensible.

Thank India for the Just War Theory. The theory emerges in the 4th century B.C., in the world’s longest epic poem, Mahabharata. Thereafter, Saints Augustine (354-430 A.D.) and Thomas Aquinas (1225-1274 A.D.) elaborated on the theory, as did Michael Walzer in his 1977 classic, Just and Unjust Wars.

Since March 22, when President Trump issued his Memorandum on Section 301, corporate America and globalists globally have rushed to hate on his proposed action against China. This pacifism is perverse, because in hushed parlance, professionals with practice purveying products in China profess “yeah, they perpetually purloin our intellectual property, and we’re pissed.”

So, let’s assume the facts alleged in the United States Trade Representative’s Section 301 Investigation Report are correct. Applying the wisdom of the Ancient Hindus, early Christians, and modern philosophers to those facts, America fulfills three of the six criteria of the Just War Theory.

The table summarizes why.

Would A China-U.S. Trade War Be ‘Just’?

‘Yes, Go-To-War’

Criteria #1: Just Cause

Just War Theory requires the cause for going to war be to correct a serious wrong.

The USTR has a four-pronged case that China’s IP “acts, policies, and practices” are grave. As the USTR’s Fact Sheet accompanying its report alleges:

  • “China uses joint venture requirements, foreign investment restrictions, and administrative review and licensing processes to force or pressure technology transfers from American companies.”

As a condition of access to the Chinese market, China compels American firms to enter into a joint venture and reveal their technology to their Chinese partner or otherwise denies foreign direct investment entry unless they hand over protected IP.

  • “China uses discriminatory licensing processes to transfer technologies from U.S. companies to Chinese companies.”

China limits the FDI activities of American firms by restricting the terms of technology licenses, whereas Chinese firms are under no such strictures. Once a patent license contract ends, China does not enforce the patent rights of American firms against infringing Chinese firms. China also mandates contract terms prejudicial to imported technology, hence foreign IP holders cannot set market-based terms to license their technology for use in China.

  • “China directs and facilitates investments and acquisitions which generate large-scale technology transfer.”

The Chinese Communist Party essentially orders its companies to invest in American firms with the aim of obtaining technology the CCP decides is strategic for the Chinese military-industrial complex.

  • “China conducts and supports cyber intrusions into U.S. computer networks to gain access to valuable business information”

The CCP directs cyber-attacks on computer networks of American companies to steal trade secrets.

Listening to those hushed conversations, the first three alleged facts are no surprise. The fourth allegation is a bombshell: cyberattacks are a veritable act of war. As such, a Section 301 action could be characterized as legitimate self-defence.

The gravity of all four is (in the words of Section 301) that they ‘burden’ American ‘commerce’, and either (1) ‘violate’ America’s trade agreements or are ‘unjustifiable’, or (2) are ‘unreasonable’ or ‘discriminatory’.

An employee tests the headphone port of a OnePlus X smartphone at the OnePlus manufacturing facility in Dongguan, China. (Photographer: Qilai Shen/Bloomberg)
An employee tests the headphone port of a OnePlus X smartphone at the OnePlus manufacturing facility in Dongguan, China. (Photographer: Qilai Shen/Bloomberg)

Criteria #2: Competent Authority

Just War Theory says only a legitimate public authority, which allows for debate about the just-ness of possible conflict, can launch a war.

Thanks to America’s First Amendment, this criterion is met. The Trump Administration is not suppressing free speech about using Section 301 against China.

Criteria #3: Last Resort

No war is moral unless it is launched as a last resort, following the collapse of all non-violent efforts to resolve a dispute.

Every U.S. President since Bill Clinton has tried peacefully to change Chinese IP behaviour.

No luck.

Peter Navarro, Trump’s chief trade advisor, extended the timeline to the February 1972 Shanghai Communiqué, saying the Section 301 action is a “seismic shift from an era dating back to Nixon and Kissinger, where we had as a government viewed China in terms of economic engagement.” Because “that process has failed,” i.e., because “with the Chinese in this case, talk is not cheap, [but rather] very expensive for America … [f]inally the President decided that we needed to move forward.”

Good point: the National Bureau of Asian Research says counterfeit goods, pirated software, and stolen trade secrets, by Chinese and other foreign powers, is $225-600 billion annually, with China mostly to blame. Tack on another $400 billion for economic espionage through hacking.

Peter Navarro, director of the National Trade Council, from right, Robert Lighthizer, U.S. trade representative, and Wilbur Ross, U.S. commerce secretary, speak before U.S. President Donald Trump, not pictured, signs a presidential memorandum targeting China’s economic aggression in the Diplomatic Room of the White House in Washington, D.C., U.S., on March 22, 2018. (Photographer: Andrew Harrer/Bloomberg)
Peter Navarro, director of the National Trade Council, from right, Robert Lighthizer, U.S. trade representative, and Wilbur Ross, U.S. commerce secretary, speak before U.S. President Donald Trump, not pictured, signs a presidential memorandum targeting China’s economic aggression in the Diplomatic Room of the White House in Washington, D.C., U.S., on March 22, 2018. (Photographer: Andrew Harrer/Bloomberg)

And yet, President Trump still exercises forbearance. He has not yet fired a shot under Section 301.

Rather, Section 1 of the President’s Memorandum threatens to impose, on as many as 1,300 different types of Chinese imports, tariffs of 25 percent, yielding $50-60 billion. That would barely approximate estimated annual damage attributable to China. (These tariffs would be on top of the applied Most Favoured Nation rates, and any anti-dumping or countervailing duties.) But, no new tariffs for 60 days, while the USTR finalises the target list of Chinese merchandise. Likewise, the Memo threatens to limit Chinese FDI in American companies with strategic technology. But, not until the Treasury Department identifies efficacious restrictions.

The 60 day period means—vitally for Just War Theory—negotiations can occur with the CCP before firing shots.

In Section 2 of his Memo, President Trump defers to the World Trade Organization. Perhaps mindful of the 2000 Section 301 WTO Panel Report, in which the United States scored a partial victory against the European Union’s claim that Section 301 violates WTO rules, the USTR launched a WTO case against China. The core claim is under the national treatment rule in Article 3 of the Agreement on Trade Related Aspects of Intellectual Property Rights: four specific Chinese laws and regulations about technology licensing allegedly discriminate against foreign firms.

In other words, Trump is not simultaneously judge, jury, and executioner on claims covered by WTO law. Rather, he is submitting TRIPs claims for WTO adjudication.

‘No, Don’t Go To War’

Criteria #4: Proportionality

Just War Theory teaches the expected benefits from conflict must at least offset any harm.

Without doubt, Americans would suffer in a Sino-American trade war. That’s why corporate America’s leaders are peaceniks. Amazon, Google, Facebook, Gap, Levi’s, Microsoft, Target, and Walmart lose from Chinese IP misappropriation. But, they and their customers fear Chinese counter-attacks.

China’s retaliation list includes a 25 percent tariff on American exports of pork, plus possibly sorghum, soybeans, and information and communications technology items. The CCP newspaper says Airbus orders will replace Boeing.

Worse, China could devalue the yuan relative to the dollar, making its exports more price-competitive in U.S. dollar terms (though rendering it susceptible to inflation and another currency manipulation charge). Worse yet, China also could sell billions of its U.S. Treasury security holdings, which would push up yields, thereby raising borrowing costs for the U.S. government (though cutting the value of its portfolio).

U.S. one-hundred dollar bills and Chinese one-hundred yuan banknotes are arranged for a photograph in Hong Kong, China. (Photographer: Xaume Olleros/Bloomberg)
U.S. one-hundred dollar bills and Chinese one-hundred yuan banknotes are arranged for a photograph in Hong Kong, China. (Photographer: Xaume Olleros/Bloomberg)

Then there is likely collateral damage.

Indian IP interests, from Bangalore to Bollywood, will benefit from an American victory that sees China cease its nasty acts, policies, and practices.

But, what about the diversion of Chinese goods from the American market, dumped into India?

What about an Asian or global economic slump caused by diminished Sino-American trade and knock-on protectionism in other markets for Indian exports?

Criteria #5: Intention

Just War Theory requires devotion to a just cause, so the only purpose for using violence must be righting the wrong.

The Trump Administration says the Section 301 case is about protecting IP. But, it also trumpets Section 301 to blow a $100 billion hole in America’s $375 billion 2017 trade deficit. That’s why the USTR is asking China to slash its auto tariffs, purchase more American semiconductors, and grant greater access to U.S. banks. All good ideas, but unconnected to the four-pronged IP case.

The Administration’s dualistic intent reveals its deployment of Section 301 stretches past rectifying a legal injustice and reaches for an economic benefit.

Criteria #6: Probability Of Winning

Starting a war is not moral if the chance of success is minimal, or disproportionate force is needed to win (though Just War Theory specifies no time frame for victory).

America and China are exporting invective to each other, and each can inflict considerable damage on the other. It is not clear America will come out first.

First, much of the damage from a Sino-American trade war would be to American and other non-Chinese firms: 43 percent of overall exports from China are by multinational corporations. So, many MNC exports would be hit with the 25 percent Section 301 tariff, diminishing corporate revenues and the appeal of MNCs to Chinese equity investment.

To be sure, China knows its bilateral trade surplus renders it vulnerable to tariffs. Historically, countries in that position are more likely to change their behaviour in response to a Section 301 action than those less exposed to the American market. But to avoid friendly fire, President Trump must target merchandise that competes with domestic (American) made products, and that also originates in China and uses supply chains in Asia with little or no involvement of American firms. The end result of this painstaking, product-by-product selection to avoid American MNCs may be a few categories of electronics, furniture, shoes, and toys.

Workers labor on the production line for women’s shoes at the Junsheng Shoe factory in Dongguan, China. (Photographer: Qilai Shen/Bloomberg News)
Workers labor on the production line for women’s shoes at the Junsheng Shoe factory in Dongguan, China. (Photographer: Qilai Shen/Bloomberg News)

Second, and conversely, a war might not inflict much damage on China. Research by Mark Williams, Chief Asia Economist, Capital Economics, shows the $506 billion China exports to America (in 2017) contributes 2.5 percent to Chinese GDP. The $50 billion in exports America contemplates targeting contributes just 0.25 percent to China’s GDP.

Third, Section 301 will not advance the secondary intent of cutting $100 billion from the bilateral trade deficit.

Long-term macroeconomic factors, especially savings and investment rates, determine trade deficits. Trade remedies can do little to alter these variables.

What Happens Next?

Had the Administration done what lawyers are trained to do—start with their best argument—then President Trump would have launched the Section 301 case against China in January 2017, rather than withdraw from the Trans-Pacific Partnership, and thereafter muddle on to the North American Free Trade Agreement renegotiations in August 2017, January 2018 Section 201 safeguard case, and March 2018 Section 232 case. The tough IP provisions in the original TPP deal actually buttress any Section 301 action. And, any worries about NAFTA auto rules of origin, washing machines, solar panels, steel, or aluminium ought to pale in significance to defending America’s intellectual genius.

Admittedly, Trump is as unsympathetic a Commander in Chief as America has ever had, even less so after the remarkable March 25 CBS 60 Minutes interview with Stormy Daniels. But, jus ad bellum—the right to go to war— should be analysed based on facts, not personalities.

In American trade AD-CVD and safeguard law, tie votes at the six-member International Trade Commission go to the petitioner. Carrying through this analogy, with three Just War Theory criteria in favour of, and three against, a Sino-American trade war, the tie supports President Trump.

Sticking to the pure theory, all six criteria must be met for this war to be ‘just’. They aren’t.

But, maybe the three that are satisfied are all the inspiration from the Mahabharata and Saints Augustine and Thomas that Trump should need.

Raj Bhala is the inaugural Brenneisen Distinguished Professor, The University of Kansas, School of Law, and Senior Advisor to Dentons U.S. LLP. The views expressed here are his and do not necessarily represent the views of the State of Kansas or University, or Dentons or any of its clients, and do not constitute legal advice.

The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.