Economy & Business

The Trade War Is Smart Geopolitics

President Donald Trump meets with China’s President Xi Jinping at the G20 summit in Osaka, Japan, June 29, 2019. (Kevin Lamarque/Reuters)
The president’s China tariffs may inflict short-term pain on American consumers, but it’s a small price to pay to combat an existential threat to the U.S.

When President Trump first took office, American tariffs on Chinese imports stood at 3.1 percent, little more than a barnacle on the hull of a $600 billion trading relationship. After the latest round of tariffs took effect on Sunday, that number stood at 21.2 percent, and if the next round is implemented on schedule, it will soon reach 30 percent. Economists and business leaders used to nervously reassure themselves that China tariffs were a temporary negotiating tactic to get President Xi to make concessions in a future trade agreement, but the truth is emerging that trade war is the new normal. The Trump administration has ceased talk of soybean-purchase agreements and begun talk of “decoupling.”

Trump’s decision to change our posture toward China from free trade to trade war is one of the most significant policy shifts in recent American history — and one of the most misunderstood.

Free-trade advocates tend to think of tariffs as misbegotten economic policy, intended to give the American economy a leg up by protecting domestic businesses from Chinese competition. They point to data indicating that tariffs are injuring the American economy more than they are helping it, notably by increasing prices. Americans for Tax Reform has protested that China tariffs “harm American companies and consumers who rely on low-priced products to run their businesses and budget their households.” The George W. Bush Institute has claimed that when consumers have to pay more for products, “the nation is less prosperous.” Thomas Donohue, the president of the U.S. Chamber of Commerce, announced his opposition to trade war with China by noting that tariffs are “taxes paid for by American families and American businesses.”

Donohue is right that tariffs are a tax on American businesses, consumers, and investment. But we should be happy to pay taxes toward a worthwhile end. Indeed, if the end is important enough, and a tax helps us achieve it, paying could be a patriotic duty. The Chinese call this “eating bitterness.”

Few ends are more important than economic growth, but the free traders err in assuming that a China trade policy that fails to immediately deliver more of it is bad, because one more-important end is geopolitical survival. The true value of the trade war lies in preventing American businesses from aiding the rise of an adversary.

The Chinese Communist Party is pursuing a long-term goal of global hegemony. The foundation of its authoritarian system is high-tech surveillance, which it uses to monitor its citizens’ every move. To build this panopticon more efficiently, China is seeking to lead the world in AI, telecom, and other advanced technologies, and so requires foreign companies that enter the Chinese market to “share” some intellectual property while running aggressive industrial-espionage operations to take the rest.

Because China doesn’t have the natural resources to dominate high-tech industries, it is also pursuing a neo-colonial foreign policy to acquire them. That requires power projection, so China has turned a dozen countries around the world into client states through debt peonage, collateralizing abusive loans with concessions for military bases and deep-water ports. Larger countries such as Pakistan and Burma have been brought into the Chinese orbit through dependence on infrastructure financing from the Belt and Road Initiative and the Asian Infrastructure Investment Bank, China’s answer to the U.S.-led World Bank.

China’s growth strategy represents a direct threat to the United States. Historically, the emergence of a peer competitor to an existing hegemon has always resulted in bloodshed. Beijing’s economic expansion is already fueling a policy of military expansion in Asia, which threatens to bring China into conflict with American allies Japan, South Korea, India, and the Philippines. Optimists who believe that economic interdependence will forever forestall conflict must be made to explain why, following its integration into the world economy, China became more authoritarian and more militaristic rather than less. We should expect the trend to continue, not reverse. The Pentagon certainly does: Its 2018 National Defense Strategy is built around a shift from small wars to “great-power competition” with China.

This state of affairs raises many questions. Why is our industrial supply chain located inside of an adversary? Why does our military readiness therefore depend on that adversary? Why are American companies allowed to transfer critical technologies to China in exchange for short-term market access? Why can Tesla build self-driving cars in Shanghai? Why can Google run an AI lab in Beijing after canceling an AI contract with the Pentagon?

The free traders have an answer: because the market wills it. But of course, markets have no reason to prefer one global power over another, and there’s no market rule barring a surveillance state from winning the competition. In that competition, our ideological commitment to free trade is nearly as great a handicap as the Soviet Union’s commitment to central planning was during the Cold War. Free trade with China means allowing its distortions into our market. Refusing to allow our government to “pick winners” by rejecting industrial-policy support to key sectors means that Beijing will pick winners for us. Depending on Ricardian comparative advantage to organize supply chains means, in effect, that we will watch helplessly as American innovations are transformed into growth-boosting industries elsewhere, as firms reap efficiency gains by locating their engineering and management operations next to their manufacturing.

Inevitably, the innovation will depart too. A recent survey of 369 manufacturers found that American firms are moving their R&D operations to China not just to take advantage of lower costs, but to be in close proximity to their supply chains. Some 50 percent of foreign R&D centers in China are now run by American companies, helping China achieve first place in market share for manufacturing R&D. If we remain neutral as to where supply chains are located, “we innovate, they build” will become “they innovate, they build.”

China’s rise may be inevitable. But given the danger represented by that rise, America can choose to minimize its risk. It can reduce opportunities for China to erode the long-term competitive advantage of American firms through forced technology transfer and R&D migration, and reduce our dependence on Chinese manufacturing for crucial industrial and military supply chains. In a word: decoupling.

Trump’s trade war is a recognition that American policy toward China should seek to prevent American businesses from speeding the rise of an adversary. Tariffs are one piece of an emerging anti-China strategy. The Trump administration is rolling out new export controls to limit the transfer of sensitive technologies such as AI and quantum computing. And it has blacklisted high-tech Chinese firms such as the telecom giant Huawei from doing business in the U.S.

Tariffs are failing if the goal is the lowest prices for consumers — the free traders’ preferred metric of success. But if strategic decoupling is the goal, tariffs are succeeding. The New York Times recently reported that “American companies that once believed the trade war would blow over are now scrambling to limit their exposure to China.” Dozens of American companies — including high-tech giants Apple, HP, Dell, and Google’s parent company, Alphabet — have outlined plans to move their supply chains out of China in the coming years. Future business is leaving too: 30 percent of CEOs surveyed by the U.S.–China Business Council have delayed or cancelled investments in China due to trade pressure. Trump’s call for American businesses to leave China is being heeded — not because of his tweets, but because of his tariffs.

This weakens China in important ways. First, while American consumer pain is temporary, the decision to move business operations out of China is permanent. Second, tariffs frustrate China’s ability to move up the value chain to export higher-tech goods rather than low-margin commodities, because Chinese exporters are more likely to absorb the cost of tariffs on high-margin goods rather than passing it to consumers. Lastly, tariffs have forced China to retaliate by devaluing the yuan, which makes servicing the dollar-dominated bonds that underpin its domestic economy more difficult and frustrates its long-term goal of making the yuan a leading global currency. Given all of this and the fact that China remains poorer and less politically stable than the U.S., Chinese observers have suggested that it is more vulnerable than the U.S. to the impact of a trade war.

Other elements of Trump’s trade strategy have undermined the effectiveness of the tariffs. Decoupling from China won’t succeed if the president continues threatening to impose tariffs on the locations to which American manufacturers might relocate, such as Vietnam, in an ill-conceived effort to reshore American manufacturing. Placing tariffs on China alternatives means that businesses will remain in China, not return to the United States.

Further, the latest round of tariffs applies to low-margin goods such as clothing — the kinds of goods least likely to return to the U.S. and least important to China’s strategic advance up the value chain. Tariffs should target the sectors that China itself identified as crucial to its rise in its Made in China 2025 strategy — robotics, telecom, energy, aerospace, and other value-added sectors. For lower-value goods such as apparel, the harm done by tariffs to American businesses facing cost increases really does outweigh the harm done to China. If Trump continues to tax these sectors, he should extend the relief already being supplied to farmers who lost Chinese orders to other businesses such as Xero Shoes, a successful American small business now scrambling to find an alternative to Chinese factories.

Perhaps Trump’s most serious misstep has been the failure of his administration to explain the trade war in geopolitical terms, instead preferring to talk about closing trade deficits and thereby ceding the terms of the fight to the free traders. Vice President Pence outlined a comprehensive anti-China strategy just last year, but that narrative has failed to embed itself in the public consciousness, and now popular understanding of the trade war is unhelpfully colored by Trump’s improvised economic musings on Twitter.

Americans have been taught to see free trade as core to our identity, and the Republican policy firmament remains filled with thinkers who can’t acknowledge that a neutral policy of “let the market decide” means, in this case, “let the Chinese Communist Party decide.” As Marco Rubio put it in a recent report on China’s rise: “In a world of state competition for valuable industries, a domestic policy of neutrality is itself a selection of priority.” If we refuse to allow even short-term harm to come to consumers while China resolves to “eat bitterness,” we will lose the long-term geopolitical competition for productivity, innovation, and power. And if we continue to believe that the world is better off with a liberal democracy at the helm rather than an authoritarian surveillance state, that cannot be allowed to happen.

When geopolitical advantage rather than low consumer prices is the desired end, tariffs help get us there. Out of patriotism, we must now be willing to eat some bitterness of our own.

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