Magazine | May 28, 2018, Issue

One-Dimensional Chess

President Trump and Chinese President Xi Jinping arrive at a state dinner at the Great Hall of the People in Beijing, China, November 9, 2017. (Thomas Peter/Reuters)
The administration needs a better trade policy if it wants to cope with China

On trade, President Trump is playing one-dimensional chess. Credit where due: At least Trump, unlike his predecessors, recognizes that a game is on and that America has opponents whose moves must be countered. But sliding a jumble of pieces forward and backward into collisions and retreats is no way to make progress.

Across the board sits China, a country that has systematically developed its economy at America’s expense, stealing our intellectual property and flooding our market with artificially cheap products while denying our producers access to its market. That we are already in a trade war, and have been for some time, should be obvious. General Keith Alexander, former head of the National Security Agency and the U.S. Cyber Command, and Dennis Blair, former director of national intelligence, call Chinese theft of American intellectual property “the greatest transfer of wealth in history.”

Imagine the outrage if China announced a 25 percent tariff on American cars. But here’s the thing: That has been longstanding Chinese policy. And that policy, along with a promise of massive subsidies, explains why Tesla has targeted Shanghai for its second manufacturing site.

Things that American workers might otherwise have produced now sail across the Pacific into our ports, but we send the ships back empty. Rather than trade its goods for ours, China takes our assets — our real estate, corporate equity, and Treasury bills. Consumers benefit from cheaper products in the short run. But those consumers are workers too, and we are managing both to sell out their immediate interests and to mortgage the nation’s economic future.

This is, fundamentally, a foreign-policy problem. Yes, its effects are economic, and the average American feels them more directly than the effects of most overseas activity. But addressing the problem requires changing the behaviors and policies of a foreign government. We cannot pass a law or issue an order that rewrites China’s strategy as we might prefer. Rather, we need to develop a strategy of our own that will deter its unfair practices and encourage its responsible participation in a trading relationship that benefits American workers, too. We will be most effective if we can marshal the combined leverage of numerous countries that share these objectives.

Sadly, President Trump has done the opposite. At the crux of his confused trade policy stands the Trans-Pacific Partnership (TPP), a multilateral trade agreement negotiated during the Obama administration between the U.S. and eleven other nations of the Pacific Rim, including Australia, Japan, Singapore, and Vietnam. Early in his campaign, Trump declared TPP “a horrible deal . . . that was designed for China to come in, as they always do, through the back door and totally take advantage of everyone.” Trump objected in particular to the agreement’s failure to address Chinese currency manipulation.

The rather obvious shortcoming of this critique was that China is not part of the TPP. To the contrary, the agreement’s intent was to construct a trading bloc among many of the economies that compete most directly with China’s and are most committed to free trade on fair terms. China’s exclusion would make it less attractive as a source of imports or a node in supply chains. The nations banding together would have a new partnership through which to exert collective pressure against Chinese misconduct.

Not one to let reality encroach upon a good story, Candidate Trump shifted to an even broader broadside against the pact, declaring it “a continuing rape of our country.” The Obama administration moved ahead with signing the agreement, but Congress never ratified it. Trump pledged shortly after his election to withdraw and, on Day Three of his presidency, he signed an executive order doing just that. In March 2018, the other eleven TPP countries nevertheless finalized the agreement among themselves.

Then, on April 12, Trump ambushed his own administration with an announcement that he was interested in rejoining the agreement. Sowing further confusion on Twitter that evening, he specified that he expected a deal “substantially better” for America, but neither he nor his economic team could say what they might like to see changed. On the evening of April 17, again on Twitter, Trump appeared to retract his interest, declaring, “I don’t like the deal for the United States.”

In parallel, during March, Trump arbitrarily and without preparation imposed tariffs of 25 percent on steel and 10 percent on aluminum from countries including China. At the start of April, he announced plans to address Chinese intellectual-property theft with a 25 percent tariff on $50 billion worth of Chinese goods and, when China threatened to retaliate with new tariffs of its own, he threatened to target an additional $100 billion of goods.

What could any of this hope to accomplish, beyond alienating allies and offering China a pretext to treat American firms with intensified hostility? Even the White House could not explain what changes in Chinese policy it expected or sought. Officials alluded vaguely to opening financial markets and reducing automotive tariffs, but largely they seem focused on a demand that China reduce its nearly $400 billion surplus in goods trade by $100 billion. How? Why? When? Who knows?

Ahead of bilateral talks in early May, the Trump administration finally compiled a list of demands across a range of topics, including protection for American intellectual property and investments in China and better access for American producers to the Chinese market. This is a start. But the U.S. doubled its demand for a trade-deficit reduction to an arbitrary and implausible $200 billion by 2020. The only apparent leverage was the threat of tariffs. The talks, unsurprisingly, went nowhere.

Any real progress with China will have to begin with the clear enumeration of what needs to change and on what timeline. Some things could be done immediately — the cyberespionage that government-controlled entities within China conduct today could end tomorrow; so could policies requiring American firms that want to do business in China to form joint ventures with Chinese counterparts and share technology. Other things will take time, for instance cleansing Chinese supply chains of stolen intellectual property and revising regulations designed to benefit local producers.

Some things will not change. So long as China remains formally Communist and state-owned enterprises play a major role in its economy, it will subsidize strategically important industries. An American demand that China convert fully to a market economy or else face tariffs would be extremely unrealistic.

Alongside the demands should stand consequences. These should be tailored, confronting the relevant Chinese policies rather than assaulting trade broadly. They should be flexible, so that they can be strengthened or weakened over time. And they should be asymmetric, meaning they should cost China as much as possible relative to what they cost America. A key drawback of tariffs is that they hurt both sides — they will certainly get China’s attention, but in the process they will cause substantial disruption at home, and China can easily retaliate in kind.

Here are some better tools: Restrict Chinese access to American financial markets, medical treatments, and schools. If some of the Chinese in American universities were replaced by students from India, or perhaps even by Americans, the Chinese elites who control their nation’s policies would notice. Would Americans?

Bar the acquisition by Chinese nationals and firms of American assets, perhaps including even the licensing of American intellectual property. Prohibit American firms from forming joint ventures in China or transferring valuable technology into the country. We already impose such restrictions on military technologies, targeting sanctions at rogue regimes. We could do it here, too. If tariffs are to play a role, they should be carefully targeted at relevant products and phased in gradually and predictably so that American buyers have time to seek alternative supplies.

Senator Marco Rubio (R., Fla.) has announced plans to introduce a bill called the “Fair Trade with China Enforcement Act,” which would emphasize the use of more-nuanced tools along these lines. Of note, it would also impose a tax on investment and dividend income earned by Chinese entities on American assets. The effect would be to penalize China for using its goods and services to acquire our assets and encourage them instead to trade for the goods and services that American workers produce.

Tools such as these will be more effective if threatened — or, if necessary, deployed — by a coalition of countries. While we might prefer acting alone to the status quo, our cost will be higher and China’s lower if China can turn easily to other partners in our absence. American firms will lose out to Japanese competitors who face fewer restrictions. But if developed and free-market economies commit to the same course, they can take more-aggressive action at lower cost to themselves and much higher cost to China.

Further, a coalition will be in a position to offer China not just sticks but also a carrot. Under the World Trade Organization’s regime, China is granted full participation in the international economy despite its malfeasance. If countries committed to free and fair trade work together to build a more exclusive economic system for themselves, with China’s participation contingent on its own reforms, playing by the rules might come to seem a more attractive course.

If the Trump administration is serious about making progress on trade rather than angrily scattering pieces across the board, it should prioritize the creation of such a coalition. And it should start by focusing on the nations of the Pacific Rim that are China’s closest economic partners. This coalition will need a name; maybe “Across-the-Pacific Partnership” or something similar.

Oren Cass — Oren Cass is a senior fellow at the Manhattan Institute and the author of the forthcoming book The Once and Future Worker.

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