China flouts the rules, but tariffs are not the answer.

China flouts the rules, but tariffs are not the answer.

Joining the World Trade Organization (WTO) gave China access to new global markets. In return, China was supposed to open its own markets up to countries like the United States. However, since 2001, when China was first admitted into the WTO, the US has seen its trade deficit with the country grow from less than $100 billion to a whopping $375 billion in 2017.

The gist of the US complaint against China is that it has used unfair and anti-competitive practices to grow its global market share, a charge with which most trade experts agree. What are these practices? Well, here are a few of the biggest:

  • In exchange for access to its markets, China requires foreign firms to cut their licensing fees and turn over their technology and trade secrets to domestic firms, which effectively eliminates any competitive advantage;
  • Chinese hackers steal data and technology secrets from foreign firms;
  • China subsidizes certain export industries, like steel and aluminum, which enables Chinese companies to sell excess product at extremely low prices, which undercuts domestic competitors and drives global prices down to unsustainable levels;
  • China has also increased demand for its exports by artificially holding down the value of their currency, the yuan, which makes their products even cheaper.

These actions are why Donald Trump has focused so intently on China, both as a candidate and now as president. Those tariffs on steel and aluminum the US enacted a month ago are in direct response to China dumping their excess steel and aluminum in other countries – after announcing the tariffs would apply to all of its trade partners, Trump ended up exempting Canada, Mexico, the European Union, South Korea, Brazil, Argentina and Australia, leaving just China, effectively, as the target of the tariffs. And more recently, the tariffs announced on $50 billion of Chinese goods are connected to data theft and forced technology transfers described above. The even-more-recent threat to impose additional tariffs on $100 billion of Chinese goods comes in response to China’s retaliation, a raising-of-the-stakes which may signal the actual beginning of a trade war.

China’s pursuit of foreign technology and trade secrets is spurred on by its ambitious “Made in China 2025” plan, which aims to build up China’s high technology sectors to increase national self-sufficiency and become the leading global manufacturer in ten industry fields, including semiconductors, artificial intelligence, robotics, self-driving vehicles, aircraft, and medical devices. In order to accomplish this goal, China’s government has been providing low-interest loans and research subsidies to Chinese businesses while also helping Chinese firms acquire foreign competitors. China’s game is to essentially subsidize this undertaking with Chinese businesses, putting them at an unfair advantage over their foreign competitors.

US Trade Representative Robert Lighthizer has not tried to hide the fact the US is concerned about the “Made in China 2025” plan and its potential impact on America’s economy. After unveiling the list of 1,300 items to be subject to US tariffs, Lighthizer said, “These are things that China listed and said we’re going to take technology, spend a couple hundred billion dollars and dominate the world… These are things that if China dominates the world, it’s bad for America.” In fact, most of the roughly 1,300 items singled out by the US for tariffs are goods in the industries highlighted by the “Made in China” 2025 plan. Most of the items targeted fall under the categories of industrial machinery, electrical machinery, optical equipment, iron and steel, vehicles, pharmaceutical products and aircraft. And since these tariffs directly threaten China’s “2025” plan, the Chinese government’s response has been aggressive.

Trump’s actions against China and China’s subsequent retaliation have mostly been met by opposition from trade and industry groups, economists, and members of Trump’s Republican party. Much of China’s tariff targets are aimed at US agriculture products, many of which are produced in rural parts of the country considered to be part of Trump’s political base. Two of the main agricultural products targeted by China, pork and soybean, are produced primarily in the Midwest states that supported Trump, including Iowa, Indiana, Nebraska and Ohio. China imported more than $1 billion in pork last year – making it the third largest export market for US pork farmers – while one out of every three soybeans produced in the US is exported to China. Republican Senator Chuck Grassley of Iowa, one of the states expected to be hit hardest by China’s tariffs on pork and soybeans, expressed his displeasure with Trump: “It’s not fair, and it doesn’t make economic sense. The Administration knew that if it imposed tariffs on Chinese goods, China would retaliate against US agriculture. I warned President Trump as much in a White House meeting in February…Today shows that’s exactly what happened. If the federal government takes action on trade that directly results in economic hardship for certain Americans, it has a responsibility to help those Americans and mitigate the damage it caused.”

While there is nearly universal agreement that China has been engaging in unfair trade and technology practices, few agree that tariffs are the answer. A stronger and more effective approach would be, as Dan Ikenson of the Cato Institute told us, to organize a coalition of other countries who are also being hurt by China’s trade practices (of which there are many, including US allies like the EU, Canada, South Korea and Japan) to present a united front in putting pressure on China: “If the US really wanted an effective solution,” he said, “We would be standing shoulder to shoulder with the Japanese and the Koreans and the Tiawanese and the Europeans [and] instead of unilaterally doing what we’re doing, we would bring cases to the WTO and say ‘look, the Chinese are stealing our technology and they need to stop.’”

Instead, China, has been able to play the victim, using Trump’s tariff actions and the WTO as a shield from legitimate criticism of their trade policies. As it stands, the tariffs implemented and proposed on both sides add much risk and uncertainty to the US and global economies: US companies will find tariffs increasing their product costs (thus decreasing their competitiveness in international markets), and companies relying on extensive supply chains based in China to source their products may see these break down, forcing companies to spend time and resources developing new supply chains (at potentially higher prices which leads to higher prices for finished goods). In addition, Chinese companies may seek to replace US imports with substitutes from countries offering cheaper prices.

The US stock market, long touted by Trump as an indicator of economic success (and by extension, his success as president), declined by more than 4 percent during the first quarter of 2018, prompted primarily by the growing risk of a trade war. Further negative developments would almost certainly result in larger stock market losses.

Trump is right to be concerned with China’s trade practices. However, some of his methods for dealing with them, primarily the tariffs, are misguided and may end up damaging large sectors of the US economy, even more so should a full-scale trade war break out. It should be noted that Trump’s latest $50 billion in proposed tariffs will not go into effect until the end of a 30-day comment period, leaving some time left for negotiations between the two countries to work out an agreement and avoid a costly trade war. Trump’s tariffs also impact other goals of his, like keeping Congress in Republican hands and denuclearizing the Korean peninsula – for which, the latter, Trump needs Chinese support.

header image: white house / flickr

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