Warring Over Trade
Devoted readers of Promontory may remember its February 2017 edition, in which we lampooned free-trade advocates and the harmful consequences their policies often inspire. In doing so we aligned ourselves with the Trump administration’s pledge to reconcile inequities of NAFTA and other trade deals.
We still support that agenda. While the free-trade Greek chorus gnashes teeth and rends garments as Trump insists on a more equitable two-way trade with China, we see bold leadership that may succeed where previous administrations have failed.
For decades, our political and corporate elites have tolerated Chinese mercantilism even—as Chinese companies exploited open markets abroad—as the price of doing business in the world’s largest market. This unholy compact has continued even as China leaches proprietary technology from US manufacturers in local tie-ups imposed by Chinese officials. If the President has to throw some elbows to get some respect from Beijing, so be it. When was the last time a US trading partner insisted on renegotiating terms with Washington? Never. What does that tell you?
In response to a White House list of Chinese products earmarked for tariffs, China responded in kind. Markets bled. Tech giants condemned the iniquity of “punishing consumers”. On March 6th, Gary Cohn, a senior adviser to the President, resigned in protest. The World Trade Organization wailed that it has been sidelined in the dispute when in fact it guaranteed its obsolescence in 2001 when it welcomed China as a member on overly generous terms.
Trade groups in particular condemned the duties as inflationary job killers. The Washington DC-based Beer Institute estimated that duties on aluminum would cost the beverage industry nearly $350 million and result in the loss of some 20,000 American jobs. The Global Farm Network reported that growers, already under pressure by low commodity prices, will bear the brunt of steel tariffs as they will raise the production costs of such capital goods as trucks, combines and tractors.
(We’ll set aside for now the fortune in subsidies US agriculture qualifies for every year—at least $25 billion, in case you’re wondering—as well as those showered on other sectors, from telecommunications to defense and pharmaceuticals, all of which consider their slice of the China market as an entitlement.)
Echoing complaints from fellow conservatives, TV commentator Larry Kudlow disparaged steel tariffs as a political sop for a relatively small employment demographic. Nevertheless, days after Kudlow broadcast his principled stand he accepted Trump’s offer to replace Cohn in the White House, where he will presumably experience a conversion worthy of St. Paul.
Seemingly lost in the din was any mention of how Sino-American trade is increasingly defined by China’s egregious flouting of copyright infringement and wholesale plundering of proprietary technology. While Trump treads heavily—we’re just as fed up with his Twitter fetish as everybody else—his instincts are true. According to The Financial Times, much of the items on the list represent the elite sectors of China’s high-margin technology such as advanced IT products, robotics, aerospace and electric vehicles. As these industries are still relatively young they accounted for a mere eighth of China’s total exports to the US last year.
Eventually, however, Beijing hopes they will provide the foundation of a truly first-world economy, one that can compete with the US and other advanced nations for the world’s most lucrative markets. By effectively pricing these products out of the US, according to the FT, the Trump administration aims to kill future competition in its larval state.
This is the kind of hard ball China understands. It is the reason we believe it will blink, at least in this round of what has been a long-running war of industrial espionage that will only intensify over time. Some of us are old enough to remember when Japan was poised to become the world’s economic Leviathan only to watch it slide into a multi-generational malaise.
China shows no sign of such a recessional; as it happens, some of China’s world-beating technology is employed under US brands or co-development agreements with American companies. That’s why iPhones were exempt from the most recent round of tariffs, for example.
Living and working abroad I was often asked by foreign economists how even a rich country like the US could afford to offer their trading partners such generous terms even as they assumed much of the world’s security burden in costly military alliances. Not that they were complaining, of course. My hosts were positively gleeful over American largesse on their behalf.
It is time for Washington to put its economic and military might to use for the good of Americans in general and American laborers in particular. But it needs to hurry. As Promontory argued recently, American centrality and its verities are giving way to regional challengers, and not just in fast-growing Asia. At the present rate, someday soon a US President will deliver his terms for reciprocal trade relations only to find no one across the table.