Opinion: Trump’s (Failing?) Trade War

From gadgets and gizmos aplenty to whoosits and whatsits galore, the consumer world is filled with new appliances and products spread all around, with “Made in China” plastered everywhere. But that’s all about to change.

The U.S. has grown more and more intolerant of immoral Chinese trade practices ranging from forced technology transfers to intellectual property theft to violations of WTO commitments. Since the U.S. trade deficit widened to $72.2 billion in July, we’ve seen the trade war between the U.S. and China grow from tit-for-tat legislation to threats of a third round of U.S. tariffs on an additional $200 billion of Chinese imports: the U.S. has expanded its trade war against the EU and Turkey to East Asia.  While well-founded, this can be exceedingly ruthless and reckless, even for Trump.

In an interview with CNBC, President Trump proclaimed, “I’m ready to go 500.”

This means he would be willing to escalate even further by slapping tariffs on all Chinese imports, about $500 billion worth of goods. This would, notes Oren Klachkin, the lead professor of Oxford Economics, essentially serve to only cool down export growth in the U.S.

With the severity of this threat in mind, we must also realize that the president cannot back down now, for his political influence would be severely compromised. The scariest thing about this, though? We can’t stop him either because, as president, he can declare China’s exports a “threat to national security” (because the trade deficit is apparently detrimental to our economy as a whole) and regulate commerce accordingly without congressional approval. But he does have a point: with the Chinese routinely executing intellectual property theft valued between $225 billion and $600 billion each year, along with regularly forced technology transfers from US firms that do business with China, the US is losing big-time, both in terms of economic value and its influence as a leading developer.

We can assume that China will retaliate likewise: Liu Kun, the finance minister, has established in an exclusive interview with Reuters that the Chinese will not hesitate to respond with more tariffs against the US while avoiding harming businesses in China, supporting the Chinese claim that they will retaliate in “equal scale and equal strength”.  The trade talks are not going to calm these world powers either: neither side seems even moderately satisfied.  The US wants China to stop growing as an economic power while China wants quite the opposite: it is pushing forward with the Made in China 2025 plan, which would ensure China remains at the top of the supply chain for a long time to come. However, China might still bend: with China’s economy faltering as a result of these trade restrictions and tariffs, maybe the government will see things rationally and take the initiative to resolve this conflict.  Maybe they’re scared of Trump after all…

Figure 1: Courtesy of PIIE/BBC

According to Figure 1, the increasing value of trade tariffs would surpass the value of some countries, even. Understandably, these tariffs would affect most (if not all) imports from China, which consist primarily of consumer electronics (e.g. phones or computers) and other technologies from wiring to refrigerators.

Sadly, the rising costs of international business would be fed back through the supply chain and end up in the hands of the consumers. We, as consumers, would be forced to pay extra for the semiconductor chip in your laptop or for that iPhone in your pocket, not to mention the trip to the cinema or — god forbid — healthcare costs. In effect, these tariffs are not encouraging better economic conditions, but rather squeezing consumers and reducing international trade.

This policy is very ineffective.  Going about a trade war will, yes, pressure the other country *hopefully* more than we are pressured, but is not conclusive in and of itself.  Therefore, we must take heed of the risks and the possible ramifications, including rising consumer costs. We should instead be considering applying the International Emergency Economic Powers Act of 1977 to authorize targeted sanctions on Chinese entities that benefit from the detrimental trade practices, such as the aforementioned forced technology transfers.

These targeted sanctions could involve, says Lee G. Branstetter from the PIIE, travel bans for key Chinese individuals, freezing foreign assets, or trade penalties. This practice would allow for maximum pressure on the offending parties with limited collateral damage to unrelated, relatively benign sectors. The Trump administration would also do better by going with its allies to pressure on China to conform to World Trade Organization guidelines and rules where applicable, reinforcing the rules-based trading system instead of “threatening it with destruction,” as Robert Z. Lawrence warns.