Foreign Policy Research Institute A Nation Must Think Before it Acts Trade War: Acting Without Thinking
Trade War: Acting Without Thinking

Trade War: Acting Without Thinking

The Trump administration has launched a no-kidding trade war with China—and no one who knows Donald Trump well is surprised. If this president has one core belief, it is that the U.S. has been the victim of unfair trade practices by other countries aided and abetted by bad trade agreements signed by previous administrations. The most consistent focus of his often expletive-laden critiques has been China, and he has cited the yawning trade deficit the U.S. runs with China as “Exhibit A.”

Most economists dismiss the trade deficit as a valid indicator of much of anything beyond chronic U.S. budget and savings deficits. But there is wide agreement bordering on unanimity that China has long exploited American faith in free markets and open trade to the detriment of both U.S. economic and security interests.

For four decades, Beijing has been focused with single-minded intensity on building China into a dominant great power—first in Asia and then the world. When this effort was launched at the beginning of the 1980s, China was at a low point—Mao Zedong’s demented rule had nearly destroyed China. But under its new paramount leader, Deng Xiaoping, China began a forced march toward modernity designed to make China the world’s factory floor and to acquire foreign technology and science as the key to China’s future power and greatness. The results were breathtaking. By the first decade of the 21st century, China had emerged as the world’s second largest economy on track to become the largest. Its military was powerful, advanced, and increasingly assertive. All of this rested on the capabilities of China’s intellectual elite—its engineers, scientists and researchers—many, if not most, of them trained in the U.S. Chinese research institutes and corporate boardrooms proudly display diplomas from Cal Tech, MIT, Penn, Harvard, and beyond.

But there was more. Beijing was determined to exploit opportunities to acquire valuable American know-how by fair means or foul, including theft and coercion. At root, the U.S.-China economic relationship (worth $650 billion annually) is asymmetric. On the U.S. side are private corporations (Xerox, Caterpillar, Ford, etc.) seeking access to the second largest market in the world. On the Chinese side are similar-looking corporations, but many of them are actually owned by the Chinese government and all of them are ultimately subject to Chinese government direction and control. If an American company wants to operate in China, it typically has to take on a Chinese corporate (i.e., government) partner and share its most advanced technology with that partner. Pretty soon, a Chinese company will emerge using that same technology and the U.S. company will find itself increasingly crowded out. Meanwhile, China has amassed a huge capital fund dedicated to buying up promising U.S. technology companies with their crown jewel capabilities. All of this is under a broad strategic program entitled Made in China 2025, which is intended to establish China’s dominance in the key technologies of the future including artificial intelligence, gene editing, and robotics.

The Obama administration was increasingly aware of all this and developed a strategy to enlist the support of other countries that shared U.S. concerns about China’s practices and ambitions. In Asia, this took the form of a 12-nation trade agreement, without China, called the Trans-Pacific Partnership. When Trump became president he scrapped all that and after a year of infighting within the administration announced punitive tariffs on Chinese products because of China’s past theft of American intellectual property. Predictably, China has retaliated with its own tariffs on U.S. exports—and the president has stated he is prepared to up the ante with a major new round of tariffs as well as augmented controls on Chinese investment in U.S. technology enterprises.

Most economists and trade experts support measures to curtail Chinese raids on U.S. technology and other intellectual assets as long overdue. At the same time, there is broad agreement that the president’s approach is fundamentally flawed—and provides China with an opportunity to gain the upper hand. Their critique makes the following points.

  • Tariffs are a crude weapon that invite retaliation in kind. Even without retaliation, they often cost more than they deliver. For example, the administration’s first round of tariffs on steel and aluminum imports are supposed to protect American jobs in those industries. However, careful analysis demonstrates that for every job saved, 18 will be lost in industries that depend on low-cost imports of steel and aluminum. In addition, the U.S. political system provides easy targets for Chinese retaliation. All Beijing has to do is identify where Trump’s political base is located and go after their livelihood—soybean farmers in the Midwest, for example.
  • There is no evidence of an overarching strategy or clear end game on the part of the administration. What exactly does the White House want? Does it just come down to the president’s gut? So far tariffs look like an end in themselves: inflict punishment for the sheer pleasure of it. None of this is made clearer by the overt infighting within the administration between trade hawks and commercial realists.
  • The most trenchant critique is that the White House has not trained all its fire on China, but has also launched incipient trade wars with allies and friends (Europe, Japan, Mexico, and Canada). These are countries like Germany that share U.S. experiences and concerns in dealing with China. They desperately want to work with the U.S. in trying to right the balance in dealing with Beijing. But instead, they have been subjected to a barrage of insults and tariffs by the White House. China has been quick to take advantage by approaching the European Union and offering preferential treatment for European investors in China at the expense of their US competitors.

This all began with a Trump tweet: “Trade wars are good and easy to win.” Maybe not.