President Trump is right: China cheats on trade. But getting better trade deals doesn’t require tariffs and other protectionist measures that hurt the U.S. economy along with China’s. There are better ways.
Trump has now imposed four rounds of tariff hikes on Chinese imports, with $250 billion worth of those imports subject to a new 25% levy. That’s a tax of about $490 per year on a typical American family, according to Oxford Economics. Trump has threatened another 25% levy on an additional $300 billion worth of Chinese imports, which would raise the cost to $800 per family per year. That’s in addition to other Trump tariffs on imported steel, aluminum, washing machines and solar panels. Many countries have retaliated with their own tariffs on imports from the United States.
Tit-for-tat tariffs raise costs for everybody, while also lowering economic output for everybody. Most economists consider them a net loser, which is why stocks decline with every escalation. The latest tariffs, which went into effect May 10, abruptly halted a robust stock market rally.
So what are some better ways to address legitimate trade problems Trump has identified? Here are six:
Fix the World Trade Organization. The WTO was established in 1995 and is not structured to deal with a giant economy, such as China’s, driven by massive government intervention rather than free-market dynamics. There’s ample evidence the Chinese government subsidizes key industries on an unprecedented scale, allowing state-owned enterprises, or SOEs, that don’t need to earn a profit to overproduce, undercut market prices and grab market share from competing firms that don’t get subsidies. It also forces foreign companies that want to do business in China to share key technologies.
The United States has filed many targeted complaints against Chinese producers with the WTO, and won about 90% of them. China typically complies with WTO-ordered remedies. But there’s a mismatch between China’s economic manipulation and the WTO’s authority. “What is needed is new and enforceable rules that address any economic distortions arising from SOEs,” Chad Bown of the Peterson Institute argued in recent testimony. “The political bargain would be an enforceable agreement on SOE rules and in exchange, China would be allowed to keep its SOEs.”
Do it with allies (if we have any left). To bring maximum pressure on China and the WTO, the United States could enlist Europe, Canada, Japan and other free-market economies to push for changes that rein in the Chinese government’s economic machinations. “Threat and pressure can play a role in achieving a better outcome vis-à-vis China,” Harvard professor Jason Furman, who served as President Obama’s top White House economist, tells Yahoo Finance. “But it would work a lot better if we had allies on board, and to the greatest extent possible brought through the WTO.” Many U.S. allies face the same economic pressure from subsidized Chinese producers as the United States does, and banding together would prevent China from playing one trading partner against another, as it is adept at doing.
Tighten the screws on technology thieves. A 2017 report on protecting American trade secrets included 21 recommendations to prevent China and other nations from stealing U.S. intellectual property, or forcing “technology transfers” as a price for entering the Chinese market. The Trump administration has begun implementing a few of them, but most have been ignored. A few of the unimplemented recommendations: raise the protection of trade secrets to a Cabinet-level responsibility; give federal agencies new powers to punish foreign companies that steal trade secrets; allocate more national-security and law-enforcement resources to identifying who steals trade secrets; and establish a rating system that measures nations and companies on their degree of compliance with intellectual-property protection.
A labourer loads coal in a truck next to containers outside a logistics center near Tianjin Port, in northern China, May 16, 2019. REUTERS/Jason Lee
Rejoin the Trans Pacific Partnership. In 2017, Trump pulled the United States from this much maligned trade bloc (now rebranded under a different name). That was a mistake. The TPP, a group of more than a dozen friendly nations, was designed as a trade counterweight to China’s heft. Most trade experts see it as a way to band together with allies and create alternatives to China as a trading partner. Trump would have more leverage in negotiations with China if he were leading a group of allied partners than he does representing the United States alone.
Do a lot more to help displaced U.S. workers. A federal program called Trade Adjustment Assistance is meant to help American workers who lose their jobs when work moves overseas, but it’s not considered effective. Bown of the Peterson Institute recommends expanding aid for displaced workers to include those whose jobs get automated. He’d also add moving benefits that help workers relocate to places where there are more jobs. Another improvement would be portable health care and retirement benefits that aren’t dependent on a single employer, state or community. There are many other good ideas for helping displaced workers while harnessing trade instead of shackling it.
Make American industries stronger. Trump seems fixated on the “China 2025” plan, a national strategy meant to make China a leader in 10 key industries of the future. His tariffs on Chinese imports are designed, in part, to blunt China’s growth in those industries. But where’s his America 2025 plan? Instead of trying to impede China’s development, Trump could promote investments to strengthen U.S. competitiveness and assure American dominance in the industries China is targeting. “We need to up our game in this country,” says Gary Hufbauer of the Peterson Institute for International Economics. “We can limit to some extent Chinese acquisition or theft of technology. But to keep our own technology leadership, 85% of it is doing it at home.”
The U.S. government doesn’t control the economy the way China’s does. But it can still incubate new technology through defense spending and funding for basic scientific research. Trump could propose more of that. Building better infrastructure would help. And improving training and education would make American workers more productive. None of this is easy. But it’s preferable to harming ourselves through trade policies meant to harm the other guy even more.
Editor’s note: This is an updated version of a story originally published on June 26, 2018.
