Trump applying 19th-century remedies to 21st-century problems

Is it a trade dispute with China, or is it a trade war? If the latter, is it on hold, or not? The flip-flops in America’s trade relationship with China are coming in ever more frequently, as President Trump issues and rescinds threats.

To recap, before the election, Trump promised to declare China a currency manipulator on day one of his administration. That declaration never came; but then over the course of his administration’s first year came the equivalent of a “phony war” where no overt moves were made in trade policy.

{mosads}Only some anti-dumping measures nearly a year into the new administration signaled a possible new direction. That all changed in March, as Trump announced a series of radical measures, rationalized on grounds of national security and intellectual property rights violations.

Why the policy incoherence?

It’s tempting to argue that it’s some kind of turf war between officials representing differing agencies, or personality conflicts bursting out into the open. The widely reported episode of Treasury Secretary Steve Mnuchin and White House National Trade Council Director Peter Navarro shouting at each other in front of the meeting venue in Beijing certainly lends credibility to those interpretations.

In my view, the interpretation of the disputes as being between nationalists and internationalists is overdrawn. Surely there is such a conflict, but perhaps there is as great a divide between the nationalists of various stripes. That is, even for those who view international trade as a zero-sum game, there is disagreement as how to proceed in a way that best protects U.S. interests. 

Consider for instance the imposition of tariffs under Section 301 of the 1974 Trade Act. These measures are based on the argument that China is improperly violating the intellectual property rights of American firms operating in China, either through counterfeiting, patent infringement, the forced sharing of technology or industrial espionage — all “cheating” in the president’s parlance.

The proposed remedy is tariffs of 25 percent on Chinese exports to the United States. Some of the items covered in the proposed target list bear little relationship to the sectors in which such intellectual property infringements take place.

Hence, there is slight hope for the tariffs to actually punish the culprits. Nor is there much hope of inducing China to negotiate on this issue, given Chinese President Xi’s dedication to the development policy embodied in the “Made in China 2025” initiative.

It is the quintessential application of a 19th-century remedy to a 21st-century problem. Much better would have been a strengthening of intellectual property protections in the countries that China interacts with, in effect ring-fencing the country, and bolstering China’s emerging incentive for greater enforcement of intellectual property rights.

In other words, we should have implemented intellectual property measures that were incorporated in the Trans-Pacific Partnership agreement at the urging of the Obama administration’s negotiators.

What do tariffs address? The tariffs imposed under the little-used national security provision embodied in Section 232 of the 1962 Trade Expansion Act certainly are not in truth a response to security concerns in steel and aluminum sectors.

Now that the administration has apparently ended the EU, Canada and Mexico exemptions, these tariffs mostly target our allies (Japan was already hit in the first round). The idea that Canada would refuse to supply U.S. needs is ludicrous.

Due to already imposed anti-dumping duties, China was barely touched. The most recent investigation — into whether automobile production constitutes a national security concern — is even more ludicrous. For one thing, the largest exporters are again U.S. allies.

What then is the driving force for these measures? It is a deep misunderstanding by the nationalists of how trade deficits are created. As highlighted in the pre-election writings by Navarro and Commerce Secretary Wilbur Ross, some prominent officials view trade deficit as an artifact of unfair competition, and if only the trade deficit could be erased, GDP would be higher by a couple of percentage points.

With the bilateral U.S.-China balance equal to about half of the total U.S. trade deficit, it seems tempting to believe that by erasing that particular deficit, half the problem will be solved. In reality, trade deficits arise because of changes in the balance between national saving (private saving and government budget balances) and investment.

Tariffs on one country’s exports to America largely re-allocate the deficit between America and country X to country Y, while likely raising prices of imported goods. 

What do hawks (maybe) have right?

The foregoing is not to deny the importance of trade relationships in benefitting Americans. Nor is it to argue there are no instances of bad behavior, particularly in the national security arena. However, the one instance of an effective measure — the imposition of sanctions on the Chinese electronics producer ZTE — has seemingly been traded away.

For what, we’re not sure. Was it Chinese cooperation on North Korea? Was it the Chinese loan to help finance a Trump Organization project in Indonesia? We might never know exactly because we are not trying to achieve our objectives with measures that are tailored to meet those objectives.

Stricter measures are needed in the area of foreign acquisitions of American companies that control sensitive technologies with military and national security applications. Up to this point, such acquisitions have been reviewed under the Committee on Foreign Investment in the U.S. (CFIUS) process, which requires voluntary application by the acquiring firms.

In the face of the increasing volume of Chinese direct investment in the U.S., this system probably needs some revamping. Interestingly, the legislation for reform has been pushed largely on a bipartisan basis in Congress, with little interest demonstrated by the White House. 

Interpretation

Is it a problem that the administration has confused policy goals (and that some have little understanding of economics)? It certainly is for American and global economic welfare.

But the foregoing discussion suggests that Trump — as opposed to his administration more generally — is more interested in show for domestic political consumption — perhaps leavened by some atavistic desire to wreck some multilateral institutions — than actual policy implementation.

Once one realizes this, much of the theatrics that have taken place over the past year make perfect sense.

Menzie Chinn is a professor of public affairs and economics at the University of Wisconsin. His research examines the empirical and policy aspects of macroeconomic interactions between countries.