Morici: How Trump’s trade policy courts disaster

Of all the economic policies President Trump has marked for attention this year – merit-based immigration, infrastructure and vocational training – fixing the trade deficit offers the biggest bang for the buck.

Cutting in half the $620 billion trade gap would create 2 million jobs.

Manufacturing would benefit most. Investments in intellectual property for new materials, supply chain management, artificial intelligence and the like would boost economic growth a full point to nearly 4 percent a year.

A bonanza of additional federal revenues would follow that and could pay for the recent tax cuts.

Washington’s attention should be laser focused on China – not our NAFTA partners.

China accounts for 60 percent of the trade deficit, because it habitually violates World Trade Organization (WTO) rules to gain unfair advantages in global markets. It subsidizes domestic industries, limits imports in areas of rapidly advancing technology to incubate its own competitors, forces foreign multinationals to transfer technology as a condition for market access and compels their compliance with the Communist Party political agenda and insidious activities monitoring its citizens.

Japan and the European Union (EU) have joined the United States in efforts to get the WTO to put more pressure on China but those are futile.

Instead of proposing new mechanisms to bring China into broad systemic compliance or at least manage down its trade surpluses, the administration has fashioned a policy that will ultimately damage U.S. industry overall, alienate allies and forfeit U.S. prestige and diplomatic clout.

Unilateral tariffs on Chinese solar panels, for example, will bring deserved relief to an American industry illegally targeted for extinction by Beijing, but those will have only the slightest consequences for the overall bilateral trade imbalance. If challenged, those tariffs could be found to violate WTO rules.

Rifle shot remedies, absent a comprehensive strategy, pose the danger of casting the Americans, not the Chinese, as malefactors in the eyes of world leaders whose cooperation Mr. Trump needs to accomplish radical change in commercial relations with China.

Administration demands that Mexico and Canada eliminate arbitration panels to resolve investor disputes are particularly maddening. These provisions are in the North American Free Trade Agreement (NAFTA) – and just about every investment treaty the United States has negotiated over several decades – because those protect U.S. companies from arbitrary foreign government actions.

For example, requirements to source components locally instead of from U.S. factories, coerced technology transfers and arbitrary treatment by foreign courts.

Killing arbitration panels – in NAFTA and the panoply of investment agreements the United States has negotiated with governments around the globe – would endanger U.S. foreign subsidiaries, result in more piracy of American intellectual property and threaten millions of jobs in the United States.

Scuttling arbitration panels for overseas investment is in economics the equivalent of bleeding patients in medicine – only a pre-modern mind could embrace it.

The WTO was conceived to be a club of market economies. Its dispute settlement mechanism is designed to rein in national industrial policies that occasionally harm other members – namely, discipline the venial sins of market economy governments.

China is not a market economy. It was admitted into the WTO on the premise that greater engagement with the West would accelerate market-oriented reforms, but Beijing’s success at flaunting the rules has taken it in the opposite direction.

China’s violations of WTO rules are far more sweeping than anything the dispute settlement mechanism was designed to handle. The United States has responded by blocking appointments to its appellate body, thereby potentially crippling the system.

This folly outrages other members who otherwise might be sympathetic to U.S. complaints. Meanwhile, the administration offers few positive suggestions for addressing China.

It’s time to recognize that China will never have a market economy compatible with fair competition, and Western nations would do well to multilaterally impose a regime that balances its trade with the West.

The United States should impose a system of licenses on imports from China and encourage its allies to do the same. Exporters would be granted transferable rights to imports equal to their sales in the Middle Kingdom.

The United States and other nations should similarly limit Chinese investments in their economies to mirror restrictions Beijing imposes on foreign investment.

After that if China wants to talk trade, we can engage Beijing in long negotiations while its businesses acclimate to being treated as their government treats U.S. businesses.

Peter Morici is an economist and business professor at the University of Maryland, and a national columnist. © 2018, The Washington Times, LLC.

Comments are closed.