Morici: Cutting a deal with China

The Trump strategy to radically change trade and investment relations with China is well-intentioned but poorly conceived.

Free trade is a simple idea when presented to the public. Tear down barriers, let each nation make more of what it does best and buy from others the rest, and more trade will raise living standards.

Beneath what economists call this neoclassical model of trade lurks an assumption dismal scientists are wont to admit – the textbook theorem implicitly assumes balanced trade accomplished by unmanaged exchange rate adjustments and a reciprocal reduction of trade barriers. We have not had an oversupply of those with the other three big economies – Japan, Germany and most of all China.

Consequently, America’s trade deficit will exceed $675 billion in 2018 – more than 60 percent of it with China. The deficit creates winners but more losers – mostly, Middle Americans who lose their jobs to imports but were not redeployed to make exports.

The West Coast high-tech executives who get rich shipping manufacturing jobs and technology to China, New York bankers who cut the deals to finance the process and Ivy League economists corrupted by corporate donations and speaking gigs tell us lower priced Chinese goods help us live better and consume more. They soft-peddle the massive foreign borrowing to finance the deficit that will soon leave the country vulnerable to bankruptcy – just as import gluttony crippled Greece, Spain and many others.

In a nutshell, China started the trade war with well documented high tariffs and administrative barriers to imports. Those encourage U.S. companies to move factories to the Middle Kingdom, where they are compelled to form joint ventures and transfer technology. Beijing has targeted a succession of U.S. industries with a combination of these measures and subsidies – for example, aluminum, autos, microprocessors and artificial intelligence.

The United States and other Western nations permitted China to join the WTO in 2002 on the premise that more trade with the West would encourage pro-market reforms and democratic reforms. Instead the regime has become more, not less mercantilist and repressive and with the help of American trade lawyers, it has tied in knots the WTO dispute settlement process – much to the frustration of the Obama Administration in its final years.

Levying tariffs on $150 billion in goods from China will not move it – it sends the United States some $600 billion annually and can counter with tariffs on virtually all U.S. exports. That would create enormous domestic discomfort and political pressure on the Trump administration to back down.

We have engaged China in negotiations for more than two decades, and its policymakers are champion at using opaque controls over the Chinese economy to promise reforms at the moment of crisis and then renege in seemingly intractable ways once the episode passes.

This time, China’s Commerce of Ministry is even denying negotiations are under way to resolve the imbroglio. Hence, we have no reason to believe those will result in anything more than more high sounding commitments to be followed by more broken promises.

Instead, it would be better to hit China across the board – on all its sales – in a way that recognizes it’s not going to reform and we had better have WTO rules for the rest of the world and balance trade as best we can with the Middle Kingdom.

The United States should require licenses to import Chinese goods. Exporters would be issued resalable import permits equal to the value of their sales in the Middle Kingdom. Those wishing to purchase items from China would then bid for those.

Any attempt to retaliate against American exports would only reduce licenses for Americans to purchase Chinese exports. Unlike a tariff, the revenue generated, going to U.S. exporters, would serve to promote our sales to the Middle Kingdom.

This could be phased in by at first issuing import licenses of somewhat greater value than exports and gradually reducing those to parity over three years. And, it would challenge the Europeans, NAFTA allies and others to do the same.

It would compel a wholesale realignment of the U.S. economy around producing and exporting more, and Americas now sitting on the sidelines to return to factories – instead of encouraging Apple to make iPhones in China and New York bankers to arrange credit to buy those.

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