Morici: Trade war could end in a stalemate

Peter Morici

Trade wars are not easy to win – especially against a juggernaut like China – and the escalating commercial conflict with Beijing could easily end in a stalemate. The outcome will depend on how much support President Trump gets from Democrats in Congress – especially if they win control of both houses – and the actions of American allies in Europe and Asia.

At issue are China’s notorious barriers to competitive foreign products – high tariffs and a maze of administrative obstacles and industrial policies that promote indigenous technology-intensive activities through subsidies, requirements that foreign companies form joint ventures and transfer technology to invest in China and access its markets, and rampant theft of foreign intellectual property through state-assisted industrial espionage and counterfeit goods.

Frustrated that negotiations – such as the Mar-a-Lago process – failed to yield meaningful progress, Mr. Trump levied 25 percent tariffs on $50 billion of imports from China this summer. Now he is adding 10 percent on another $200 billion.

Beijing is behaving as if it can ride out Mr. Trump. It sees him low in the polls, widely criticized for his personal style and presiding over a staff that does not fully support his international policies. Beijing reads American economists predicting tariffs will have disastrous consequences for the U.S. economy, and it has levers to lessen the impacts of the tariffs in China.

The yuan is down 6 percent so far this year – obviating most of the effects of the 10 percent tariff on $200 billion – and China’s provincial governments and state banks can ladle on subsidies and no-payback loans to keep businesses afloat and exporting. It can undertake selective liberalization to attract foreign investors. For example, Exxon is working on a deal for a petrochemical complex in Guangdong without the usual joint venture partner, and Taiwan-based Foxxcom has a deal percolating for a big semiconductor project.

Beijing can roll back these policies after tensions ease, but it is miscalculating.

At stake is not merely the $350 billion bilateral trade imbalance but who accomplishes global leadership in fields like artificial intelligence, robotics, supercomputing and human brain-computer interface.

Democrats on the Hill and leaders in Europe and Japan recognize the potential for these technologies to drive economic growth, create and destroy millions of jobs, alter espionage and warfare, and change relationships between citizens and governments. Regarding the latter, Beijing has imposed an Orwellian order to quell minority opposition and impose strict adherence to behavioral norms in its Western provinces and elsewhere with facial recognition and ubiquitous cameras – do not jaywalk if you want to rent an apartment!

Western leaders do not like China’s predatory trade and industrial policies any more than do Trump trade hawks Peter Navarro and Robert Lighthizer. Differences with U.S. allies are over tactics.

Industry leaders almost always dislike changes in the regulatory environment. They adjust investments to protectionist policies, and are now objecting strenuously to the change in U.S. policy toward China.

We ran into the same problem back in the 1980s and ‘90s, when we liberalized trade in the North American auto sector – the Big Three had configured their investments to conform to pre-NAFTA production requirements imposed by Mexico and Canada to access their markets. Now, the Business Roundtable is screaming about Mr. Trump’s use of tariffs to open China.

Ultimately, China has enormous staying power. It has huge dollar reserves, it can selectively liberalize to attract the investments it considers vital and divert what it sends to U.S. markets to Europe, Japan and other destinations. Then it is up to the Europeans and Japanese to act. They will likely insist on negotiations in the WTO, but that is folly. We have been talking with Beijing for the better part of three decades about liberalization, and it simply does not want to embrace Western norms.

At that point, Mr. Trump, or whoever succeeds him if he loses the 2020 election, could manage the commercial relationship with China absolutely – tougher tariffs and quotas to force down the trade deficit, strong financial sanctions and limits on Chinese students at U.S. universities. And demand that our trading partners expel China from the WTO lest the United States withdraw from the global trading body.

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