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Workers load goods for export onto a crane at a port in Lianyungang, Jiangsu province, China June 7, 2019. Picture taken June 7, 2019. REUTERS/Stringer ATTENTION EDITORS - THIS IMAGE WAS PROVIDED BY A THIRD PARTY. CHINA OUT. - RC18EA753F70
Order from Chaos

On U.S.-China trade, America is off track

One of America’s greatest strengths is its ability to self-correct. Unlike China, with its one-party state and its censored media, the United States fosters a constant competition of ideas, which enables it to adjust course when it veers off track. And right now, the United States is off track in its approach to addressing trade problems with China.

President Trump was directionally correct in prioritizing efforts to address China’s unfair economic practices. There is broad agreement that Beijing’s policies of shielding Chinese companies from foreign competition, pumping them full of subsidies, and then unleashing them on the global market where they can undercut market-based competitors are unfair. But the tactics President Trump and his team have pursued to change China’s behavior have done more harm than good for American farmers, workers, pensioners, and business owners.

Here are the facts: Tariffs will cost the average American household $831 this year; farmers have suffered over $1 billion in lost exports, mostly to China; farm foreclosures are spiking across the Midwest; businesses that rely on imports of intermediate goods from China are getting squeezed; and Chinese purchasing patterns are shifting from U.S. firms to foreign competitors. For all these reasons and more, the American Chamber of Commerce has urged the Trump administration to end its trade war with China, warning that continuing down the current path risks costing the U.S. economy $1 trillion over the next decade.

It’s not just soybean farmers who are taking the hit. As the Peterson Institute of International Economics has shown, China is slapping retaliatory tariffs on U.S. exporters at the same time as it is slashing duties on American competitors. China has increased tariffs on U.S. exports to an average of 20.7%, while reducing tariffs on competing products from everywhere else to an average of only 6.7%. In other words, tit-for-tat tariffs are severely disadvantaging American companies in the fastest growing market in the world.

Tit-for-tat tariffs are severely disadvantaging American companies in the fastest growing market in the world.

These results are not a surprise to U.S. businesses. In fact, they are one of the reasons why previous administrations eschewed tariffs as a cure-all for trade troubles with China. President Trump was indifferent to evidence-based arguments on the risks of over-reliance on tariffs, though. He was convinced that his predecessors were weak, and that he just needed to impose tariffs and signal resolve to compel capitulation from China. Thus far, his experiment is failing. Americans are suffering pain without realizing gain.

By politicizing China to the extent he did during his campaign and since, Trump set the stage for such an unfavorable outcome. He made bold pledges to “fix the trade deficit” and reform China’s economic structure, all at little cost to Americans. He famously declared that “trade wars are good, and easy to win.”

Such promises were politically potent but economically illiterate. By overpromising outcomes from the start, he eliminated space for give-and-take compromise and steady if imperfect progress toward greater Chinese market access and economic reform. When trade negotiations between two global powers get reduced to all-or-nothing dynamics, the American people risk being left with nothing.

Similarly, by conducting the negotiations like a reality television show, with periodic episodes live from the Oval Office, Trump reinforced the “I win, you lose” nature of the negotiations. Trump assumed that Xi “needed” a trade deal so badly that he would accept the indignity of being seen as the loser in negotiations. Trump failed to appreciate Xi’s own political requirements, as well as Xi’s sense of his own leverage in the negotiations, for example, as a leader that has consolidated authority and doesn’t face re-election, manages his domestic media, and controls China’s fiscal and monetary levers behind the protective wall of a non-tradable currency.Listen to Dollar and Sense

Trump also placed unjustified faith in the power of personal chemistry with Xi. He assumed Xi would privilege his relationship with Trump in trade negotiations, not recognizing that Xi is one of the most ruthlessly unsentimental leaders on the planet.

For a while, some China experts were optimistic that Trump’s aggressive approach would rattle Beijing and get it to make concessions to relieve pressure. Yet, as the tangible costs of Trump’s approach mount while the benefits elude American companies and workers, this argument is nearing its expiration date.

If the goal is to compel China to alter its economic practices, Trump’s approach simply is not the way to do it. Pursuing a zero-sum strategy toward China at the same time as launching attacks against allies and undermining the institutions of the postwar order is not a formula for success. It’s a recipe for failure. And even more so, it is undermining confidence throughout the world in America’s strategic thinking on China.

So, how to correct course?

To begin with, the United States must resist fatalistic conclusions that China cannot be swayed. Beijing has shown capacity to adjust course when confronted with the need to do so. It responded to early concerns about the Asian Infrastructure Investment Bank (AIIB) becoming an arm of the Chinese state by turning it into a legitimate multilateral institution. The AIIB now is operating largely in line with international standards and cooperating with established multilateral lenders. In the face of a slowdown in its private sector, Beijing instructed its state banks to make capital available to small and medium-sized businesses. And most recently, when faced with concerted international pushback to its international infrastructure projects, Xi announced that China would raise the environmental, social, and economic standards of the Belt and Road Initiative. The world now will be watching to see if Xi’s words get translated into action. The point is that policy directions can change if external incentives require China to be adaptive. That has a been a continuity of Chinese foreign policy that not even Xi has altered.

Second, public expectations in the United States need to be reset. There is no policy option available that will deliver a Chinese surrender ceremony that aligns with America’s electoral calendar. Pressing China to create a more level playing field for competition will take time, require patience, and likely incur some economic costs that the American people will need to be brought along to accept.

Next, the Trump administration will need to acknowledge that Trump’s preferred tool—unilateral tariffs—will be insufficient to the task. China’s economy has outgrown its reliance on exports to the United States to sustain its economic growth. In value-added terms, Chinese exports to the U.S. now account for less than 3% of its GDP. China’s far greater concern than unilateral American tariffs is a concerted coalition among all of China’s major trading partners against its unfair practices. Building such a coalition will require American leadership, diplomacy, patience, persistence, and creativity. Keep in mind: China has no allies (other than a fraught relationship with a failed state in North Korea). America’s relationships with partners amplify our power and protect our interests.

Coalition-building conceivably could start with Japan, South Korea, Australia, Canada, and the European Union, and then broaden out from there. In order to attract support for such efforts, though, the U.S. will need to frame such efforts around advocacy for common principles and acceptance of China’s continued rise. Otherwise, it will fail to attract international support.

The United States will not get all of what it wants in such coalition-building efforts. Germany and France, for example, will be reluctant to call out some of China’s industrial policies that they also employ. Nevertheless, there should be space for consensus among America and its partners on key issues such as intellectual property rights protection, forced technology transfer, disciplines on subsidies, and the need for new rules around digital trade and data flows.

Some China hawks, who hold visions of dividing the global economy into American and Chinese spheres and knee-capping the Chinese economy along the way, will not find satisfaction in these suggestions. They will view this approach as inconsistent with their objective of undermining China’s social and economic stability, and they will appeal for more time to erode China’s global competitiveness. But their policy experiment over the past several years has not worked. It has done the one thing successful American security policy never does—reduce American options and diminish our credibility with allies and partners who look to us for leadership. Continuing on the current course will do more to isolate the United States than undermine the Chinese economy.

For the majority of Americans—those who consider China neither a partner nor enemy, who do not want to enter into a recession as a consequence of unbridled competition with China, but who do want a fair shot to outcompete their Chinese counterparts—I expect there will be appetite for a more sober and productive alternative to the current approach.

If President Trump is not willing to adjust course, perhaps one of his presidential challengers will. After all, competition is at the heart of the American experiment.

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