First posted on:
Jeffrey Frankel's Blog, 31 May 2018.
The Trump administration on 29 May, nine days after having said that the China trade war was “on hold”, flipped the switch back to “on”. As of now, the White House again plans to move forward by June 15 with plans for 25% tariffs on $50 billion of imports from China. But the areas where Trump is pushing China the hardest are the ones that make the least sense.
Trying to ascertain the Trump position on trade at any point in time is like trying to ascertain the position of a sub-atomic particle: it is better viewed as having a probabilistic distribution than as having a true position that could be discovered through sufficiently acute observation and analysis. That is, the ‘position’ may not exist.
Even under normal circumstances it could be hard to keep track of a half-dozen or more different China trade issues running simultaneously. Some of the actions that are at stake have a basis in economic or political or legal logic, and some do not.
Let’s begin by noting that when the US goes against international institutions and agreements, for example by imposing tariffs that violate the WTO or other international agreements, aside from immediate negative economic effects, we give other countries good reason to mistrust the value of our word and to engage in similar behaviour themselves. The calculus is that much worse because the US is the country that had the overwhelmingly dominant role in setting up such institutions as the WTO in the first place. And we did it because such international agreements and institutions are in our national interest.
Actions that make little logical sense
The least logical of the recurring Trump obsessions is the demand that China reduce the US bilateral trade deficit. The Chinese government has no policy levers that could reduce the bilateral balance by the mooted $100 or $200 billion. If it wanted to give Trump a superficial ‘win’, it could reduce the bilateral deficit some by buying more American natural gas or by routing smart phone exports through a third country like South Korea. But the economics would be illusory; there would be virtually no effect on the overall US trade deficit. We would sell the same natural gas to some other country if we didn’t sell it to them; and in reality those smart phones already get about 95% of their value added from South Korea, the US, and other countries anyway. Focusing on the bilateral balance as opposed to the overall trade balance is a waste of time. Regardless what happens with China, the overall US trade deficit will rise this year as a result of the Republican tax cut, enacted at a time when the economy is already producing at the limit of its capacity.
Similarly unmoored from both economic and legal logic are the tariffs that Trump has imposed on imports of steel and aluminium and threatens to impose on autos and other goods. With respect to legal criteria, the national security justification that he has invoked is flimsy in the extreme and will likely inspire other countries to retaliate. With respect to economic criteria, the beneficiaries in the steel industry, for example, are vastly outnumbered by those who will be hurt because they use steel as inputs (the auto industry), they consume the final products (all of us), or they produce export goods that will be hit by the repercussions (e.g. farmers). Extending the tariffs to autos themselves doesn’t help; that step would ignore how integrated auto production is across US borders.
Actions that could have a basis in logic
Much better-grounded are the US penalties legally imposed on the Chinese telecoms company ZTE for violating international sanctions against Iran and North Korea. But this is precisely the issue on which Trump seems most clearly to have let China off the hook.
In between the two extremes are some grievances that the US could reasonably pursue in negotiations with China if done intelligently. These include intellectual property rights and a Chinese practice of requiring foreign firms who want to set up in China to share technology. But to pursue such areas effectively, the US should do it in cooperation with allies like Europe and under international agreements like the WTO and the Trans-Pacific Partnership. Trump has been doing the opposite.
Can the Trump approach be explained?
The Trump approach to China has been so inconsistent that observers have had to stretch to find explanations. Suggested explanations include allegations of quid pro quos for Trump family business, divisions between ‘nationalists’ and ‘business’ factions on his staff, the President’s tendency to be persuaded by whomever he last talked to, a desire to pre-empt Democratic protectionists, and an instinct to do the opposite of whatever Obama did.
It is easier to say what the Trump approach is not. It is not the deliberate or competent application of a coherent strategy informed by a clear set of American policy objectives, an understanding of the other side’s incentives, or an appreciation of the implications that impulsive tweets can have for the long-term global system or even for the next move in the short-term tactical game.
China’s rise as a great power over the last three decades has had little to do with the terms of any international trade agreements that were made or could have been made. The bilateral trade issues currently under discussion could all be viewed as low-stakes. This is especially true when compared to some larger national security issues. We need China’s help with a newly nuclear North Korea more than we need it to give in to any of our on-again off-again trade demands, even those that might make some sense.
Think how bad it would be if President Trump applied to Kim Jong-un the same pattern of erratic alternation back and forth between inflammatory bluster and inexplicable concession that he has applied to China. Oh, wait…
Author's note: An earlier version appeared at The Hill. Comments can be posted at Econbrowser