Trade hostilities between the United States and China continue to escalate. Last week, U.S. President Donald Trump threatened to place tariffs of ten percent on $200 billion worth of Chinese goods after China retaliated against his previous threats to put tariffs of 25 percent on $50 billion worth of its products. Washington has warned of additional trade protection if China retaliates again. The latest move comes in addition to the 25 percent tariff on steel and the ten percent tariff on aluminum that the United States has placed on several countries, including China.
The Trump administration has declared that China must fulfill its demands before it will lift the tariffs. It wants China to cut its trade deficit with the United States, protect U.S. intellectual property, accept restrictions on Chinese investment in sensitive U.S. technology, allow greater U.S. investment in China, and remove trade barriers. Washington also wants a variety of concessions from many of its other trading partners.
Although commentators often describe Trump’s approach as a radical departure, U.S. attempts to strong-arm its trading partners are nothing new. Examining what happened the last time the United States tried to bully China can shed light on the likely outcome this time around. The prognosis is not good, in either the short term or the long term. Trump wants to put the United States first in order to get better deals. History suggests that his strategy will have the opposite effect.
WHY TRADE THREATS WON’T WORK
The United States has often used trade policy to try to coerce China into making political and economic concessions. Things got particularly heated after 1979, when Washington gave Beijing short-term tariff reductions (known as “most favored nation” status) but made their yearly renewal contingent on China implementing a variety of concessions. These included improving human rights, reducing weapons proliferation, and cutting tariffs on U.S. goods. The United States warned that if China failed to comply, it would restore its tariffs to their previously high levels.
It didn’t work.
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