The Pandemic Depression
The Global Economy Will Never Be the Same
President Donald Trump has finally delivered on a premier campaign promise to hold China to account for its unfair trade practices. The president deserves credit for being more willing than his predecessors to call out China’s bad behavior, but his remedies are among his most disruptive and isolating foreign policies yet. Wide-ranging tariffs will harm American companies and consumers, punish U.S. allies, and undermine the global trading system. There’s a better to way to challenge China that protects U.S. innovation and sustains both U.S. prosperity and leadership in the international economy.
There’s no disputing that China has done damage to the global trading system and U.S. economic interests. For years, Beijing has flooded world markets with subsidized goods, forced U.S. companies to transfer proprietary technologies to Chinese firms, restricted foreign access to broad sectors of the Chinese economy, and engaged in outright theft of intellectual property. The United States has paid a heavy price in lost growth and jobs. Now, as China moves up the value chain, these same practices are threatening the United States’ prized innovation base as Beijing aims to dominate the technologies of the future, including in robotics, health sciences, and artificial intelligence.
AMERICA FIRST, AMERICA ALONE
Trump’s desire to combat China’s mercantilism is widely shared across the U.S. political spectrum and, increasingly, in the U.S. private sector. More controversial is his approach. The Trump administration has employed a series of rarely used domestic laws that predate the multilateral dispute mechanisms of the World Trade Organization (WTO)—specifically, provisions in the Trade Expansion Act of 1962 and the Trade Act of 1974 that allow the U.S. government to respond to a range of dangers to national well-being, including surges of imports, over-dependencies that threaten national security, and discrimination against U.S. firms. Trump has decided to use these laws to impose sweeping tariffs on imported washing machines and solar panels, then on foreign steel and aluminum, and now, in his March 22 announcement, against at least $50 billion worth of Chinese imports per year for technology-related abuses.
Trump’s tariffs may succeed in the narrowest sense of redressing some of China’s harmful practices in the short term. But the damage done in the process will greatly outweigh the benefits. With few exceptions, economists agree that tariffs are a lousy tool. They raise prices for consumers, as well as downstream companies that rely on foreign inputs. Trump’s tariffs on steel, for example, were arguably good for the U.S. steel industry, but terrible for a whole host of U.S. manufacturers. By some estimates, the tens of thousands of job increases from Trump’s steel and aluminum tariffs will be offset by nearly half a million job losses throughout the U.S. economy, meaning roughly 18 jobs lost for every one gained. This isn’t just theory: steel tariffs levied by President George W. Bush in 2002 cost an estimated 200,000 jobs.
Trump’s tariffs could have major knock-on effects on the broader global trading system.
If that wasn’t enough, Trump’s tariffs could have major knock-on effects on the broader global trading system. Other countries are likely to follow Trump’s lead, using an expansive definition of national security as an excuse to put up all sorts of trade barriers that lock out U.S. companies. Affected countries are also likely to take the United States to the WTO on the grounds that the Trump administration’s national security exemption lacks merit.
The expansive nature of Trump’s initial decision on steel and aluminum tariffs also impedes efforts to mount an effective coalition of countries to counter China’s trade practices. By covering all trading partners, including key allies in Europe and Asia, the initial announcement sent exactly the wrong signal to partners such as Australia, Japan, and Germany who should be working with the United States to deal with China’s overcapacity and intellectual-property theft. It led the European Commission to go as far as openly talking about retaliation against U.S. goods such as blue jeans and cranberries, and South Korea’s foreign minister to imply a less cooperative stance on the North Korean nuclear crisis. The Trump administration finally yielded to this pressure and exempted these and a number of other trading partners from the tariffs. But key allies such as Japan remain on the target list, and the broader political damage was done.
TOUGH BUT TARGETED
Trump’s wrecking-ball approach to trade is not the only alternative, nor should the default be a return to fruitless dialogues and endless negotiations. Instead, a healthy combination of strong political will in Washington and American leadership abroad can parry China’s unfair advantages without doing significant collateral damage in the process.
The best offense starts with good defense. The United States should update and bolster the Committee on Foreign Investment in the United States (CFIUS), the government body tasked with examining foreign investments for national security concerns. Already, there is bipartisan legislation making its way through Congress to tighten screening for critical technologies. It will be crucial for Congress to do this in a way that avoids doing broader harm to the open U.S. investment climate, and provides CFIUS sufficient resources to handle a much larger caseload. Similarly, more staff and resources at the Office of the U.S. Trade Representative would allow greater focus on trade enforcement, in addition to negotiating and renegotiating trade agreements.
Trade remedies are a legitimate part of any response to the China challenge. The Trump administration is not wrong to look to tools such as Section 301 of the Trade Act of 1974 to brush back Chinese bad behavior, including forced technology transfer. But actions taken under U.S. trade laws should root out the underlying problems, win the support of other trading partners, and avoid violating Washington’s international obligations. By contrast, raising tariffs will almost certainly violate WTO rules and invite damaging retaliation.
With a more targeted approach to China, the United States could better rally key partners to address malicious Chinese practices in a more coordinated fashion. U.S. actions alone will do little if China can simply go to the next highest bidder. Washington should be working with Asian and European partners to file joint WTO cases and share information about China’s investment activities.
In addition to playing good defense, the United States should also lead with a positive vision by writing new trade and investment rules for the twenty-first century. This holds the best promise for curbing China’s unfair practices over time by requiring Beijing to play by the rules if it wants to continue benefiting from open trade and investment in the Asia-Pacific and beyond.
This was precisely the purpose of the Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP) agreements—both abandoned by Trump—which would have set high standards and rules for many issues of concern related to China, including on state-owned enterprises, government procurement, and data localization. The deals also included labor and environmental standards to level the playing field for American workers and prevent a race to the bottom. Trump’s decision to withdraw from the deal is estimated to cost the United States potential income gains upward of $131 billion annually by 2030, not to mention the fact that subsequent negotiations without the United States have led to the suspension of more than 20 hard-fought-for provisions on intellectual property and other disciplines.
Competing effectively with China is not just a matter of trade policy; it will also require the United States to renew its investments at home. Quality health care, education, and infrastructure will do at least as much for the American people as any trade deal or tariff could. U.S. policymakers should also consider a range of innovative and bipartisan proposals emerging to support those dislocated by the twenty-first-century economy, including from trade and automation. The Council on Foreign Relations’ Edward Alden and Robert Litan, for example, have put forward common-sense solutions for a new social contract, including proposals for wage insurance, relocation support, and national occupational licensing. These and other ideas merit serious consideration.
Finally, U.S. leaders will have to find the political courage to oppose the herd mentality in both parties toward protectionism. The fact is that Americans still support free trade by a wide margin. According to a recent Gallup poll, 70 percent of Americans see foreign trade as an opportunity for economic growth, versus 25 percent who see it as a threat. The numbers are similar for both parties, despite vocal anti-trade minorities in both camps. There remains a large bipartisan center on trade ready for the taking.
Trump has done the United States a service by elevating China’s mercantilist trade practices to an issue of national concern. But it doesn’t make sense for Washington to isolate itself, punish its allies, and undermine collective efforts to hold China to account. Most of the administration’s steps to date have been counterproductive at best. There’s a better path that includes strong and sensible defensive measures to protect U.S. critical technologies, appropriate remedies to deal with unreasonable trade practices, a positive agenda to write rules that enhance U.S. leadership and prosperity, and long-overdue investments at home to strengthen the ability of the American people to outcompete anyone, China included.