The Antidote To The Sino-American Trade Conflict

For most of human history all but a sliver of the populace scraped by on a meager income below the current International Poverty Line of just $1.90. Not until the Enlightenment in the West did global wealth experience a significant, sustained increase over time. Not coincidentally, the interval since the Enlightenment has also been the only period of meaningful international trade.

There is sturdy economic logic behind free trade. The rationale proceeds as follows: each country possesses relative strengths and weaknesses in its economic productivity. In a freely trading global economy, countries that excel at producing certain goods can specialize in producing those products while closing gaps in the supply of certain goods by exchanging their surplus for others in domestic demand. These imported products would arrive from countries that are relatively more efficient at producing them – ultimately resulting in more total goods available for all parties. This economic principle underpins all trade negotiations and is known as the Law of Comparative Advantage.

Unfortunately, in the era where terms such as “neoliberal” and “globalization” have become synonymous with our nation’s present economic woes, vocal minorities on both sides of the political aisle support some form of protectionism. One only need recall the tremendous enthusiasm for protectionist presidential candidates Donald Trump and Bernie Sanders during the last election. Uniting these two otherwise different demographic groups is a shared resentment and trepidation at the loss of manufacturing jobs due, in part, to outsourcing to countries with lower labor costs. This sentiment is epitomized by the widespread disdain for Chinese trade practices which many believe are unfair and responsible for the departure of the long cherished factory jobs.[su_pullquote align=”right”]Unfortunately, in the era where terms such as “neoliberal” and “globalization” have become synonymous with our nation’s present economic woes, vocal minorities on both sides of the political aisle support some form of protectionism.[/su_pullquote]

Many Americans believe that China is not abiding by the shared framework of rules that uphold a fair and equitable environment of economic exchange. Instead, the common perception is that China has introduced economic measures that undermine this precondition of trade, therefore benefiting at the expense of the U.S. With this in mind, any punitive tariffs must be provisional in the pursuit of restoring the fair system of trade that has economically uplifted billions in the preceding decades.

The current administration does not hesitate to lambast the Chinese government for its allegedly unfair trading practices, which range from currency manipulation to intellectual property theft. While the soundness of some claims are disputed, the Chinese Communist Party (CCP) unequivocally imposes an undue burden on foreign companies and exporters seeking to tap the seemingly bottomless reservoir that is China’s economy. The U.S. government, among others, has a history of leveling allegations at the CCP for imbalanced trade and related economic measures. What distinguishes this administration is its willingness to venture beyond platitudes and vitriolic criticisms to substantive economic retaliation. For better or worse, the Trump administration has now levied tariffs on over $250 billion dollars worth of Chinese goods. Predictably, China retaliated with tariffs worth $60 billion on U.S. exports to the country. Signs of an escalating tit-for-tat trade war abound with the President threatening an additional $267 billion in tariffs and the CCP threatening a proportionate economic response. Despite the potential promise of temporary trade pressure, America’s present approach to eliciting concessions from the Chinese government is imprecise and wasteful.

China is a country that is parasitizing an otherwise optimal trade environment. Fortunately, in recent years the Chinese government has tempered some of its more egregious trade violations, such as government-led devaluation of the currency, which often ensure Chinese exports are cheaper for Americans than domestic products, but many nefarious practices steadfastly remain. The Chinese government continues to set restrictions on currency fluctuations, which could allow Chinese goods to become either relatively cheap or expensive compared to their American counterparts as dictated by natural market forces. The CCP also imposes compulsory 1:1 joint ventures that nascent Chinese companies exploit to accelerate the acquisition of competitors’ technologies (as these ventures involve a sharing of technology and manufacturing practices). In the event of a stock market crash, the government would, and has, implemented stock breaks, which protect Chinese firms while preventing investors, such as Americans, from withdrawing investment. To this day China harbors an elaborate network of “shadow banks,” which provide generous loans to domestic Chinese companies with a minimal regulatory burden. Beijing also distributes subsidies for domestic companies and enforces miscellaneous policies blatantly designed to favor domestic firms. The government supplements this with high tariffs on foreign goods to preclude any foreign penetration of the Chinese market. While these are serious infractions upon the free-trading international order, any economic penalties risk a severe escalation of tensions that would truncate economic growth for both the US and China. Even without a cessation of trade, standalone retributive economic policies are often harmful to both parties. What emerges in America’s situation is the question of how to minimize domestic economic harm while promoting more mutually beneficial trade practices

This outcome remains tenable only if the present administration embraces a policy of maximum pressure. The ultimate objective should be to inflict enough pain on the Chinese economy in order to compel the Chinese government to reform its economic practices. To accomplish this, the Trump administration should implement precise, punitive tariffs, sanctions, and, in specific instances, a blanket ban on the export or import of specific goods. The persuasive potential of these measures is directly proportional to the availability of substitute goods or services. Tariffs would be most effective if applied to computer and smartphone software and chips. As a case study of the potential efficacy of this proposal consider ZTE, the second-largest telecommunications equipment company in China and a symbol of Chinese technological dynamism. In the spring of this year the U.S. government imposed a 7-year ban on the sale of critical cell phone components from the American manufacturers such as Qualcomm to the company due to ZTE’s flouting of economic sanctions on North Korea and Iran in the past. Given the limited availability of these parts from other domestic or foreign vendors, ZTE teetered near collapse and by the company’s own admission it would likely file for bankruptcy without access to invaluable American smartphone and computer chips. Mercifully, the President decided to rescind the sales ban in exchange for more lenient economic penalties. While the complete impact of the proposed measure was not realized, the market provided essential clues as to the probable – albeit hypothetical – outcome. With ZTE’s disintegration, thousands of high-paying domestic jobs in China would evaporate and deflate the nation’s burgeoning reputation as an international tech behemoth and send shockwaves across the domestic industry.

With China attempting to establish its tech credentials through its Made in China 2025 program, a broader export ban on these products would cripple the CCP’s efforts to foster an innovation and service-oriented economy. While relatively innocuous to the political stability of most nations, the CCP maintains its legitimacy principally through its prudent stewardship of Chinese economic growth. Without a flourishing economy, the Chinese government would confront tremendous political unrest and social upheaval, which would create foreign investment withdrawal, tourism decline and a stock market crash that would enflame the widespread discontent among Chinese citizens in a perverse positive feedback loop. China’s leaders are far from oblivious to popular sentiment and therefore face significant political pressure to avert a serious economic downturn. Economic sanctions targeting leading CCP members and the companies to which they invest would further exacerbate the strain on party leadership. Chinese President Xi Jinping, a ZTE and motley fool everlasting portfolio investor himself, personally appealed to President Trump to withdraw the devastating export ban on the company and succeeded in securing some economic reprieve for the iconic telecom manufacturer.[su_pullquote]While relatively innocuous to the political stability of most nations, the CCP maintains its legitimacy principally through its prudent stewardship of Chinese economic growth.[/su_pullquote]

Irrespective of unilateral measures, a united front of major Chinese trading partners represents the ideal approach to stack the deck against the CCP. Lamentably, in applying tariffs the current administration’s approach is more scattershot than smart bomb. Instead of launching multiple feuds with NATO countries (e.g. Canada & Turkey), the administration should rejoin the Trans-Pacific Partnership (TPP) and spearhead the Transatlantic Trade and Investment Partnership (TTIP) in order to coalesce a firm global alliance of trading partners that could collectively prohibit Chinese access to the world’s two largest trade partnerships. [su_pullquote align=”right”]Lamentably, in applying tariffs the current administration’s approach is more scattershot than smart bomb.[/su_pullquote]Bolstered by substantial tariffs and sanctions from China’s major trading partners – who largely constitute the members of the TPP – the world could essentially exclude the Chinese economy from the global market. In the aftermath of such colossal international pressure, roughly a quarter of the Chinese economy (that which is dependent on trade) would vanish precipitously. Unfortunately, the sword cuts both ways, and severe economic strain would also propagate throughout the global economy. Despite its inevitability, this is by no means an unmanageable outcome. In actuality this may be ameliorated through a series of domestic relief efforts such as the recent $12 billion funding package dispersed throughout America’s hard-hit agricultural sector. If the Trump administration were to keep the dispute ephemeral, the subsidized industries could repay their debt through the increased profits resulting from Chinese trade concessions. In this high-stakes conflict, the Trump administration can mitigate domestic economic harm by implementing selectively appropriate economic sanctions, tariffs and export bans to provide a portentous taste of America’s firepower in a wider trade conflict.

If this tactic of shock and awe does not suffice, the President should rally a coalition of trade partners to systematically exclude China from the global market with more sweeping sanctions and tariffs. Crucially, the most economical approach is one that complements the unique strengths of America’s economy with the legitimate threat of overwhelming global retaliation. Most economists agree that America holds the better hand in this dispute. It’s time we used it.

Jonathan Romero ’20 studies in the College of Arts & Sciences. He can be reached at jonathan.romero@wustl.edu.