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Trump’s 45 percent tariff

By Dr. Peter Morici
web posted January 30, 2017

President Trump’s proposed 45 percent tariff on Chinese imports could leverage significant changes in trade with the Middle Kingdom, but to succeed he must address Beijing more realistically than past presidents.

Since Richard Nixon’s historic trip, U.S. policy has been premised on the notion that offering China wider access to American markets and cooperation in other areas would encourage it to evolve into a western-style market economy with more democratic institutions. A prosperous and more liberal Chinese society would provide a buoyant market for U.S. exports and become more sympathetic toward American security arrangements in the Western Pacific.

That simply has not happened. China limits imports with high tariffs and discriminatory regulations, subsidizes exports with an inexpensive currency and generous credit through state controlled banks, bullies foreign investors, pirates western intellectual property and much more to gain advantages in trade.

Unapologetically, Beijing has pronounced it is creating a socialist-market economy but it all smacks of good old-fashioned mercantilism. China’s exports to the United States exceed imports 3 to 1, and that costs Americans millions of jobs

China is becoming decidedly less democratic — indeed Orwellian. Beijing is rolling out a system that monitors the minutia of citizens’ activities — from internet sites visited to jaywalking citations — to assign “social credit” ratings that will determine access to jobs, credit and their children’s school admissions.

It is using the wealth generated by huge trade surpluses to build a sophisticated navy and air force to bully neighbors and assert sovereignty over neutral waters in the South China Sea, and establish an Asian Infrastructure Development Bank to assert soft power in the region.

China’s economic success, financial largesse and President Obama’s failure to challenge Chinese military assertiveness have encouraged strategically important Malaysia and the Philippines to tilt toward China.

Confronted by Chinese practices that victimize U.S. businesses, both the Bush and Obama administrations have responded by pushing China to adopt market-oriented reforms, but this has proved folly.

For example, faced with a chronically undervalued yuan, U.S. diplomats encouraged China to make its currency more freely convertible — dollar yuan conversions are regulated in China. What they neglected was that Beijing’s monetary and industrial policies — such as pumping liquidity into state-owned banks and restrictions on foreign investment — can be tweaked to drive down the value of the yuan too.

Imposing a tariff may persuade China to abstain from some forms of currency manipulation or lift certain restrictions on U.S. investment, but it won’t radically alter the disposition of Chinese leaders. They harbor deep suspicions of open markets and unbridled civil liberties and bristle at the notion that the United States should enforce security in the Western Pacific.

China can offer some face-saving concessions to American negotiators, and then implement other more opaque policies that subsidize exports, limit imports and harm American workers.

Alternatively, it can harass U.S. companies with large investments in China, like GM and Wal-Mart, to whip up political pressure in Washington against Mr. Trump’s assertive policies. Or ratchet up military tensions in the South China Sea, and force Americans to ask whether the trade deficit really is worth risking a war.

The Trump administration certainly can’t mount any kind of economic pressure that would put China on the path to becoming a western market economy, a democratic society or regionally less aggressive.

The best it can do is to force a deal to manage bilateral trade explicitly to ensure a balance between bilateral exports and imports. That is a very different approach than facilitating market forces and letting the chips fall where they may, which has been the orientation of U.S trade agreements since World War II.

Accomplishing equity between the two economies based on complementarity and mutual advantage would be particularly complex as Chinese industry increasingly moves away from labor intensive industries, as wages rise, into more sophisticated technology intensive activities.

To secure interests in the region, the United States must be prepared to devote the naval and other military resources necessary to meet China’s provocative actions in the South China Sea and elsewhere. Otherwise, Asian neighbors by necessity will pivot toward Beijing and be more inclined toward its prescriptions favoring state directed capitalism and autocratic governance.

These will prove expensive and difficult, but prosperity and leadership are never cheap or easy. ESR

Peter Morici is an economist and business professor at the University of Maryland, and a national columnist.

 

 

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