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Peter Morici: Is Trump's trade war headed for failure?

| Saturday, July 28, 2018, 11:03 p.m.

Donald Trump’s trade war with China is headed for failure. By relying on tariffs, Trump is leading with America’s jaw — Beijing is able to accuse Washington of breaking the international rules it says China should better follow and impose considerably more pain on Americans than the Chinese will endure.

Consider the 25 percent tariff on the first $50 billion . The president wanted to avoid hitting consumers with higher prices on TVs and toasters, so he focused on Chinese industrial and transportation goods and components — the exact opposite of what he should be doing.

During his first term, President Obama nagged at China incessantly that its undervalued currency was bulging the bilateral trade imbalance by making Chinese-made consumer goods artificially cheap. Chinese leaders sensed Democrats’ penchant for appeasement and called his bluff when he threatened to act if Beijing didn’t.

Seeking to succeed Obama, candidate Trump threatened across-the-board tariffs.

By failing to educate the public about the need to accept some short-term pain to accomplish long-term gain, Trump now sits between a Communist hammer — President Xi’s ability to pick whatever goods he chooses to retaliate against — and an anvil — Republicans’ midterm election vulnerability.

Xi chose to impose tariffs on U.S. goods that will hit red-state voters hard — stuff like soybeans and bourbon — and Trump’s emphasis on the industrial products is disrupting supply chains in the electronics, automobiles and other industries.

Now the administration is readying 10 percent tariffs on an additional $200 billion of imports from China and that has the potential to assess three times as much pain on Americans as the Chinese.

First, Beijing manages the value of its currency quite effectively, and could let the yuan drop 10 percent against the dollar to offset the impact of the additional U.S. tariffs.

The U.S. exports only about $135 billion to China but Beijing will have already assessed 25 percent in additional tariffs on $50 billion of those; consequently, Beijing will have only the remaining $85 billion to target for retaliation. It could assess 25 percent tariffs on all of those as equivalent to the 10 percent tariff on the additional $200 billion in U.S. imports from China targeted by Washington.

In net, prices of those $200 billion of U.S. imports from China would be about the same as before but a cheaper yuan and China’s retaliatory tariffs would make all U.S. exports into China about 35 percent more expensive than before.

And it gets worse. The president, under U.S. law, can hold up Chinese acquisitions of U.S. companies, but he cannot direct regulators to harass Chinese business interests already operating here. Xi can do exactly those things to U.S. businesses operating in China and also organize a consumer boycott of U.S. goods.

There are better ways to prosecute this trade war — for example, by requiring import licenses for Chinese goods sold in the United States. Simply, issue to U.S. exporters resalable licenses to import from China in proportion to their sales in the Middle Kingdom.

Also, impose financial sanctions on Chinese entities that benefit from Beijing’s subsidies, restrictions on U.S. investments and pirated intellectual property.

Those would get Xi into serious negotiations, but Trump’s tariffs will only result in a stalemate or shame deal that permits him to step down gracefully.

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

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