Peter Morici: How to win trade war with China
According to the Trump administration, America is winning the trade war with China. The Middle Kingdom’s economic machine may be slowing, but President Xi Jinping is unlikely to sue for peace anytime soon — at least not on terms acceptable to American interests.
China’s economic system is antithetical to American democratic capitalism. Its buccaneer commercial policies flout the World Trade Organization’s rules and other Western norms
President Trump aims to persuade or compel Beijing to stop commercial tactics that undermine American prosperity and global geopolitical interests. And that requires systemic changes in China’s socialist-market economy.
Xi sits atop a communist oligarchy with a long history of breaking its word and has exhibited no intention of negotiating in good faith. On several occasions, he has persuaded Trump to postpone tariffs to initiate protracted talks that end with the Chinese offering little.
We are at a stalemate, and the lesson for Trump should be clear — incrementalism does not work. Threats followed by postponed actions and raising tariffs on selective portions of Chinese exports and in steps are a fool’s journey.
It’s aggrandizement at the White House to attribute the slowing of the Chinese economy to those limited measures and to claim Americans are not paying the tariffs.
China’s economic model was hitting barriers even before Trump joined the war. It lacks sufficient overseas markets to sell all the stuff its subsidized factories crank out, and Xi’s efforts to shift leadership to state enterprises from private businesses impose terrible inefficiencies.
Neither the Chinese nor Americans pay all the costs of the tariffs. Anyone who has taken Principles of Economics knows that taxes are partially borne by producers — they accept some price cuts — and by consumers — they pay the differences between the tariffs and those price reductions.
Foreign investors are moving supply chains out of China to avoid the uncertainty of American ire. The next president, like Trump, Obama and Bush, will face the same economic and geopolitical challenges posed by Beijing’s obsession with creating an Imperial China on the global stage.
Contrary to the promises of White House trade adviser Peter Navarro, factories leaving China are not moving to America but to other Asian locations. Chinese wages and bureaucratic risks are now too high even without Trump’s tariffs, and his trade war is accelerating a trend.
American farmers are getting clobbered by Chinese-targeted retaliation. Beijing is a lot smarter about how it turns the screws than a divided White House.
Trump will have to hit Xi a lot harder to get results.
Trump could impose a system of mandatory import licenses that ends the $320 billion bilateral trade imbalance. Issue U.S. exporters resalable licenses to purchase goods from China in proportion to their sales there. The more China buys in America, the more it can sell here, but if it retaliates against American farmers, then it must sell less here. And implement tough financial sanctions against technology pirates like Huawei and their banks.
A few skirmishes a victory does not make, and it’s hard to have confidence in a divided White House that does not have the stomach to act decisively.
Peter Morici is an economist and business professor at the University of Maryland.