Trump’s trade strategy on China isn’t working

The Trump administration’s willingness to push the Chinese harder on trade has struck a bilateral chord. Beijing is listening. So far, so good. Now the question is what the US wants to achieve. Answer: the total destruction of China as a competitor.
That isn’t a trade goal, and the demands being made contradict one another. This aim also unnecessarily awakens Beijing’s deepest nationalist fears. Unsure what to offer next, China is falling back on familiar jingoistic strategies and rhetoric. Things are likely to get much worse from here.
Meanwhile, the US economy is incurring pain that the Trump administration seeks to alleviate with a $12 billion bailout program to aid farmers. Pain may be worth enduring if something is being accomplished. But the only likely outcome is a reduction in trade and more expensive Chinese products. In other words, fat taxes on the American consumer.
Over the past few months, Chinese imports from the US have dropped sharply, declining 25% in November, even as its exports to the US continued to rise. The big falloff started in July, after Washington implemented the first list of China-specific tariffs.
The majority of US firms polled by the American Chamber of Commerce in Shanghai reported that the trade war hurt their profits and that non-trade barriers have increased. The policies, if anything, have supported more offshoring: 31 percent of the respondents said they were looking to assemble or source components outside the US. There is no evidence that cybersecurity or intellectual-property protections have improved for US companies.
That’s a big turnaround in sentiment from years past. So why the change of heart?
China started its economic opening with an all-fronts offensive to charm foreign businesses. Politburo members were told to doff Mao suits and put on ties and jackets. Beijing and Shanghai built luxurious hotels at the end of highways that led straight from their airports: Foreign investors never needed to encounter inconveniences of China proper.
By the 1990s, every third-string corporate delegation from the US hoping to manufacture ball bearings or Barbie dolls in China was given an audience with the top political leadership, and those of us working there met constantly with government representatives. It’s no wonder that American corporations believed the country was on a trajectory towards better market access, more transparency and fairer competition.
The decade between 2000 and 2010 was a heyday for Chinese IPOs – especially for state-owned enterprises, for which public markets seemed like a bottomless and benevolent well of cash. After Hu Jintao assumed leadership in 2003, he dispensed with all government meetings for foreigners.
Another decisive moment was 2008, when the nation’s measures to secure an optically triumphant Olympics established the machinery for tighter information control. That came in handy as the global financial crisis hit. With infrastructure stimulus appearing to rescue the economy, Beijing became convinced of the country’s exceptionalism – a hubris that only affirmed the success of China’s authoritarian model, and led to a new era of assertiveness.
In this way, China lost the support of foreign businesspeople, who have become disillusioned with the market, tired of the pollution, and now fear for their physical safety.
Initially, it was startling and encouraging that a US administration was finally willing to call China’s bluff. Problems in bilateral trade genuinely run deep, and Beijing has a coordinated
strategy of stealing the US technology, evading American export-control laws. Market access has in many ways deteriorated since the country joined the World Trade Organisation (WTO) in 2001 and made sweeping commitments to open up. The country subsidises industries that then gain unfair advantages against competing foreign products.
But the Trump administration’s attempt to address these problems isn’t working. Its trade positions conflict with one another, and despite various theories, no one is entirely sure who speaks for the US President Donald Trump started off by demanding that China reduce its trade surplus with the US by $200 billion and threatened a series of tariffs on its goods. The US trade representative is pushing forward a Section 301 action to address intellectual-property theft, while also claiming to be working to encourage “reshoring” by US firms. The Department of Defense is focused on cyber-strategy; the Department of Commerce on export controls; the FBI on non-traditional espionage. In other words, there is a litany of complaints whose basic target is the whole Chinese economic and political system.
Many of these goals are incompatible. Enforcing US export controls will necessarily decrease its shipments to China and therefore increase the trade deficit. US tariffs, and the inevitable retaliation, are a disincentive to reshoring, as they raise costs. Enforcing intellectual-property laws promotes import substitution. None of this is to say that the laws shouldn’t be enforced; the administration just needs to be clear on its goals.
There are a few ways the US could adopt a constructive approach without relinquishing (most of) its goals.
China’s political leadership rules at the pleasure of its military and security forces, a fact poorly appreciated in the US Beijing’s more regressive and nativist powers are held at bay when
the country demonstrates strength, and even bellicosity. The Trump stance could easily trigger a backlash for which the US is ill-prepared.

—Bloomberg

Anne Stevenson-Yang is co-founder and research director of J Capital Research Ltd., a provider of investment advisory services