Digging in for a Long Fight

Simon Lester

US President Donald Trump frequently proclaims his desire to “drain the swamp.” In US-China trade relations, however, he is steadily leading the United States into a quagmire from which it may be difficult to escape. Skepticism and hostility towards China among US politicians and commentators existed long before Trump, but the intensification of the rhetoric, and aggressive actions taken in recent months, will be difficult to undo or pull back from, at least for this administration.

Like all countries, China is guilty of a number of trade sins. There are sectors in which it is highly protectionist, and it has only recently begun to follow rich country norms on intellectual property. China is not the only offender, of course, but given its economic size and its authoritarian politics, it is not surprising that China is the target of the most intense criticism.

What is surprising is the strategy taken by the Trump administration to address these issues. While the Barack Obama administration tried to work within multilateral rules, the Trump administration has decided to go it alone. It is imposing tariffs on China that clearly flout World Trade Organization (WTO) obligations, and which do not appear to be achieving the objective of prompting reform in China.

Instead, we are in the midst of a back-and-forth game of tariff escalation. The US imposes tariffs on US$34 billion of imports; China matches it. The US adds tariffs on another US$16 billion of imports; China matches that. The US is now threatening tariffs on $200 billion of imports; China doesn’t import enough from the US to match that, but it will impose tariffs on all the imports it can. If this keeps going, both sides will be imposing tariffs on all imports from each other, and perhaps taking other retaliatory actions as well.

The administration’s defense of its policies is that other methods of dealing with China have been tried and did not work. The administration accuses China of cheating, and says the WTO cannot handle China’s unique brand of state intervention. There have even been suggestions that China’s entry into the WTO on the terms agreed in 1999 was a mistake.

The reality is that WTO litigation against China’s trade practices has worked quite well, where it has been used. China does as well as other countries at compliance when challenged in a WTO complaint. The problem is that WTO dispute settlement needs to be used more. But the Trump administration is not listening to this criticism (it has filed only one new WTO complaint). It is relying mostly on tariffs instead.

And despite the concerns of economists and affected companies, the administration shows no sign of letting up. As long as the US economy is doing well, the administration is confident that it will win this battle. The logic is simple: US imports from China are much greater than Chinese imports from the US. Therefore, in a contest of tariffs on imports, the US will come out ahead.

This view is mistaken for a number of reasons. First, while so far China has focused on equivalent tariff retaliation, it can retaliate with more than just tariffs. China could penalize US companies operating in China in a variety of ways.

Second, the US tariffs hurt Americans just as much as they hurt Chinese producers. Tariffs are taxes that are ultimately paid by importers and consumers, and thus the administration’s approach harms Americans (and then the Chinese retaliation harms them more).

And third, as much as the Trump administration would like China to back down, politically speaking, it would be very difficult for China to do so. Public demands for unilateral concessions from China, which would make China look weak if it agreed to them, are difficult to accept.

So how will this end? Perhaps China will cave, although most China experts think this is unlikely. And even if China wanted to cave, it is not clear exactly what would satisfy the Trump administration. While the administration shows no signs of backing down, there are two possible events that could lead to some reconsideration of its approach: a slowing of the economy and the results of the US midterm elections.

Part of the confidence the Trump administration has right now is derived from the strong US economy. Despite all of the tariff actions in recent months, the US economy is still doing well. But these tariffs are still relatively new and have only affected a small amount of trade so far. As the Trump administration continues to push forward with tariffs, the impact should become more noticeable.

As for the midterm elections, if the Democrats win one or more houses of Congress, the domestic political landscape could change considerably. The Trump administration might spend most of its time defending itself from congressional investigations, and its flexibility to undertake trade policy could be diminished.

In the meantime, we watch the escalation nervously and warily. The key players in the Trump administration are not interested in other perspectives, which means that little can be done to encourage a change in approach. We all have to dig in for a long trade battle, and hope there are not too many casualties.

Simon Lester is Associate Director of the Herbert A. Stiefel Center for Trade Policy Studies at the Cato Institute, Washington DC.