The Trump administration is going about its trade war with China all wrong. Its strategy and tactics are muddled. If President Trump were a general watching the battle unfold, what he’d see is his troops getting slaughtered, while the enemy, though suffering casualties, was holding most of its positions.
Trump has two goals, says William Reinsch, a trade expert at the Center for Strategic and International Studies (CSIS), a nonpartisan think tank. The first is to reduce the United States’ huge goods trade deficit with China, which was $419 billion in 2018. As Reinsch notes, most economists discount the importance of this. If the deficit declines through temporary purchases from the United States, the effect may fade with time.
Trump’s second goal is more significant. It is to suppress the most anti-competitive aspects of China’s state capitalism, which aims to make Chinese firms the world leaders in most high-technology industries. These include robotics, pharmaceuticals, autonomous vehicles, biomedicine, semiconductors and others. Here, the talks have failed.
The United States has claimed that Beijing has rigged the competition in favor of its firms through government subsidies, the theft or coerced transfers of new technologies and outright discrimination against foreign firms doing business in China.
Consider semiconductors as a case in point. These are the tiny computer chips that govern virtually all digital services.
At present, U.S. firms are the world leaders in semiconductor design and technology, accounting for roughly half of all world revenue in chip sales (46 percent in 2017), according to data from the Semiconductor Industry Association (SIA), an industry trade group.
Other countries lag, the SIA reports. South Korean firms are second with 22 percent of world sales, followed by companies from Japan at 10 percent, the European Union at 9 percent, Taiwan at 6 percent and China at 5 percent. The United States also has a trade surplus in semiconductors, which is the fourth largest U.S. export, behind aircraft, refined oil products and crude oil. In 2018, the U.S. trade surplus in semiconductors was $4.5 billion, says SIA.
But China has vowed to expand its global market share by constructing new semiconductor plants (called “fabs”) and embracing the latest chip-making technologies. It’s unclear how much, if at all, China plans rely on technologies stolen or coerced from U.S. firms. Late last year, the Justice Department indicted a Chinese firm, Fujian Jinhua, for allegedly stealing trade secrets from a major U.S. chipmaker, Micron.
The U.S. industry fears that a surge in subsidized Chinese chip-making plants will create surplus capacity that will drive down prices and profits, putting unsubsidized foreign firms at a huge disadvantage. That has been the pattern in older technologies such as steel, says the CSIS’s Reinsch.
The trade negotiations have apparently made little headway in resolving these issues. Meanwhile, the tariffs that the United States has imposed on China’s exports may hurt U.S. consumers. So far, the Trump administration has announced 25 percent tariffs on $250 billion of Chinese exports to the United States and has threatened higher tariffs on another $300 billion, covering virtually all Chinese exports to the United States.
The crucial question is who bears the burden of the higher prices created by the tariffs. According to Gary Hufbauer of the Peterson Institute for International Economics, U.S. consumers ultimately shoulder most costs. The tariffs simply get embedded in the products’ final prices. Hufbauer estimates that if $500 billion in Chinese exports are hit with a 25 percent tariff, the annual cost for a three-person household would be $2,200. The existing tariffs cover about half of that. Hufbauer’s estimate also assumes that, shielded from import competition, U.S.-based firms would raise some domestic prices.
What the United States should have done is create a global coalition of major trading countries — itself, the European Union, Japan and other advanced societies — that would negotiate limits on subsidies, coerced technology transfers and a level playing field for competition between domestic and foreign firms. If China violated the rules and refused to join, the other countries could take action against its exports.
But this sensible approach was virtually eliminated when Trump decided to pull out of the Trans-Pacific Partnership, a trade agreement that could have done just that. Instead, we have a system that, through high tariffs, imposes the equivalent of a tax on American citizens to implement a trade policy that favors China.
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