President Trump’s announcement Monday to impose tariffs on $200 billion worth of Chinese products is already drawing fire, but the tariffs are justified and in America’s national interest. They are also good for the world.
The president said tariffs of 10 percent will take effect Sept. 24 and will rise to 25 percent on Jan. 1. He added in a statement: “Further, if China takes retaliatory action against our farmers or other industries, we will immediately pursue phase three, which is tariffs on approximately $267 billion of additional imports.”
The tariffs will apply to thousands of Chinese products sold in the U.S., driving up prices to consumers and making U.S.-made products more competitive.
In June, the U.S. announced tariffs on $34 billion worth of Chinese products imported annually into the U.S., prompting exaggerated and off-target criticism that is now sure to intensify. The Trump administration imposed tariffs on another $16 billion worth of Chinese products in August.
“I would say the policies that are embraced by the U.S. administration around trade represent the biggest risk today to the global economy,” Philipp Hildebrand, vice chairman of BlackRock, the world’s largest asset manager, told CNBC.
And Hildebrand’s prediction is by no means the most dire. Some of President Trump’s critics are making it sound like the new decision to impose more tariffs on Chinese products will end international commerce as we know it.
The fundamental problem facing the global trading system today is that since the turn of the century China has behaved like an outlaw at the center of world commerce.
“My fear is that the global trading system will start to crumble, and if that happens, this will just be the opening salvo in a much larger trade war in the world,” said Emily Blanchard of Dartmouth’s Tuck School of Business before the new announcement. “If it does unfold that way, our problems will get much, much worse.”
But if the worst-case scenario occurs and markets crash, economies collapse and the global trading system falls apart, don’t blame President Trump. In reality, his policies are the best hope for continued free trade.
The fundamental problem facing the global trading system today is that since the turn of the century China has behaved like an outlaw at the center of world commerce. As trade expert Alan Tonelson told me, China does not believe in trade’s fundamental principle – comparative advantage.
Beijing, therefore, is seeking dominance of all the crucial technologies of tomorrow. To corner the future, Chinese President Xi Jinping launched his decade-long Made in China 2025 initiative, which seeks near self-sufficiency in 11 sectors (5G wireless communications was added in January to the original 10 areas).
CM2025, as the initiative is known in China, contains market-share quotas – a clear violation of World Trade Organization (WTO) rules. The initiative also includes subsidies and other features that almost surely run afoul of China’s trade commitments.
Made in China 2025 is just one of a series of industrial policies designed to make sure that the future is dominated by the Chinese. At the same time, Xi has been closing off China’s economy to outsiders with tactics like discriminatory law enforcement actions against foreign competitors.
Xi is also merging already gargantuan state enterprises back into duopolies and formal monopolies – it looks like he is about to combine China Telecom and China Unicom to aid Beijing’s push to control 5G technology. At the same time, he is clubbing multinationals with China’s now infamous Anti-Monopoly Law.
For example, Beijing’s State Administration for Market Regulation in late July effectively killed Qualcomm’s intended acquisition of NXP Semiconductors by not granting approval. All eight other affected countries had approved the deal.
Beijing is well-practiced in the art of not granting approval to foreigners. Take the case of American payment processors. In 2001, Beijing agreed to open its market to foreign competitors by 2006. China in 2012 lost a WTO case to the United States on the matter.
China has, through theft and forced taking, grabbed U.S. intellectual property worth hundreds of billions of dollars each year. This has, with justification, been called the biggest theft in history.
Nonetheless, Chinese officials – despite promises from Beijing and persistent badgering from Washington – are still refusing to issue rules permitting Visa, MasterCard and American Express into China. While Beijing stalled and dishonored promises to the companies, China UnionPay was able to obtain control of more than 90 percent of the Chinese market.
The case of the payment processors illustrates how Beijing has gamed the global trading system. WTO rules, incredibly, do not impose a penalty for trade violations unless a country continues a violative practice beyond an adverse decision by a dispute-resolution panel.
China has repeatedly taken advantage of that generous provision by committing obvious violations – allowing time to injure foreign competitors as dispute panels deliberate – and then remedying violations after adverse decisions. Or not remedying violations, as in the case of the American payment processors.
The U.S. has won every WTO case it has brought against China since 2004 – and many before that date – yet Beijing’s trade behavior has only deteriorated, especially in the last five years. Unfortunately, the rules-based trading system has proven inadequate to constrain a country determined to flout rules.
And the trading system has failed to stop the theft of intellectual property – creations of the mind, such as inventions, designs, works of literature and artistic works – that are often protected by patents, copyright and trademarks.
As detailed in the U.S. Trade Representative’s 215-page investigative report, issued in March – along with other studies, most notably reports of the Commission on the Theft of American Intellectual Property in 2013 and 2017 – China has, through theft and forced taking, grabbed U.S. intellectual property worth hundreds of billions of dollars each year.
This has, with justification, been called the biggest theft in history.
The losses to the U.S. have been grievous. Yet no amount of Washington’s shaming, cajoling, negotiating, or threatening has stopped this rampant Chinese conduct.
President Trump can’t arrest Chinese officials for theft, but he can impose tariffs to deter further crime.
The theft has been so large that some analysts, including Alan Tonelson, are arguing that the United States should simply avoid trading with China. In an email to me, the prominent critic said “disengagement is the objective that would make by far the most sense.”
Disengagement is where America is ultimately headed unless President Trump is successful. His remedy is the tariffs imposed on China under the authority of Section 301 of the Trade Act of 1974. In July, the president threatened to place tariffs on all Chinese products. Last year, the U.S. imported products worth $505.5 billion from China.
Nobody like tariffs. As Jacques deLisle of the University of Pennsylvania points out: “Tariffs and other measures targeting imports – which are a principal mechanism of self-help, sometimes legally authorized, and a favored tool of Trump administration policy – are crude and flawed instruments in an international economy characterized by complex global supply and value chains, many of which run through China.”
Yes, tariffs are not the perfect retaliatory instrument, but they promise to be more effective than other methods, like attempts at persuasion, bilateral agreements, or WTO cases. And tariffs just might do the trick with an export-dependent, debt-ridden China, which knows it does not have the means to resist the U.S. over the long-term.
What’s really eating Trump’s critics is that, as deLisle explains, “the United States has not played its customary role as principal patron of a law-based, multilateral order.”
President Trump’s self-help measures, like the Section 301 tariffs, may not pass muster under WTO rules. As a result, there is a risk that bypassing that organization’s dispute-resolution panels will result in the end of the rules-based trading order.
How so? China’s retaliatory measures – Beijing has already imposed tariffs on $50 billion of U.S. goods – also bypass the WTO.
The WTO, therefore, looks fragile. As an editorial published by Bloomberg Opinion recently noted, China has “pushed to the breaking point the multilateral trading system.” Because of persistent Chinese predation, the enforcement mechanisms of that trading system are now seen – by victims and perpetrators alike – as ineffective.
Ineffective organizations, no matter how noble their purpose, do not last. So we might soon see the demise of the WTO, which as a practical matter means the end of the rules-based trading order.
Those who criticize President Trump for his trade policy toward China are blaming the victim of what amounts to international crime. They should instead blame the culprit – China.
Something has to be done to stop Chinese criminality. Increasingly, the U.S. has an innovation-based economy, so theft of innovation is a critical threat. China will dominate our era if Americans cannot commercialize the technology they develop.
So there is much at stake. Many call the struggle between the U.S. and China a “trade war.” If it is, it is the trade war of the century because the rules-based trading system will survive only if China loses – in other words, if it is forced to comply with its obligations.
Everyone, therefore, has a stake in seeing President Trump’s tariff policy succeed. Democrat, Republican or independent, we all are victims of China.