Why China Won’t Yield to Trump

China may give Donald Trump some face-saving way out from the trade war he has started, but it won’t offer any substantive concessions. In other words, Trump’s tariffs will do nothing to improve America’s external balance, output, employment, or real wages.

.. some defend Trump’s actions as a  to impel China to adjust its trade policies, such as the requirement that foreign companies share their intellectual property (IP) to gain access to the Chinese market.

.. Trump does not understand the basics of such a negotiation: he thinks that a country with a trade deficit necessarily has the stronger negotiating position. In reality, the surplus country is often in the stronger position, because it has accumulated financial claims against its “opponent.”

.. China does not necessarily even have to sell to wield influence. With US debt expanding and interest rates on the rise, even rumors that the Chinese might stop buying Treasury securities could be enough to drive down US bond prices and accelerate the increase in US interest rates.

.. While industries and consumers in China would also be hurt by a trade war, that country’s leaders can overrule interest groups and stifle protests.

In any case, public opinion will largely back retaliation against the US.

.. The Chinese remember well the Opium Wars of the nineteenth century, when the Middle Kingdom tried and failed to resist the British campaign to force it to open its economy to opium and other imports.

.. Add to that Trump’s reputation for flip-flopping, and the odds that Chinese leaders would bother making a deal with Trump to change their country’s trade policies seem small.

.. Even if China did decide to concede something to Trump, it would not be meaningful.

.. China could export less merchandise to the US directly, instead routing products through Taiwan and other countries, where some final assembly could take place.

.. The result would be economically meaningless; but so is the concept of the bilateral deficit itself, as Chinese exports to the US contain a high proportion of intermediate inputs produced in South Korea, the US, and elsewhere.

.. What really matters is that China’s current-account has been falling since 2008, and now stands at a relatively small 1% of GDP.

.. America’s external deficit is growing, but that is the result not of trade policy; it stems from Republicans’ , which is blowing up the budget deficit and reducing national saving.

.. As for Trump’s complaints about China’s IP “theft,” there are some valid grievances on this front. But addressing this issue requires technical expertise and negotiating skill, not blunt threats based on inadequate knowledge.

Crucially, it would also require cooperation with other partners who have similar grievances with China, ideally including pressure applied through rules-based institutions like the World Trade Organization.

Trump is pursuing the opposite strategy, arguing that neither multilateralism nor bilateral negotiations work with China. Yet such tactics have helped to compel China to allow a 37% appreciation of the renminbi in 2004-2014 and to crack down on counterfeiting of US merchandise and theft of US software.

.. Trump may also want to avoid the WTO because the US doesn’t win all of the cases it brings there. But it does have a 90% success rate. And it is not as if the US has never violated international rules

 

The Art of the Flail

Whenever investors suspect that Donald Trump will really go through with his threats of big tariff increases, provoking retaliation abroad, stocks plunge. Every time they decide it’s just theater, stocks recover.

.. while trade is one of Trump’s two signature issues — animus toward dark-skinned people being the other — when it comes to making actual demands on other countries, the tweeter in chief and his aides either don’t know what they want or they want things that our trading partners can’t deliver. Not won’t — can’t.

.. In some ways, China really is a bad actor in the global economy. In particular, it has pretty much thumbed its nose at international rules on intellectual property rights, grabbing foreign technology without proper payment

But if getting China to pay what it owes for technology were the goal, you’d expect the U.S. both to make specific demands on that front and to adopt a strategy aimed at inducing China to meet those demands.

.. In fact, the U.S. has given little indication of what China should do about intellectual property. Meanwhile, if getting better protection of patent rights and so on were the goal, America should be trying to build a coalition with other advanced countries to pressure the Chinese; instead, we’ve been alienating everyone in sight.

.. Anyway, what seems to really bother Trump aren’t China’s genuine policy sins, but its trade surplus with the United States

.. Over all, the U.S. trade deficit is just the flip side of the fact that America attracts more inward investment from foreigners than the amount Americans invest abroad.

.. A decade ago, China’s current account surplus — a broad measure that includes trade in services and income from investments abroad — was more than 9 percent of G.D.P., a very big number. In 2017, however, its surplus was only 1.4 percent of G.D.P., which isn’t much.

.. But in that case, why is “bilateral” trade between the U.S. and China so unbalanced? The answer is that it’s largely a kind of statistical illusion. China is the Great Assembler: it’s where components from other countries, like Japan and South Korea, are put together into consumer products for the U.S. market. So a lot of what we import from China is really produced elsewhere.

.. It’s not clear why we should demand that China stop playing that role.

.. it’s not clear that China could even do much to reduce its bilateral surplus with the U.S.: To do so, it would basically have to have a completely different economy. And this just isn’t going to happen unless we have a full-blown trade war that shuts down much of the global economy as we know it.

.. Oh, and a trade war would also devastate much of pro-Trump rural America, since a large share of our agricultural production — including almost two-thirds of food grains — is exported.

 

The Case for Responsible Nationalism

The excesses of globalization are real, but trade wars aren’t the answer.

More than two decades ago, Harvard economist Dani Rodrik warned that globalization was driving a wedge between workers who had the skills and mobility to prosper in the global economy and those who did not. The key challenge, he argued, was to make globalization “compatible with domestic social and political stability”—that is, to ensure that international economic integration “does not contribute to domestic social disintegration.”

.. International trade weakens the postwar social contract between American employers and their workers. Less-skilled workers often are forced to accept lower wages, inferior benefits and diminished job security. Leading economists acknowledged that increased trade with lower-wage countries would widen the gap between highly skilled and less-skilled workers in advanced economies, but they played down the magnitude of these effects.

Western policy makers embraced the Panglossian assumption that maximizing open markets and minimizing social policy would produce better living standards for all. The West assumed that its edge in innovation and productivity would enable it to dominate in the 21st century as in the decades after World War II.

..  China’s accession to the World Trade Organization in 2001. Yes, China had a large state-owned sector, used public resources to encourage the private economy, and broadly subsidized its producers. But over time, the thinking went, the communists would see the folly of propping up inefficient producers. The state sector would shrink, and the market would become more powerful. China’s economy would converge with the Western model, and its political institutions eventually would evolve too.

Democratic and Republican administrations then presided over a flood of Chinese imports that gutted entire sectors of the U.S. economy. After a period of stability in the 1990s, U.S. manufacturing employment shrank by more than three million between 2001 and 2007—before the onset of the Great Recession, which destroyed another two million jobs. These developments hit rural and small-town areas with particular force, creating the geographically concentrated sense of abandonment and loss that helped propel Mr. Trump to the White House.

.. automation—not protectionism—is the key to the future.

.. the Trump administration should focus, as it belatedly has begun to do, on the forced transfer and sometimes outright theft of American intellectual property. If necessary, U.S. laws and regulations should prevent American corporations from yielding information about technologies that will shape the future in return for access to China’s market.

Trump Administration Tells Lawmakers China Trade Actions Are Needed

Mr. Lighthizer, in his formal statement, wrote that actions against China were necessary because the World Trade Organization “has proven to be wholly inadequate to deal with China’s version of a state-dominated economy that rejects market principles.” He didn’t repeat that sentence during his oral remarks.

.. “Our view is we have a very serious problem losing our intellectual property, which is the single biggest advantage of the U.S. economy,” Mr. Lighthizer said. “We are losing that to China in ways that aren’t reflective of the underlying economics.”

Some Things Are True Even if Trump Believes Them

One of the hardest things to accept for all of us who want Donald Trump to be a one-term president is the fact that some things are true even if Donald Trump believes them! And one of those things is that we have a real trade problem with China. Imports of Chinese goods alone equal two-thirds of the global U.S. trade deficit today.

.. he’s so weirdly obsessed with protecting “manly” industries like coal, steel and aluminum that affect our allies more than China — and he’s built such a chaotic policymaking process and unilaterally surrendered so much leverage to Beijing — that he can’t be relied upon to navigate the China trade issue in our national interest.

.. David Autor, the M.I.T. economist who’s done some of the most compelling research on the impacts of China trade

.. the “shock” that China delivered to U.S. lower-tech manufacturers in the years right after Beijing joined the World Trade Organization in 2001

.. roughly 40 percent of the decline in U.S. manufacturing between 2000 and 2007 was due to a surge in imports from China primarily after it joined the W.T.O.

.. it led to the sudden loss of about one million factory jobs in Ohio, Michigan, Wisconsin and Pennsylvania. Trump won all of those states.

.. This “China shock,” said Autor, led not only to mass unemployment but also to social disintegration, less marriage, more opioid abuse and more people dropping out of the labor market and requiring government aid.

.. “International trade creates diffuse benefits and concentrated costs,”

..  has created identifiable losers in trade-impacted industries

.. We assumed that China would “reform and open” after it joined the W.T.O.,

.. Instead, China “reformed and closed.” So China kept a 25 percent tariff on new cars imported from the U.S. (our tariff is 2.5 percent)

.. China grew its companies behind a wall of protection, fed them with state funds and, when they were competitive enough, unleashed them on the world

..  “Chinese and foreign makers are about to start sending huge numbers of fully built cars to the U.S. We are about to see a big increase in the U.S. trade deficit in automotive in the next several years.”

.. U.S. tech firms, like Apple, that want to offer cloud services to Chinese citizens have to store the data in China on servers operated by a Chinese partner. The U.S. has no such regulation.

.. “if they don’t accept demands to partner with Chinese companies and store data in China, then they risk losing access to the lucrative Chinese market, despite fears about trade secret theft and the rights of Chinese customers.”

.. “no US auto company is allowed to own even 50% of their own factory in China, but there are five 100% China-owned EV auto companies in the US.”

.. American electric vehicle (E.V.) companies operating in China are forced to have a Chinese partner and transfer technology to them.

.. they are also playing by a set of rules that others would be naïve to ignore.

.. So what would a smart American president do? First, he’d sign the Trans-Pacific Partnership trade accord. TPP eliminated as many as 18,000 tariffs on U.S. exports

.. focused on protecting what we do best — high-value-added manufacturing and intellectual property.

.. China was not in TPP. It was a coalition built, in part, to pressure Beijing into fairer market access, by our rules. Trump just gave it up for free.

.. “Since you like your trade rules so much, we’re going to copy them for your companies operating in America: 25 percent tariffs on your cars, and your tech companies that open here have to joint venture and share intellectual property with a U.S. partner — and store all their data on U.S. servers.”

.. Having a really tough trade negotiation with China on manufacturing and high technology, but doing it in secret, makes sense to me.

Starting a public trade war with our allies over aluminum and steel that raises the costs for our manufacturers, that doesn’t protect our growth industries and that loses allies that we need to deal with China makes absolutely no sense.

.. We needed to be, and still need to be, much more serious, and generous, about creating “wage insurance” and community reinvestment policies for people and places whose employers are suddenly wiped out by a trade shock.

.. tax incentives, Pell grants, community colleges — to create the conditions for every American to be constantly upgrading skills

.. Too much of the economic discussion of late “has been focused on the 1 percent versus the 99 percent,” observed Autor. “It’s become a kind of ‘inequality porn’

.. You lose sight of the fact that there is a dramatic rise in the economic return to tangibly acquiring skills — skills that are available and should be within everyone’s reach.”

.. The lack of real meritocracy in our country today, he added, “is not about the returns to realized skills. It is about the inequality in the ability to acquire those skills.

.. If you get educated in America today, and have a good work ethic, you are going to be rewarded.’

.. What does education do? It gives you a skill set and enables you to adapt to change better.

And cities and towns anchored by universities tend to reinvent themselves more easily; they’re engines of adaptation.