On China: Applying 19th-century remedies to 21st-century problems

My op-ed in today’s The Hill:

Is it a trade dispute with China, or is it a trade war? If the latter, is it on hold, or not? The flip-flops in America’s trade relationship with China are coming in ever more frequently, as President Trump issues and rescinds threats.

To recap, before the election, Trump promised to declare China a currency manipulator on day one of his administration. That declaration never came; but then over the course of his administration’s first year came the equivalent of a “phony war” where no overt moves were made in trade policy.

Only some anti-dumping measures nearly a year into the new administration signaled a possible new direction. That all changed in March, as Trump announced a series of radical measures, rationalized on grounds of national security and intellectual property rights violations.

Why the policy incoherence?

It’s tempting to argue that it’s some kind of turf war between officials representing differing agencies, or personality conflicts bursting out into the open. The widely reported episode of Treasury Secretary Steve Mnuchin and White House National Trade Council Director Peter Navarro shouting at each other in front of the meeting venue in Beijing certainly lends credibility to those interpretations.

In my view, the interpretation of the disputes as being between nationalists and internationalists is overdrawn. Surely there is such a conflict, but perhaps there is as great a divide between the nationalists of various stripes. That is, even for those who view international trade as a zero-sum game, there is disagreement as how to proceed in a way that best protects U.S. interests.

Consider for instance the imposition of tariffs under Section 301 of the 1974 Trade Act. These measures are based on the argument that China is improperly violating the intellectual property rights of American firms operating in China, either through counterfeiting, patent infringement, the forced sharing of technology or industrial espionage — all “cheating” in the president’s parlance.

The proposed remedy is tariffs of 25 percent on Chinese exports to the United States. Some of the items covered in the proposed target list bear little relationship to the sectors in which such intellectual property infringements take place.

Hence, there is slight hope for the tariffs to actually punish the culprits. Nor is there much hope of inducing China to negotiate on this issue, given Chinese President Xi’s dedication to the development policy embodied in the “Made in China 2025” initiative.

It is the quintessential application of a 19th-century remedy to a 21st-century problem. Much better would have been a strengthening of intellectual property protections in the countries that China interacts with, in effect ring-fencing the country, and bolstering China’s emerging incentive for greater enforcement of intellectual property rights.

In other words, we should have implemented intellectual property measures that were incorporated in the Trans-Pacific Partnership agreement at the urging of the Obama administration’s negotiators.

What do tariffs address? The tariffs imposed under the little-used national security provision embodied in Section 232 of the 1962 Trade Expansion Act certainly are not in truth a response to security concerns in steel and aluminum sectors.

Now that the administration has apparently ended the EU, Canada and Mexico exemptions, these tariffs mostly target our allies (Japan was already hit in the first round). The idea that Canada would refuse to supply U.S. needs is ludicrous.

Due to already imposed anti-dumping duties, China was barely touched. The most recent investigation — into whether automobile production constitutes a national security concern — is even more ludicrous. For one thing, the largest exporters are again U.S. allies.

What then is the driving force for these measures? It is a deep misunderstanding by the nationalists of how trade deficits are created. As highlighted in the pre-election writings by Navarro and Commerce Secretary Wilbur Ross, some prominent officials view trade deficit as an artifact of unfair competition, and if only the trade deficit could be erased, GDP would be higher by a couple of percentage points.

With the bilateral U.S.-China balance equal to about half of the total U.S. trade deficit, it seems tempting to believe that by erasing that particular deficit, half the problem will be solved. In reality, trade deficits arise because of changes in the balance between national saving (private saving and government budget balances) and investment.

Tariffs on one country’s exports to America largely re-allocate the deficit between America and country X to country Y, while likely raising prices of imported goods.

What do hawks (maybe) have right?

The foregoing is not to deny the importance of trade relationships in benefitting Americans. Nor is it to argue there are no instances of bad behavior, particularly in the national security arena. However, the one instance of an effective measure — the imposition of sanctions on the Chinese electronics producer ZTE — has seemingly been traded away.

For what, we’re not sure. Was it Chinese cooperation on North Korea? Was it the Chinese loan to help finance a Trump Organization project in Indonesia? We might never know exactly because we are not trying to achieve our objectives with measures that are tailored to meet those objectives.

Stricter measures are needed in the area of foreign acquisitions of American companies that control sensitive technologies with military and national security applications. Up to this point, such acquisitions have been reviewed under the Committee on Foreign Investment in the U.S. (CFIUS) process, which requires voluntary application by the acquiring firms.

In the face of the increasing volume of Chinese direct investment in the U.S., this system probably needs some revamping. Interestingly, the legislation for reform has been pushed largely on a bipartisan basis in Congress, with little interest demonstrated by the White House.

Interpretation

Is it a problem that the administration has confused policy goals (and that some have little understanding of economics)? It certainly is for American and global economic welfare.

But the foregoing discussion suggests that Trump — as opposed to his administration more generally — is more interested in show for domestic political consumption — perhaps leavened by some atavistic desire to wreck some multilateral institutions — than actual policy implementation.

Once one realizes this, much of the theatrics that have taken place over the past year make perfect sense.

27 thoughts on “On China: Applying 19th-century remedies to 21st-century problems”

  1. pgl

    “But the foregoing discussion suggests that Trump — as opposed to his administration more generally — is more interested in show for domestic political consumption — perhaps leavened by some atavistic desire to wreck some multilateral institutions — than actual policy implementation.”

    That is one plausible explanation. I still say the SEC needs to investigate whether Trump’s cronies are trading (or short selling) stocks based on inside information.

      1. Dave

        I think it very much does matter. If Trump pardons a clear insider trading felon, then the whole drain the swamp talking point becomes weaponized against him.

  2. pgl

    Trump says Canada is cheating us on trade but the our balance of trade in goods and services was a $2774 million surplus in 2017. OK, we had a services surplus that exceeded $23 billion. Yes we imported $306 billion in goods and exported $282 billion in goods. So if one ignores the services surplus – one might get Trump’s nutty claim. Of course $50 billion of those imports were oil. Remove that one component and we have a yuuuge merchandise trade surplus in Canada.

  4. pgl

    Trump says our trade deficit with Mexico is in the “hundreds of billions” per year. No – less than $70 billion. But then Trump says Mexico took our ca companies. So when you buy that GM or Ford which was supposedly assembled in Detroit – Trump wants you to know it was assembled in Mexico City.

    Lord – how much Ambien did this fool take today?

    1. CoRev

      Pgl, surely you don’t refer to this tweet: ”

      Excellent Jobs Numbers just released – and I have only just begun. Many job stifling regulations continue to fall. Movement back to USA!
      5:45 AM – 4 Aug 2017 It was in the string of your reference.

      As I understand his tweet this AM it was similar to this: “looking forward to seeing the jobs numbers” Some one here must follow him, so they may provide a copy of his actual tweet.

      This over reaction is getting to be hilarious. Amazing. Every word of what you just said.. was wrong. 😉

      1. 2slugbaits

        CoRev I believe he was referring to this tweet:

        Looking forward to seeing the employment numbers at 8:30 this morning.

        It was sent 69 minutes before the 8:30 EDT embargo time.

        That’s the tweet that was in pgl’s link.

          2. CoRev

            2slugs, thanks. That was the gist of what I understood the Trump tweet to be. Where in pgl’s references did you find it?

          3. 2slugbaits

            Towards the top of the TalkingPointsMemo post look for the hyperlink word “tweet”.

  7. Moses Herzog

    Really enjoyed Menzie’s “The Hill” editorial. Although editorials give the writer more leeway to give opinions, Menzie’s was largely fact based, which is both refreshing and makes for good reading.

    Now Menzie, did you put that Arthur Laffer embedded video in just to piss me off?!?!?!! (friendly teasing) I have decided to forgive you since there was a Jennifer Garner video endorsement for a credit card, and I got to salivate over her luscious lips and hair for awhile. Jennifer Garner’s hot bawd is your reprieve for the embedded Laffer video.

  8. Ed Hanson

    Not that it is particularly important, but does anyone have a link to the words “day one” and “currency manipulator” directly from President Trump. I found the speech to Economic Club of New York which he was quite clear about currency manipulators, but it did not have the words “day one” (unless of course I missed it). It must be out there, so if anyone has it at there finger tips I would be grateful. But don’t spend anytime on it, it is not worth it.

    Ed

      1. pgl

        “Donald Trump’s Contract with the American Voter”.

        I thought the 1994 Newt Contract on America was the dumbest thing ever. Then came Paul Ryan’s “Better Way” which was much dumber. But Newt gets the bronze while Ryan gets the silver. This “contract” wins the gold medal in all time stupidity.

      2. Ed Hanson

        Thanks Menzie, Though the document that still exists does not exactly say ‘day one’, there is little difference between day one and day 100. But still not enough to continue to trumpet the ‘day one’ line yet.

        I will try ottnot’s excellent suggestion.

        Ed

        1. Menzie Chinn Post author

          Ed Hanson: This ABC News article provides the quote and links to a WSJ article that seemingly has had its URL changed. I remember the quote (since I teach and research on this issue of RMB misalignment). I would try searching the WSJ.

    2. ottnott

      Ed, if you don’t get stuck on “day one” and use “first day” instead, you’ll find what you need.

      1. Ed Hanson

        Thanks ottnot

        Using your idea, I was lead to the Gettysburg, PA (10/22/2016) First 100 Day Plan speech. Many items were labeled first day priorities. Certainly directing his Sec. of Treasury toward China currency manipulation was one of them. So that reasonably being settled, does anyone have documentation that President Trump did or did not make such a direction in the beginning of his term?

        Ed

        1. ottnott

          “Trump also has softened his tone in the past months. In an interview with The Wall Street Journal last month, Trump said that he wouldn’t name China a manipulator on his first day in office as previously promised. ‘I would talk to them first,’ he was quoted as saying. ‘Certainly they are manipulators. But I’m not looking to do that.'”

          I’m posting the relevant quote. You’ll never get that invitation to Galt’s Gulch if you don’t find the full article (or the WSJ interview, if you have passage through the paywall) yourself.

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