If there’s a trade war between the U.S. and China, don’t blame Donald Trump, says The Wall Street Journal's Greg Ip: China started it long before he became president.
While definitely not toeing the line of the mainstream media's ubiquitous 'Trump is an idiot' narrative, Ip explains below that, if they're honest with themselves, even free traders and internationalists agree China’s predatory trade practices - which include forcing U.S. business to transfer valuable technology to Chinese firms and restricting access to Chinese markets - are undermining both its partners and the trading system.
Mr. Trump’s China crackdown is risky, but it’s on firmer legal, political and economic ground than many of his other trade complaints, for several reasons.
1. These products are different: The classic case for free trade predicts that each country specializes where it has a comparative advantage, lowering costs and raising incomes for everyone. If China subsidizes exports of steel to the U.S., in theory the U.S. still benefits because consumers and steel-using industries will have lower costs, and while some steel jobs will disappear, more productive jobs elsewhere will take their place.
But starting in the 1980s, economists recognized that comparative advantage couldn’t explain success in many industries such as commercial jetliners, microprocessors and software. These industries are difficult for competitors to enter because of steep costs for research and development, previously established technical standards, increasing returns to scale (costs drop the more you sell), and network effects (the more customers use the product, the more valuable it becomes).
In such industries, a handful of firms may reap the lion’s share of the wages and profits (what economists call rents), at the expense of others. China’s efforts are aimed at achieving such dominance in many of these industries by 2025.
“China is undermining or taking away some of our rents, so we are relatively worse off and they are better off,” says Douglas Irwin, author of “Clashing over Commerce: A History of U.S. Trade Policy.” Unlike Mr. Trump’s tariffs on steel and aluminum, “a lot of economists would hold their fire in terms of attacking Trump for his China actions. I don’t think anyone can really defend the way China has moved in the past few years, violating intellectual property and forced technology transfer.”
2. The WTO isn’t enough: When China joined the World Trade Organization in 2001, many advocates thought it would play by the global rules against advantaging its own firms and hurting others. Instead, China does so anyway in ways not easily remedied by the WTO.
Rob Atkinson, president of the Information Technology and Innovation Foundation, notes that a WTO case typically requires evidence from an aggrieved company. But many foreign companies are reluctant to complain about their treatment in China for fear of retaliation, such as being investigated for antitrust, consumer abuse, fraud or espionage, or losing sales to state-controlled companies. With no balance of powers or independent courts, “there is no rule of law to constrain Chinese officials from implementing arbitrary and capricious mercantilist policies,” Mr. Atkinson and two co-authors wrote in an extensive critique of China a year ago.
It is also difficult to hold China accountable for its WTO obligations because its system is so opaque. Mr. Atkinson says many discriminatory measures aren’t published, or published only in Chinese. When the central government, under external pressure, rescinds some discriminatory measures, they reappear at the provincial and local level, he says.
3. The U.S. isn’t alone: Mr. Trump’s steel and aluminum tariffs were widely panned for hitting both China and law-abiding allies like Canada and western Europe alike.
By contrast, his ire at China is widely shared. French President Emmanuel Macron has called for a unified European Union policy against Chinese corporate takeovers.
“Everyone who trades with China faces this problem,” Peter Navarro, Mr. Trump’s trade adviser, told reporters Thursday. “Part of the process that we’ve undergone … is to have a significant outreach to our like-minded allies and trading partners.”
4. China isn’t like Japan: For decades, Japan, like China now, sought to help Japanese firms by limiting foreign access to its market, providing direct industrial support, and pushing western companies to license their technologies. Japanese companies did catch up in autos, electronics and computers, but the U.S. leapt ahead in new industries such as software and services. Japan’s economy entered a long slump in 1992 and hasn’t entirely escaped. Some say the current panic about China is similarly misplaced.
But Japan is different. It is a military ally and is thus sensitive to U.S. pressure on trade. China is a geostrategic rival pursuing and sometimes stealing U.S. secrets for both civilian and military purposes. Where Japan is democratic and transparent, China is authoritarian and opaque.
The scale is also different. Mr. Irwin notes that in 1987, President Ronald Reagan hit $300 million worth of Japanese imports with 100% tariffs for its failure to open its market to U.S. semiconductors. That pales next to the $50 billion worth of damage Trump officials say China’s trade practices inflict.
“New plays and musicals are often tried first in Philadelphia or Boston before going to Broadway,” says Clyde Prestowitz, president of the Economic Strategy Institute. “Well, Japan was Philadelphia. Now, with China, we’re on Broadway.”
Japan was reluctant to retaliate because it valued its political and strategic ties with the U.S. China under President Xi Jinping is turning more nationalist and adversarial, making it more willing to retaliate than Japan was.
This, however, means that the collateral damage of a trade war, and thus the risks of Mr. Trump’s strategy, are also much greater. The breadth of his action elevates the potential harm to American consumers, supply chains and exporters.
Mr. Irwin says it isn’t clear that Mr. Trump’s strategy is right. Taking China to the WTO might be a less dangerous approach. But he adds: “No one is saying we shouldn’t do anything.”