In trade war, US has economic edge, but China has political advantage

In trade war, US has economic edge, but China has political advantage
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Over the past few months, President TrumpDonald John TrumpTrump: Dems playing destructive 'con game' with Kavanaugh Several Yale Law classmates who backed Kavanaugh call for misconduct investigation Freedom Caucus calls on Rosenstein to testify or resign MORE has threatened punitive tariff increases — effectively economic declarations of war — with all of our major trading partners.

From one week to the next, no one — including the often conflicting senior officials within his administration — has been certain which country or countries would be among the president’s targets.

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After recently calling the European Union a “foe,” he has, for now at least, agreed to a vague commitment to settle his differences with the EU. The North American Free Trade Agreement (NAFTA) renegotiations with Mexico and Canada seem a bit more promising now but remain in a similarly uncertain state.

 

With China, the United States’ largest trading partner and its third-largest export market, we are now engaged in the first stages of a full-fledged trade war. Both countries — representing the two largest economies in the world — are destined for damage if this war lasts very long.

After only a few weeks, American agricultural exports and a number of other impacted sectors have already suffered significant losses.  

President Trump, who thrives on chaos, moving from one distraction to the next, promises that in the long run the trade war will somehow bring an end to the U.S. trade deficit with China.

Most economists have declared that Trump’s trade policies make no sense as a tactic to reach that goal without adopting macroeconomic policies addressing the domestic fiscal debt now headed to historic levels under Trump’s tax cuts.

In any case, after President Trump’s first tariff threats this spring, the Chinese offered to buy an additional $70 billion in U.S. goods to reduce the bilateral trade deficit partially, but Trump summarily rejected the offer.

Both sides, rhetorically at least, are preparing for a long trade fight while proudly waving nationalistic battle flags in the face of high political and economic risks. Trump seems to think that since the United States is less dependent on trade with China than China is with America, he has stronger economic leverage.

Marginally, he could be right, but Trump is weaker on political leverage, which may be more important. President Xi Jinping, who now has no term limits, is largely insulated from democratic political pressures.

While the Chinese have shown a willingness to make concessions to maintain economic stability, Xi and the Chinese people are also nationalistic and historically sensitive to being pushed around by Western powers.

Economically, China’s GDP growth rate has gone down in recent years but is still strong at 6.6 percent per year, and its declining currency value (now due to Trump’s attacks, not manipulation) will offset the tariff hikes to a degree.

China exported over $500 billion in goods to the United States last year, but that figure includes substantial value-added inputs from other countries and is offset by $130 billion U.S. exports. While China’s economy is fueled by exports to America, these exports represent only 4 percent of its GDP.

Trump’s marginal economic leverage will not offer much of an advantage in a drawn out war of attrition, especially given President Xi’s overriding resolve to revive China’s role as a great power.

The political handicap is clearly on the Trump side. Trump is the first Republican president to promote protectionism since Herbert Hoover. The only element of the Republican Party supporting the Trump tariffs is his nationalistic, anti-immigrant core. Meanwhile, the party leadership remains largely silent.

At a time when his party appears vulnerable three months before the midterm elections, he is staking out a trade position that is damaging many segments of the economy from which his core support originated. The president is out of step with the congressional leadership of his party, who long ago abandoned the protectionist GOP history of the robber-baron era.

Recognizing the potential economic damage to his supporters and its corresponding negative political impact, the Trump administration announced a plan to extend $12 billion in emergency subsidies to U.S. farmers, thus resorting to a Depression-era spending remedy for trade war destruction.

Ironically, both punitive tariffs and domestic subsidies were targets for elimination in the post-Depression, postwar negotiations for a rules-based trading system aimed at avoiding trade conflicts. Many trade lawyers consider Trump’s punitive tariffs unjustified under World Trade Organization (WTO) rules.

President Trump has taken a number of actions over the past 18 months undermining the effectiveness of the WTO and has expressed a desire to withdraw from the institution.

An adverse ruling by the WTO Dispute Settlement Body may prompt him to withdraw as he has done with other international institutions. But this withdrawal would require congressional approval.

Will Congress continue to remain silent as more harm unfolds from Trump-inspired chaos? Will another respected institution built under the prescient leadership of postwar American statesmen be allowed to crumble under his chaotic misrule?

Former Rep. C. Donald Johnson (D-Ga.) served as ambassador at the Office of the United States Trade Representative under President Bill ClintonWilliam (Bill) Jefferson ClintonLet’s confirm Kavanaugh and move on Feehery: Are you (October) surprised? Why must everything Rosenstein be filled with drama?   MORE. He is currently director emeritus of the Dean Rusk Center for International Law and Policy at the University of Georgia.