Trump's trade war is unwinnable — because he's no longer in charge

Trump's trade war is unwinnable — because he's no longer in charge
© Getty Images

Donald TrumpDonald John TrumpStates slashed 4,400 environmental agency jobs in past decade: study Biden hammers Trump over video of world leaders mocking him Iran building hidden arsenal of short-range ballistic missiles in Iraq: report MORE’s on-and-off-again trade deal with China is off again. It will be on again — but not for long. That’s because Chinese President Xi Jinping is in control.

Unlike Trump, Xi doesn’t have to win an election. So he can prolong negotiations and the pain tariffs are causing Americans, most notably its farmers, who are key to Trump’s reelection and already grumbling. Americans’ tolerance for pain can only last so long.

Xi however can tolerate the tariffs indefinitely. Chinese consumers are hardly feeling the pain because Chinese exporters have not reduced their prices. China’s untapped domestic market will continue to sustain economic growth and avoid a recession. A recession in the U.S., however, would doom Trump’s reelection — an outcome Beijing can make more likely by prolonging the trade war.

ADVERTISEMENT

China’s $3.1072 trillion of foreign exchange reserves enables it to prevent and minimize economic downturns. China’s central bank can use the reserves to manage yuan’s value downward, to make Chinese products cheaper for foreign buyers, or upward, to stem capital flight. Its foreign exchange reserves also give foreign investors confidence that China’s central bank is well equipped to act should the economy falter.

It’s inconceivable that China would stop its intellectual property (IP) theft or its practice of forced technology transfer. China needs all the technology it can garner from as many sources as possible because its ability to innovate is inadequate given its goals. For example, China has a 10-year plan to dominate 10 manufacturing industries that depend heavily on advanced technology.

President Xi is fixated on China becoming the “master of its own technologies.” To get there, China is taking lessons from the other emerging Asian economies that co-opted and looted foreign technology and IP. China is clearly not an outlier in its transgressions. The Office of the U.S. Trade Representative recently cited 36 violators of IP theft rules.

China’s intense focus on technological superiority is illustrated by its spending on R&D. In 2019 China's central government will spend $52.8 billion on science and technology R&D, up from around $10 billion in 2000.

There are other indications that China intends to continue its abuses. Trump announced that a first-phase trade agreement was close. But it dealt only with tariffs and had no provisions for stemming IP theft or forced technology transfer. China also retracted previous commitments to end IP theft and technology.

ADVERTISEMENT

After Trump abandoned the Transpacific Partnership, which contained broad protections against IP and technology theft, China signed a successor trade agreement with would-be TPP countries, but eliminated many of those protections. The change underscores China’s penchant for easy access to technology.

President Xi can expect Republican tolerance for Trump’s tariffs to weaken. They’ve failed to make headway against IP or technology pilfering or the trade deficit with China, which increased from $347 billion when Trump took office to a record $419 billion in March of 2019. Republicans are already concerned that the economic slowdown from the tariffs will cost them their Senate majority. Xi would benefit should Congress reclaim its Constitutional tariff authority that it granted Trump.

Former Democratic Virginia Sen. Jim Webb tried to address China’s abuses by introducing a bill that would have prohibited U.S. companies from transferring technology developed with government assistance. But since China would deny those companies access to its massive markets, the prohibition would hit the companies’ profits, so the bill went nowhere.

The U.S. by itself can’t put enough pressure on China to change its practices. It would have to convince European countries to come down harder on China by, for example, prohibiting their companies from transferring technology to China, applying financial sanctions on Chinese public officials or switching their purchases from Chinese goods to goods from other countries.

That would be hard enough even if the U.S. had normal relations with its allies. But the Trump administration has lost their trust and alienated them with Trump’s tariffs, insultsthreats to withdraw from the WTO, and pulling out of the Iran nuclear deal and the Paris Accord. As Foreign Affairs magazine observed, “in the last two years, American hegemony died.” So has the willingness of our allies to cooperate with America.

Neil Baron advised the SEC and congressional staff on rating agency reform. He represented Standard & Poor’s from 1968 to 1989, was vice chairman and general counsel of Fitch Ratings from 1989 to 1998. He also served on the board of Assured Guaranty for a decade.