Why the China trade war is justified

Why the China trade war is justified
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The trade “war” between the United States and China is exaggerated and overblown. Seemingly stark numbers pale against national net wealth in excess of $99 trillion and annual consumption expenditure in excess of $14 trillion at the end of 2018. President TrumpDonald John TrumpMarine unit in Florida reportedly pushing to hold annual ball at Trump property Giuliani clashes with CNN's Cuomo, calls him a 'sellout' and the 'enemy' Giuliani says 'of course' he asked Ukraine to look into Biden seconds after denying it MORE has noted an action that would matter, which is using the International Emergency Economic Powers Act (IEEPA) to order American firms to exit China operations. Use of IEEPA should be sparing, but a few actions would be justified.

Start with what is not justified. IEEPA is the international economic equivalent of martial law and should not be casually invoked. Even if aggregate or bilateral trade deficits are deemed serious problems, they are not emergencies, as shown by the solid economic performance of the United States despite an aggregate trade deficit of $621 billion last year, more than 60 percent of which is with China alone.

Nor should IEEPA be a method to simply add tariffs. The obvious reason is that the United States already has sufficient tools to do that. More subtle is that the 10 percent or 25 percent tariffs are not responses to a true international emergency. An example of such a response would be an outright ban on a large quantity of goods viewed as indirectly dangerous to the country. This is what IEEPA should be used for.

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Very few changes in exchange rates qualify as an emergency. The yuan is falling against the dollar, about 15 percent down from its peak and with more declines likely to come. If that is the case, it may soon warrant American action. But IEEPA itself should only be considered for currency change of a magnitude that can broadly disrupt United States trade in a sudden 50 percent drop rather than a gradual 15 percent fall.

What else qualifies? Back in 2003, IEEPA was used to cut off financing to terrorist organizations. Regarding China, military clashes with the United States or our allies in the South China Sea or Taiwan would plainly justify use of IEEPA. If Chinese security forces use force against protesters in Hong Kong, then IEEPA should be invoked to reduce material support from the United States, from the dollars spent on Chinese imports to exported parts found in the telecom equipment of security forces.

The scope of application for IEEPA should be otherwise narrow. One case would be American design or components assisting dangerous new Chinese military equipment. Along the same lines, a potential near term Chinese breakthrough in an economically transformative technology, say artificial intelligence, might justify emergency action.

Much more likely, however, is a sustained and long term Chinese challenge in military or economically transformative technology, based on heavy spending and the theft of intellectual property. For this scenario, there is a gap in American policies that Congress partly addressed by upgrading the review process for inbound foreign investment and export controls in the 2018 National Defense Authorization Act.

The gap remains because the needed implementing regulations have yet to emerge. A key position for this process, undersecretary for industry and security at the Commerce Department, has been unfilled for more than a year, and there is no present nominee. While these regulations are absent, incomplete, or inadequate, the United States can face a choice of inaction on a critical issue or improper application of IEEPA.

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This unpleasant choice may partly explain why President Trump jumped from overblown tariffs to a sweeping public statement about American companies departing China. Even if it was just rhetoric, it does not make economic sense to lump together semiconductors, consumer goods procurement, food processing, and more as if they pose the same risk.

But the United States does not have a clear way to separate truly vital sectors from those less important. Finishing this task is important in ensuring IEEPA is not invoked unnecessarily, among other benefits. The other criterion is the when, which is only during military conflict, political violence, or a sharp change in economic conditions.

China does have the size to make its policies matter to the point of an emergency, the potential to use force, and a drive over several decades to acquire technology by any means short of war. Its actions may thus call for using IEEPA, even after the United States finishes its new policy tools and sets aside lesser matters such as bilateral trade deficits.

Derek Scissors is a resident scholar at the American Enterprise Institute.