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THE BOTTOM LINE

Trump's trade war with China has become a huge fiasco

Washington

PRESIDENT Donald Trump's education in global trade continues. Not long ago, he declared that trade wars "are good and easy to win". He knows better now. The administration's performance in its latest trade talks with China has been ineffectual, instructive and (yes) humiliating.

Let's be clear. China is the one major country where an aggressive American trade policy is warranted - unlike Mr Trump's decisions to withdraw the United States from the Trans-Pacific Partnership (TPP) or to renegotiate the North American Free Trade Agreement (Nafta). These were exercises in grandstanding, intended to impress his supporters.

In reality, these moves damaged American interests. They alienated our allies and trading partners, from Canada and Mexico (Nafta) to Japan, Australia and Chile (TPP). Mr Trump's obsession with trade deficits further muddies the debate.

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By now, it must be obvious that US trade deficits are connected loosely, if at all, with the unemployment rate, which is now 3.9 per cent - the lowest since 2000. Meanwhile, the US trade deficit in 2017 was US$566 billion.

The explanation for the apparent paradox is the dollar's role as the major international currency, used to conduct trade and investment among many (non-US) countries. The extra demand for dollars raises its exchange rate, making US exports costlier and imports cheaper. The result is a structural US trade deficit.

The China problem is different. China practises what is variously called "state capitalism" or "industrial policy". The state supports and subsidises industries that it considers vital to its future. China's state capitalism is ambitious. Its centrepiece is the "Made in China 2025" programme, which envisions that Chinese companies will dominate major manufacturing sectors (semiconductors, telecommunications equipment, commercial aircraft, electric vehicles and the like). As part of this programme, China coerces technology transfers from US and other multinational companies to local businesses. Foreign companies receive a choice that is hard to refuse: Transfer your technology or lose access to China's vast local market. In effect, Chinese businesses are being trained and financed by their foreign competitors. It's high-technology extortion.

American and foreign multinationals effectively pay a large part of Chinese companies' research and development. The scale is impressive. A recent survey of 325 US China-based firms found that 35 per cent faced pressures to turn over their technology. These transfers occur in many ways: US firms conclude joint-venture agreements with Chinese partners; licensing fees for American firms are set at artificially low levels; Chinese firms merge with foreign firms that have advanced technologies. The implications are also military; many advanced technologies have "dual uses", defence as well as civilian.

During the 2016 campaign, Mr Trump denounced China's outrageous practices and pledged to eliminate them. Here's where things went awry. To pressure the Chinese - to persuade them to buy more American goods and to shrink the technology transfers - the President proposed 25 per cent tariffs on up to US$150 billion of Chinese imports into the United States. Well, guess what? China retaliated with its own high tariffs.

To make a long story short, once China adopted high tariffs, Mr Trump backed down on his high tariffs. The negotiations resulted in a bland pledge from China to buy more oil and food products from the United States, some of which would have been purchased anyway. In the first quarter of 2018, food and energy represented 11.7 per cent and 8.3 per cent, respectively, of US exports to China.

The complete story of why Mr Trump changed his mind on China trade has yet to be told, though the media report bureaucratic feuding between Treasury Secretary Steven Mnuchin (an alleged opponent of high tariffs) and trade representative Robert Lighthizer (a supporter).

It is argued that slapping China with high tariffs might provoke a real trade war and derail the global economy. True. That's the dilemma. To do little about forced technology transfers puts US firms at a competitive disadvantage. Doing too much threatens a global slump.

The Trump administration has not thought through these difficult problems. Emblematic of the confusion is the treatment of ZTE, a Chinese telecommunications firm with worldwide operations. The US Commerce Department censured the firm for violating US trade embargoes with North Korea and Iran; the punishment was to prohibit US electronics firms, such as Qualcomm, from selling components to ZTE.

This is precisely the sort of selective sanctions that might work against China. In effect, the Commerce Department order was a death warrant for ZTE, because without the US semiconductors, ZTE couldn't manufacture its products. But after a personal appeal from Chinese president Xi Jinping, Mr Trump ordered Commerce to modify the order so ZTE would survive. Go figure. Mr Trump has now further muddled matters by suggesting a 25 per cent tariff on vehicle imports.

This is the larger story: The post-World War II trading system is being slowly dismantled. On that, Mr Xi and Mr Trump agree, even if they can't decide who should run it. THE WASHINGTON POST WRITERS GROUP