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1 December 2018

Who is Trump's trade war really helping?

Jeff Spross

Hopes were high that a meeting between Trump and Chinese President Xi Jinping, at the G20 summit in Argentina this Friday, could produce a deal to ratchet back Trump's tariffs. But on Monday, the president told the Wall Street Journal that outcome was "highly unlikely" — and then threatened to tighten the screws on China even further.

Yet if Trump really wants to help American workers, then he needs to demand the right concessions from China.

Right now, he isn't.


Frankly, this being the Trump administration, it can be difficult to figure out precisely what the president wants. Even the Chinese seem to be frustrated. But several demands are pretty clear.

One thing Trump wants is for China to bring down its "barriers" to entry. Beijing requires any foreign business opening up shop in the country to partner with a domestic Chinese business. By definition, this usually means handing intellectual property, technology, and business know-how over to the partnering Chinese firm. (And over to the Chinese government by extension, as a lot of corporations there remain state-run.) Beyond that, China has lots of rules on a whole slew of subjects that make it difficult for U.S. companies — or any other foreign businesses — to get a foothold in the Chinese market. The Trump administration wants China to reform all these practices.

"I think the president is exactly right to show strong backbone ... [to] break through these Chinese walls," Larry Kudlow, the head of Trump's National Economic Council, told reporters on Tuesday. "We have to protect our technology, our inventiveness, our innovation." Trump himself insisted to the Journal on Monday that China "has to open up their country to competition from the United States” and “they have to take down their barriers."

Of course, China is a sovereign country and can impose whatever regulations it wants. Accordingly, American businesses are free to decide whether the benefits of opening shop in China are worth the costs of compliance. Yet you can certainly understand why American corporations and business leaders, used to the United States' free market approach, would find China's practices grating — and why they want the Trump administration to arm-twist the Chinese into changing course.

But that's the thing: Those are demands organized around the interests of big business.

Trump said he was for the workers, the little guy, the "forgotten American." He rails against job loss in the American heartland and places much of the blame on China for "ripping us off." In that same Journal interview, Trump once again pointed to America's trade deficit with China, a favorite hobbyhorse of his: "It's been such a terrible one-way street with China having — with a deficit of at a minimum $375 billion a year, and it's for a long time," he said. And this all makes crude economic sense: If creating more jobs is what you're concerned about, the trade deficit is the key issue. It means American demand is leaving to create jobs in China, but not enough demand is coming back from China to replace it.

Unfortunately, neither opening up China's markets to U.S. businesses, nor protecting American technological know-how, will do much about the trade deficit or consumer demand. It might create more work for U.S. patent lawyers. And more U.S. investment in China could certainly create more jobs for Chinese workers. But by and large, the benefits to Americansof these policies will flow overwhelmingly to the rich shareholder class in the form of more corporate profits, legal fees, and returns.

Granted, Trump also wants the Chinese to buy more American goods and to drop some of their own tariffs on U.S. exports. But these demands seem to be afterthoughts. They also miss the fundamental cause of the American trade deficit with China, which is the imbalance in the value of our respective currencies. Fix that and flow of goods between the two countries will naturally move into greater balance as well.

In fact, there was a time when Trump was flirting with labeling China a currency manipulator. But then the White House backed off for technical reasons. It's not so much that China needs to be labeled as such — just that the currency question is where Trump's focus should be, and it isn't any more. Even now, Trump could meet with Xi Jinping on Friday and tell the Chinese president he wants the currencies rebalanced as the price for ending the trade war. China has a sophisticated economic policy apparatus, with a central bank and massive reserves of U.S. dollars. It could easily make that happen.

In fact, the United States has convinced other trade partners to rebalance their currency policies with exactly this strategy.

The problem is, while Trump has the gumption to buck the elite consensus on trade, he has neither the principles nor the intelligence to build a meaningful alternative. As a result, the goals of his trade war have been captured by the interests of the GOP's big corporate backers who don't really care about currency manipulation.

Meanwhile, the Chinese insist they already are moving to address Trump's demands. "The development of the Chinese economy in the future can only be guaranteed on the basis of even greater openness," Liu He, China’s vice-premier, said recently. "On strengthening [intellectual property rights] protection, we understand this is an area of special interest to our foreign friends." Nor does it sound like China is in a mood to be accommodating if Trump doesn't back down.

At any rate, Trump has already slapped tariffs of 10 percent on $200 billion worth of Chinese exports to America. He's planning to crank those up to 25 percent in January — a plan the Chinese are eager to dissuade him from this week. But as Trump told the Journal, he doesn't want to back down. In fact, if the G20 summit doesn't produce a deal to his liking, Trump is threatening to impose tariffs on the remaining $267 billion worth of Chinese exports.

It seems Trump's trade war with China will continue. Who will benefit is another question.

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