Trade war and peace: Policies should unite allies, make lasting reforms

China announced on Sunday that it would impose tariffs on $3 billion of U.S. exports in response to U.S. tariffs on a like amount of Chinese steel and aluminum products.

This first round of tariffs was imposed on China (and all other countries) by the Trump administration following its investigation under Section 232 that concluded that imports of steel and aluminum threaten U.S. national security.

{mosads}But this round of reprisals, and Monday’s almost-500-point drop in the Dow, were only a warm-up for the main event: the retaliation cycle that will surely follow the publication by the Office of the U.S. Trade Representative later this week of a list of about $50 billion of Chinese exports subject to tariff increases as a result of the administration’s separate Section 301 investigation of China’s unfair trade practices. 

The public debate over these actions has thus far focused on whether imposing tariffs — essentially a tax on U.S. consumers — is the right approach and the potential fallout from a trade war with China.

Perhaps more interesting is what a trade peace looks like: Will the president work with like-minded allies to seek systemic reform in China or focus only on short-term measures to reduce the trade deficit?

The Section 301 investigation exhaustively detailed China’s unfair trade practices, which harm a broad swath of U.S. companies. It documented longstanding concerns that China’s state-directed model of economic development, much of which is not covered by global trade rules, prevents U.S. companies from competing on a level playing field. 

The investigation shows that the administration is right to seek changes to China’s trade and investment regime.  But the president’s primary stated goal to date has been for China to reduce its trade surplus — his principal metric for “fair” trade. 

Reducing our trade deficit with China through the purchase of a few big ticket products may allow President Trump to declare a political victory, but that “victory” will be hollow and short-lived. Nothing meaningful will have been accomplished to address persistent market access barriers and discriminatory practices — or even to rebalance trade in a sustainable way.  

Now that the administration has begun the Section 301 process against China, it should use this leverage to negotiate real reforms, including eliminating restrictions on foreign ownership, forced technology transfers and other intellectual property rights violations and market-distorting subsidies. 

This approach is consistent with the purpose of Section 301: to eliminate unreasonable or discriminatory trade practices that burden or restrict U.S. commerce. This is also the correct approach if the United States wishes to enlist the support of our allies, who fully share our concerns about China’s predatory commercial practices.

One-off purchases of U.S. goods by China to reduce temporarily the trade deficit may benefit some but not all U.S. exporters and would come at the expense of EU and Japanese products, for example. By contrast, insisting on systemic reform will benefit U.S. economic interests more broadly, as well as those of countries whose cooperation we need. 

Regrettably, the administration hamstrung its ability to rally allies by claiming (wrongly, according to the U.S. secretary of Defense) that national security considerations under Section 232 required imposing steel and aluminum tariffs on them. 

The administration quickly made clear that exemptions from these tariffs would be on offer to those countries willing to negotiate sector-specific, trade deficit-reducing measures — all in areas unrelated to U.S. national security interests.

There are two casualties to this approach. First, by invoking national security for what the president has subsequently shown was pure protectionism, the administration has invited and largely substantiated a challenge at the World Trade Organization (WTO). 

If the WTO rejects the national security claim as merely a pretext and rules against the United States, that result may lead the trade hawks in the president’s cabinet to call for withdrawal from the WTO.

The second and more immediate casualty from the 232 action is the U.S. ability to lead collective action against China’s trade practices. Instead of holding friendly trading partners hostage in order to secure bilateral concessions, the administration should unconditionally exempt them from the steel and aluminum tariffs and seek their cooperation on China. 

A united front will prevent China from playing our allies off against us, and will reinforce the verdict of the rest of the world that it is China’s actions — not those of the United States — that constitute the preeminent threat to global trade and must change.   

The U.S. administration has an opportunity to lead a coalition of like-minded countries in addressing the challenge China poses to the global trading system. To succeed, the administration must abandon its opportunistic adventurism against our allies and assure them that the victory it seeks against China will be enduring and benefit all.

Daniel M. Price is managing director at Rock Creek Global Advisors, an international economic policy advisory firm. He previously served as the International Economic Affairs advisor to President George W. Bush.