The right way to beat China on trade

The right way to beat China on trade

There’s already a trade war, and it’s being waged by Beijing.

China’s ascension to the World Trade Organization nearly 20 years ago has failed in its large-scale strategic objectives. It hasn’t created a liberalizing regime or a free-market economy in China; in fact, it hasn’t even created a China ready and willing to abide by the norms of free trade.

The regime of Xi Jinping, who increasingly looks like president for life, hasn’t been pushed toward democratic reforms by a rising middle class. He has centralized power and written “Xi Jinping thought,” challenging Western liberalism, into the constitution.

China still champions state-led, rather than market-led, capitalism. It has no rule of law, and the government suffuses the economy such that the distinction between state-owned enterprises and purportedly private-sector firms is fuzzy. A country that has a “13th Five-Year Plan for Science and Technology” is probably not robustly free market.

As for trade, China has taken advantage of the WTO to push mercantilist policies. It uses non-tariff barriers and industrial policy the WTO wasn’t built to address to maximize exports and minimize imports.

President Trump’s prospective tariffs on steel and aluminum have put renewed focus on China trade, although the tariffs, at least as announced by Trump, are a comically inept misfire if their true target is China. The rubric for the levies could be: “How to lose a trade war with China in one easy step.”

The tariffs don’t really affect China, from which we import only about 3 percent of our steel. Meanwhile, they send the message that the US government is lurching toward protectionism under risible pretenses (the idea that the tariffs are necessary to national security, when the largest exporter of steel to the US is Canada, is laughable). And they alienate allies.

If the motivation is simply to protect select domestic firms from competition, whatever the knock-on consequences, the tariffs make sense. Otherwise, they run exactly counter to what would be a sound approach to Chinese mercantilism, as a compelling report by the Information Technology and Innovation Foundation underscores.

The report argues that there are two ways to wave the white flag on China trade — one, favored by the Washington establishment, is to accept Chinese cheating as the way of the world; the other, perhaps favored by Trump, is to adopt a mercantilism of our own. Both would concede to the Chinese an outsize role in forging new, less desirable rules of the road in the global trading system and poorly serve America’s interests.

A better approach begins with acknowledging that China is unique, and a unique problem. For all of Trump’s complaints, Mexico isn’t pursuing a well-honed strategic agenda of exploiting the global trade system at the same time it undertakes an aggressive neo-imperialist foreign policy. Only China is doing that.

China isn’t the first developing country to seek to maximize exports. What makes it different is its sheer ambition and its size, which gives it leverage over foreign companies seeking access to its market and international influence. As the ITIF report notes, China effectively pressures countries like Indonesia, Malaysia and Vietnam to ape its unfair practices.

What’s the harm to the US? Yes, technology accounts for a large share of job losses in manufacturing in recent decades. Yes, lower-end manufacturing would’ve left regardless. But there’s no doubt China’s practices have harmed US manufacturing, and that Beijing works to block higher-value-added exports from the US and is pursuing a comprehensive strategy to dominate in advanced industries.

By no means should we emulate China. We should continue to pursue free trade, as a policy, not as a theology that prevents us from acknowledging that there is such a thing as unfair trade and that there are practical ways to respond to it.

The ITIF report urges using a global free-trade regime against China. That means bringing more actions against China in the WTO and working to update the rules to capture Chinese cheating (and to begin thinking of a new organization if the WTO proves inadequate). It means joining, and influencing, a multilateral agreement like the Trans-Pacific Partnership. It means forging bilateral agreements with up-to-date standards that reinforce principles that China undermines.

“A failure,” the authors write, “to complete and to implement next-generation trade agreements that establish higher-standard rules, principles, and norms for market-based global trade will only cede the terms and structure of global trade to Chinese leadership.”

We obviously can’t do this alone. We’d have to lead an alliance of international partners to pressure China on specific practices, with tailored consequences if we get nowhere. There is obviously no chance of doing this if we are engaged in an absurd retaliatory cycle of tit-for-tat tariffs with the likes of Canada and the EU.

Such a broad-based effort to crack China’s mercantilism wouldn’t be protectionist, but the opposite. It would aim to foreclose Xi’s ridiculous pose as the defender of globalization. “Pursuing protectionism is like locking oneself in a dark room,” Xi preaches to international audiences while systematically stealing foreign technology and plotting his 21st-century autarky.

Trump can have emotionally satisfying, blunderbuss tariffs to scratch his protectionist itch, or he can have a strategy to muster an alliance of truly free-trade partners to pressure China. He can’t have both — and you can be sure China knows which option it prefers.

Twitter: @RichLowry

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