USA and China: A New Imbroglio

Since last year, the United States and China have imposed billions of dollars in tariffs on each other.

The trade war between the two largest economies in the world has climbed dramatically. On Friday, President Donald Trump announced high tariffs on $200 billion in U.S. imports from China, with promises to impose more. Yesterday, the Asian giant retaliated by raising tariffs on $60 billion in imports from the U.S.

Trump started this war last year, with complaints against China that are not unfounded. After all, when China joined the World Trade Organization in 2001, it pledged to abide by the rules of the WTO and, moreover, by the rules of the market. Yes, it was open to the global economy, but for years it has stopped being free. Instead, China’s trade transgressions seem to have been institutionalized along with the increase in its volume of trade.

Among other violations, these transgressions include the use of subsidies and favoritism toward state enterprises, the forced transfer of technology and the theft of intellectual property. Previous U.S. governments have done little to reverse these protectionist practices. Trump’s strategy, presumably, is to impose such a high cost on China that the country will end up changing its policies.

A major problem with this strategy − beyond the fact that the bet is not working for Trump − is its use of the wrong tool to correct the identified abuse. Imposing such broad tariffs on specific problems is detrimental to all trade with China, including a large part that should not be controversial.

Trump could have tried to solve the problems through the WTO and in conjunction with Europeans and other U.S. allies, also unhappy with China for the same reasons. He did not opt for WTO mechanisms, even though China tends to respect the WTO rulings against it, in situations when it has adjudicated cases.

Instead, he has chosen a bilateral policy that ignores or harms [the United States’] own allies. Trump has imposed tariffs on certain exports from Europe, Canada and other partners, while withdrawing from the Trans-Pacific Economic Cooperation Agreement* − which dealt with several of the complaints by the U.S. and other countries − which China would have felt obliged to join, sooner or later.

Far from demonstrating a search for lower barriers and greater openness, Trump’s trade policy toward China exhibits a disturbing prejudice in favor of mercantilism, with protectionism and favoritism towards certain national industries at the expense of consumers, whether individuals or other local companies.

He also exhibits astonishing ignorance about the benefits of an international voluntary exchange; Trump considers that a trade deficit (which is what the U.S. has with China) is, in itself, adverse, contrary to the thinking of most professional economists.

What is at stake goes beyond the negative impact of the trade war between the two giants on their own economies and the world. Trump does not turn to the WTO, guardian of the international open trade system, because he wants to disqualify it. Last year, he threatened to withdraw from the organization. He probably will not do anything that drastic. Instead, what Trump is trying to do is to castrate the WTO by blocking the appointment of new judges to the dispute resolution mechanism of that body.

The WTO has been left with only three judges of last resort, with terms of two of them set to expire this year. If they are not replaced, the organization will not have the ability to hear cases and enforce its rules. The blow to the liberal system of international trade would be enormous.

Trump is exploiting the dispute with China to construct the fake news that the WTO is useless.

*Editor’s note: The agreement referred to here appears to be the Trans-Pacific Partnership. President Trump withdrew the U.S. from it in January 2017.