Both the USA and China remain the global economic powers to be reckoned with. Therefore, any statement concerning their respective roles in world trade is to be taken seriously. President Trump’s Trade Chief said on Monday that China represents an unprecedented threat to the world trading system. That is a very significant statement, but it is worth delving into some of the reasons that may have inspired such a categorization. Robert Lighthizer (U.S. Trade Representative) focused on the Chinese economic model as the source of tension.
The first issue concerns the state-driven system that is favored by the Chinese. In this case, the government is a real and powerful stakeholder in an economic system that would otherwise be dominated by the private sector. The wealth and economic clout of the Chinese government is something to be reckoned with, and not many private sector players would be able to deal with it effectively. This is something that has been known and discussed in international trade circles for a long time, but Lighthizer says that the challenge is now “substantially more difficult.”
American Workers and the Global System
The contention from the Trump administration seems to be that the global trading system as it stands today is not serving the interests of American workers and farmers. They are being out-competed by cheaper alternatives from countries like China. The problem with such a simplistic analysis is that it ignores the interrelatedness of global economies. China produces goods, they are bought in the USA, and the money that China earns is partly lent to the US government in order to engage in public spending. Upsetting one side of the equation will necessarily upset all the other bits. International trade remains in a delicate balance.
The protectionist model that in Lighthizer’ assessment would go some way to protecting American workers and farmers might inadvertently attract similarly protectionist moves by other nations such as China. Hence, the prices of goods and services will rise, yet America may find it difficult to export some of its expensive products to other countries, which will already have cheaper alternatives. The Free Trade ethos was meant to overcome these problems by allowing the best to shine whilst necessarily consigning second-rate producers to the dust bin. It seems that some American workers have been consigned to the dust bin, and it is not because they necessarily produce poor-quality products. The issue is about cost and efficiency.
Emphasis on Trade Deficits
Right from the moment of its inception, the Trump administration has expressed unease about significant trade deficits that the USA has accumulated with other countries over the years. The administration sought ways to reduce these deficits by a variety of means, including putting restrictions on imports and identifying those countries that were using government subsidies in order to give their domestic companies an unfair and undeserved competitive advantage.
According to Lighthizer, China is going to increase its trade surpluses with other nations whilst simultaneously causing damage to the global trading system:
“The sheer scale of their coordinated effort to develop their economy, to subsidize, to create national champions, to force technology transfers, and to distort markets in China and throughout the world is a threat to the world trading system that is unprecedented.”
To China, its global position as an economic power can only be cemented through strengthening its own domestic companies vis-à-vis other foreign countries, particularly the USA.
There seems to be a belief that the WTO (World Trade Organization) rules were never designed to deal with the kind of policies that China is pursuing. This may herald even more significant requests to have a reform agenda that would send tremors across the globe. Existing laws do give the administration some leeway. For example, a USTR investigation into alleged intellectual property violations by China is being undertaken under the auspices of Section 301 of the Trade Act. This section allows for the unilateral imposition of restrictions and tariffs to protect American interests.
Putting Pressure on Mexico and Canada
The Trump administration is just not fighting one trade war with China. It also has potential adversaries closer to home. For example, it is the contention of the administration that NAFTA is a fundamentally unfair treaty that puts the US at a significant disadvantage in terms of international trade. That is why the administration has put the brakes on the agreement and has indicated a desire to renegotiate its terms, which open up US workers and firms to unfettered free trade. This free trade makes them vulnerable because the terms and conditions that are acceptable to US workers and firms mean that the costs of their goods and services are much higher than those from other countries such as Mexico.
In effect, the competition from foreign firms means that US workers and firms are left outside the loop. The administration is looking for a semi-protectionist model of “America First” and “Buy American.” In that way, cheaper goods from other countries are not allowed in to create competition. In cases where such a drastic intervention is not acceptable to trade partners, the administration intends to place certain tariffs on imports in order to make them at the very least more expensive than the “home-grown” products. The administration hopes that such an intervention will rebalance the trade system and make American workers or firms competitive on US soil.
Possible Plans for the Future
The Trump administration is looking to identify those countries with whom the US has a significant trade deficit. The corrective actions that have been mentioned above will then be focused on those countries as priority areas. The US government has a number of tools at its disposal, which may or may not fall in line with international law. The indications are that the US government will not hesitate to use these instruments if it continues to perceive countries like China as being a threat to its national economic well-being.
As Lighthizer said, “We must use all the instruments we have to make it expensive to engage in non-economic behavior and to convince our trading partners to treat our workers, farmers and ranchers fairly.”
The question is whether the other countries will retaliate or whether such retaliations will have significant repercussions for the way in which international trade is carried out.