Punitive levies on Chinese imports would hurt American consumers and U.S. companies that are part of the global supply chain. At the same time, they would strengthen Beijing's resolve to speed up its quest for independence from foreign technology.
President Donald Trump’s executive orders and tweets focusing on trade just a week before meeting Xi Jinping, his Chinese counterpart, came across as clumsy and somewhat hostile towards China. Threatening Beijing is a counterproductive strategy to reduce trade deficits or create jobs in America.
Such escalation may close the door shut on the opportunities achievable through negotiations requiring both sides to move toward each other. Mr Trump appears to be playing a dangerous zero-sum game: instead of fostering mutually beneficial economic ties, he is upping the ante and thereby raising the possibility that both sides may lose.
The Trump administration’s proposal for stiff punitive tariffs on imports from China is not only bad economics, it also shows a poor grasp of Sino-U.S. economic relations. Tariffs could trigger a trade war that would hurt not just China but American industry and American consumers. They could also accelerate China’s state-driven ambitions to become less dependent on advanced technology from abroad in areas ranging from long-haul aircraft to medical equipment and semiconductors.
Simplifying the U.S. trade deficit with China down to brass tacks, one could argue that Chinese factories and workers have outcompeted American workers and destroyed manufacturing jobs in the U.S. However, a closer look reveals how intertwined U.S. and Chinese manufacturing really is.
Tariffs on Chinese products would hurt American suppliers
Take the information technology (IT) industry: U.S. companies export semiconductors and key components to China that are then assembled in Chinese factories into cell phones, tablets, and computers destined for global markets. Not to mention the creative input — such as design and engineering — that also originates outside China’s borders. Tariffs on Chinese products would thus hurt American suppliers, American designers and engineers, American IT companies, and most of all American consumers who would have to pay a much higher price for the imported final product from China.
Moreover, the Trump administration’s hope to reverse the current trade deficit also ignores the global challenges faced by manufacturing that is experiencing another industrial revolution triggered by robotics and 3D-printing.
Countries at the lower end of the value chain such as China are much more exposed to increased industrial automation than the U.S. is now. The U.S. economy has in large part already undergone the painful structural changes of scaling down labour intensive manufacturing. In other words, the US has lost manufacturing jobs to China, but it has also exported potential mass lay-offs of semi-skilled workers due to automation or cheaper competition from elsewhere.
Therefore, the hope that tariffs would provide a quick fix and American workers would again stand at production lines assembling consumer goods is painfully simplistic. By this logic, why not do away with mechanical excavators and use manpower equipped with shovels instead. For a highly developed economy, manufacturing jobs at the low-end of the value chain will only return at the expense of productivity and standards of living.
U.S. workers would lose in trade war with China
Even if tariffs would facilitate relocation of some manufacturing to the U.S., one should expect high levels of automation rather than high numbers of blue-collar jobs. For the limited gains of some new jobs, every American would have to pay more for their mobile phones, computers and other products. And by pure economic logic, U.S. consumers at the lower end of the income scale, i.e. those workers who were promised they would benefit most from protectionist trade policies, would see their purchasing power decline.
A possible trade war would also hurt all those U.S. companies that are part of the global supply chain. Any form of sanctions against Chinese exports would result in a boomerang effect on U.S. tech companies supplying components for these “Made in China” products. In other words: the U.S. would shoot itself in the foot and would punish its own tech giants.
Other sectors of the economy would become vulnerable too: targeted Chinese retaliation against American exports could hit the aerospace industry with Boeing at its centre as well as soyabean farmers in the Midwest. U.S. companies that have invested heavily in China could also become easy targets for Chinese reprisals.
A trade war based on a massive trade deficit is not only a miscalculation of basic economics, it is also a short-sighted strategy for dealing with China. To put it bluntly: defending low-end manufacturing simply misses the point.
China's government is thinking long-term
The Chinese master plan “Made in China 2025“ aims to develop key high-tech industries in which US manufacturing is still highly competitive today. The Chinese government is thinking long-term — not just in terms of quick fixes and quick gains. For the U.S., it is therefore much more pressing to deal with the question of how to remain competitive in the long run rather than attempting to revive industries of yesteryear.
But such an approach requires a different and much more co-operative strategy. Possible approaches include: try to wrap up the negotiations on an investment agreement with China, demand that China opens its service sector to overseas companies and create a level playing field for foreign companies, push back against Chinese state-owned enterprises. That is a much more constructive approach to transform and improve bilateral economic ties than sanctions, tariffs and trade wars.
No sustainable gains can be expected by advancing mercantilist trade policies. They will not successfully trigger a revival of U.S. manufacturing. Nor is it in the U.S. strategic interest to favour low-end manufacturing activities by implementing protective policies. Sino-American economic relations have much to gain from engaging with each other to foster competitiveness and innovation. Isolation from each other will result in distortions and missed opportunities.
This article was first published on the Financial Times' Beyond Brics blog on April 6, 2017.