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Mosher: How Trump Will Win the Trade War with China

The American business press is filled with doomsday scenarios about the trade war that the President-elect is supposedly about to unleash on the world.

Most of these stories envision a vicious circle of tariffs and countertariffs – a kind of economic mutual assured destruction – that ends in a global recession. The Smoot Hawley tariffs are invariably invoked, even though we now know that these did not cause the Great Depression.

A few imaginative souls have even speculated that lowering the boom on Chinese cheating will actually benefit China.  Bloomberg, for example, published an article by Michael Schuman entitled, “Who Wins a Trade War? China.”

In the article, Schuman argues that any effort to level the trade playing field will only accelerate China’s effort to develop “national champions.” These are the government-subsidized behemoths that Beijing imagines will one day soon be able to flood the American market with cheap smart phones, medical devices, and electric cars.

(Someone in the Chinese leadership ought to ask Japan’s mighty Ministry of Economy, Trade and Industry (METI) how its enormously expensive effort to pick winners and losers over the decades has worked out.  The answer: not very well.)

As the countdown to the inauguration continues, it is dawning on American business circles that President Trump is actually serious about stopping China’s cheating on trade. Their nervousness over the prospect of a confrontation with one of America’s largest trading partners is real and growing.

Beijing, for its part, is doing everything it can to stoke their anxiety.

The Chinese Communist Party’s Global Times has already started issuing threats, promising to retaliate if tariffs of 45% are imposed on Chinese-made goods. “A batch of Boeing orders will be replaced by Airbus,” the paper threatened on November 13th. “U.S. auto and iPhone sales in China will suffer a setback, and U.S. soybean and maize imports will be halted.”

Apparently Beijing has not yet realized that lobbyists, even lobbyists for Blue Chip companies like Boeing and Apple, are not really high on Trump’s list of favorite people. Nor have they grasped that the businessman does not respond well to threats.

Trump, on the other hand, understands perfectly well that the Chinese leadership does not merely cheat on trade: it is the biggest trade cheater in the history of man. He is under no illusions about the fact that Beijing is engaged in all-out economic warfare against the United States.

The numbers don’t lie.

The Chinese sold us $367 billion more stuff in 2015 than we sold them, $483 billion versus a paltry $116 billion. The shipping containers from China arrive full and go back empty. America’s trade deficit with China is spiraling out of control.

Trump advisor Peter Navarro has explained how China is cheating on trade, and it has nothing to do with a lack of American competitiveness. Nor is it solely a matter of Beijing manipulating its currency.

Rather, Navarro says, Beijing engages in five unfair trading practices. Besides manipulating its currency and providing illegal export subsidies, it engages in massive intellectual property theft, avoiding research and development costs. Add to this lax worker safety standards—tens of thousands of Chinese workers are killed each year on the job—and environmental regulations that go unenforced. Taken together, these unethical and illegal practices reduce the price of Chinese goods sold in American stores by 45%.

President-elect Trump has proposed a simple yet elegant solution to this inequity: he promises to impose a tariff of 45% on all Chinese-made goods coming into the United States.

My prediction is that China, recognizing that for the first time they are dealing with an American president who is serious about righting the trade imbalance, will come to the negotiating table before this happens.

First of all, China’s leaders know that, as President, Donald Trump will enjoy broad authority on trade matters. He can, on his own authority and without consulting Congress, raise tariffs, impose quotas, and terminate trade agreements.

His promised renegotiation of the North American Free Trade Agreement with Mexico and Canada will be a further wake-up call for the Chinese, signaling that he is serious about righting the trade imbalance not just with American’s near neighbors, but with China as well.

Another reason to expect China’s leaders to blink is that their export-oriented economy is far more vulnerable than ours to a trade war. According to the World Bank, 41.2% of China’s GDP comes from exports and imports. The comparable figure for the U.S. is only 27%.

In fact, these numbers understate the risk to China’s economy. For while the United States is China’s most important economic partner, the converse is not true. Beijing desperately needs American consumers to keep buying massive amounts of Chinese-made goods, especially now. China’s export sector is essentially stagnant, its factories suffer from overcapacity, and the country as a whole is running at a significant fiscal deficit.  The last thing the Chinese leadership wants is for their country’s already fragile economy to be disrupted by a trade war.

If China actively takes steps to avert a trade war with the United States, as I expect it will, it will not be the first time that Beijing has chosen negotiation over confrontation. Beijing has a long history of resolving trade imbalances with its East Asian neighbor, Japan, in exactly this fashion. When the balance of payments between the two countries skews in one direction or the other, trade officials from both countries sit down and draw up plans to bring trade back into balance.

Negotiations between American and China will necessarily be more complicated, not least by the enormity of the trade deficit in question, but can in principle be resolved the same way.

There is one final reason, less tangible perhaps, why I expect President Xi Jinping to eschew retaliation in favor of negotiation. He and the other members of the top echelon of the Chinese leadership live in a world defined not by rules but by interpersonal relationships. It is a system where the strong are respected, while the weak are mercilessly crushed.

I believe that President Trump will, more than Presidents Obama, Bush, or Clinton, enjoy the respect of the CCP leadership. After all, a strong-willed, no-nonsense, deal-maker is a type that Xi Jinping and his colleagues will instantly recognize.

In fact, Trump may well turn out to be precisely the right person to strike a bargain with China, saving American jobs and factories.

For the time being, expect China’s leaders to continue to bluster and bully, even as it becomes increasingly clear to them that their threats are having absolutely no effect on President-elect Trump. Then, just before Trump slaps them with tariffs—and serious damage is done to China’s economy–they will agree to sit down and negotiate a reasonable accommodation on matters of trade.

Steven W. Mosher is the President of the Population Research Institute and the author of The Bully of Asia.

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