Trump's Unnecessary Trade War with China

Yukon Huang, David Stack

Economics, Asia

And why a bilateral investment treaty might be the answer.

The most tangible outcome of the Mar-a-Lago meeting between President Trump and his Chinese counterpart Xi Jinping was a one-hundred-day plan to reduce trade imbalances. China expressed a willingness to end its ban on U.S. beef imports and limit exports of steel to the United States along with loosening restrictions on America’s investments in China’s financial services sector. Taken together such measures are miniscule in value but symbolically important when compared with the bilateral trade deficit of $350 billion.

For China, the objective is to avoid an all-out trade war that would have a negative impact on both sides. But the one-hundred-day plan is unlikely to fully deflect protectionist sentiments from surfacing via other channels, especially if the White House uses trade issues to press China to take a more aggressive posture towards North Korea. A faction within the White House remains fixated on the view that trade deficits are a threat to growth, jobs and security, and much of the blame belongs to China. Recent executive orders taking a bilateral approach to trade deficits and intentions to target trade partners using subsidies to “dump” their products in the United States are likely to refocus attention on China as the major culprit.

Rather than focusing on trade frictions, America’s interests should be on strengthening investment relations by concluding a bilateral investment treaty (BIT). The United States can learn an important lesson from China’s past experience: the key to strengthening competitiveness lies not in protectionist measures but by increasing the productivity of a nation’s workforce through supportive infrastructure investments. But an “America First” agenda will not easily accept that promoting U.S. investment abroad supports that vision.

It is understandable why the White House obsession with trade deficits has popular appeal. Last year, the United States imported roughly $500 billion more goods and services than it exported, and trade with China accounted for more than 60 percent of that overall deficit. If exchange rate manipulation is not the culprit, then according to this way of thinking it surely must come from China’s unfair trade practices.

This line of reasoning on trade as well as investment issues being championed by President Trump’s more populist advisers is misguided.

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