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Here’s What “Winning” at Trade Really Means

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Here’s What “Winning” at Trade Really Means

September 19, 2018

President Trump wants to “win” at trade—by which he means: the United States should export more than it imports. Economists have rightly criticized this view as antiquated mercantilism. The idea that the country is a business for which net exports are like net revenues is not just wrong, it is economically destructive. It’s no surprise that President Trump’s policies have caused the U.S. trade balance to get worse. His administration’s mismanagement of trade policy is causing an unnecessarily sharp drop in the trade balance, leading to America being a bigger “loser” even under Trump’s own terms.

But where the President’s critics have gone wrong is in failing to supply any compelling alternative vision of what it means to “win” at trade. If all it means is that t-shirts are a little bit cheaper, but the factory workers of Ohio are out of work, it’s really not clear why we should prefer free trade. Many of us would happily pay a few cents extra for goods if it means employing our friends and neighbors, or at least our fellow Americans, rather than, say, Chinese workers.

The idea that the country is a business for which net exports are like net revenues is not just wrong, it is economically destructive.

The main obstacle to America winning at trade is China. Imports from China from January to July 2018 came in at $296 billion, versus just $74 billion of exports. This deficit of $222 billion accounts for nearly half of America’s total trade deficit for the year thus far. There are many countries with which we have a trade deficit, of course, but China’s is unusual for another reason: China exports four times as much to the United States as it imports.

We do not have such lopsided trade flows with any other large trade partner. With Japan, exports have amounted to half of imports; with the EU, it’s two thirds. Even with the oil-exporting OPEC countries, exports amount to 70 percent of imports. With Canada and Mexico, it’s 85 percent. (Generally speaking, the United States has better trade balances with countries with which it has free trade agreements, because most countries have higher general trade barriers than we do, so we get bigger benefits from special agreements.) We actually have a trade surplus with the countries of South and Central America. And with most of these countries, even if we have a trade imbalance, it’s not a big deal because we have open investment in those countries. If we lose out a bit on trade with Germany, the Germans will just plough it into investment with the United States, and build productive assets here—and those assets pose no security concern.

With China, the situation is different. Only in the last 5 years or so did China begin to make serious re-investments in productive capital in the United States, and now the rate of investment is falling again. Before then, China just piled up cash reserves and invested them in U.S. government debt, subsidizing American welfare consumption and foreign wars instead of building factories, railroads, or research labs.

Only in the last 5 years or so did China begin to make serious re-investments in productive capital in the United States, and now the rate of investment is falling again.

But even if China does try to invest in the United States, there is a risk. Unlike Japanese or German firms, Chinese firms often act as agents of the Chinese government, promoting Chinese security interests and providing fronts for Chinese espionage. Chinese businesses and researchers have been widely known to steal American intellectual property to try to gain a competitive trade advantage. In other words, thanks to China’s aggressive industrial policy, and the unscrupulous and sometimes illegal business practices of many Chinese firms, investments from China can sometimes pose a serious danger to the United States.

In other words, even if we “lose” on trade with a country like Norway, we “win” on investment, as those dollars are ploughed back into productive activity in the United States that poses no security risk, and makes Americans richer. But with China, we lose on trade and we lose on investment. This is what uncritical free-trade advocates often miss. They promote treating China like an honest partner, when China is a ruinously dishonest partner. China often doesn’t even allow U.S. investment in China unless the U.S. company makes a joint venture with a Chinese company, transferring intellectual property, a transparent form of legalized theft. If China were some tiny backwater, this would be no problem. But China is a global superpower that, if the relationship is not carefully managed, could someday become a dangerous rival.

Free trade advocates promote treating China like an honest partner, when China is a ruinously dishonest partner.

Thus “winning” on trade doesn’t mean hammering every country we can with random extra tariffs. That hurts American consumers and American investors—and provides no real help to American businesses, as foreign countries will just retaliate with equivalent tariffs, so everybody loses. “Winning” on trade means forcing cheaters like China to play fair. With fair play, American companies are competitive, and can win. They can seize good business opportunities and make money, create jobs, and, ultimately, boost tax revenues.

The Trump administration’s strategy has been mind-blowingly foolish on this front. It has torpedoed programs well-suited to pressuring China like the Trans-Pacific Partnership, a strategic trade alliance created to unite the trade policies of all the fair-trading countries around the Pacific Rim. They have attacked NAFTA and other agreements with Canada and Mexico, threatening trade with countries where we have some of the least imbalanced trade, and where we have good investment balances. To its credit, the Trump administration has filed a WTO case against China related to intellectual property—but the administration then turned around and shot itself in the foot, threatening to withdraw from the WTO, which is the only form of leverage the United States has against China. The Trump administration talks a good game about being tough on China, but then systematically destroys every tool it has for actually pressuring the Chinese to change their dishonorable trade and investment practices.

“Winning” on trade globally, and especially with China, means forcing every country with which we trade to adopt international standards about state ownership of companies, intellectual property, investment freedom, regulatory standards, and currency exchange. Whether the issue is worker safety in Bangladesh, forced labor in Uzbekistan, or intellectual property in China, the United States should be focused on pressuring other countries to adopt international standards with which we can fairly compete. We can do this by forming comprehensive trade agreements that include rules in these categories.

For China, this could mean changing how the “Great Firewall” works so that Twitter can crush the leading Chinese social media site Weibo and Google can stomp on the main search engine Baidu. But these things will never happen without a maximum pressure strategy, and the only way to apply maximum pressure on China is to stay in the WTO and win case after case, gathering together co-complainants so that a growing range of countries can slap punitive retaliatory measures on China. We can create WTO-supervised sub-agreements on investment rules and intellectual property, locking Chinese firms out of numerous markets. We can create large regional trade agreements like TPP that lower barriers to trade and, even more importantly, lock China out of lucrative markets.

We can create large regional trade agreements like TPP that lower barriers to trade and, even more importantly, lock China out of lucrative markets.

If the United States pursues this strategy, China’s companies will eventually lose their edge. They will pressure the government to make changes to help them compete. Eventually, the government will either give in and liberalize, or else resist, and China’s economy will weaken.

But for now, this prospect is distant. Our current leaders seem determined to destroy the American negotiating position against China, sabotage our most productive trade and investment relationships, and reinforce the power of China’s leadership. This isn’t winning on trade; this is being a sore loser.

Lyman Stone is an economist who works on regional development, demographics, and trade. He is formerly a trade analyst for the U.S. Department of Agriculture, where he specialized in cotton markets in Africa, the Middle East, and the former Soviet Union. A native of Kentucky, he currently lives in Hong Kong. Follow him on Twitter here.

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