The Australian

U.S. Tariffs on China are Well Deserved

The U.S. will slap a tariff of 25 per cent on $US65 billion of Chinese imports

Senior Fellow

On June 15, the US will release a final list of more than $US65 billion ($86bn) of Chinese imports which will be subject to a 25 per cent tariff, while details of further restrictions on Chinese acquisitions of American technology will be released five days later. This comes just a fortnight after it was reported both sides made progress on ways to reduce the US trade deficit and weeks after China promised to usher in a new wave of openness and allow American firms better access to its financial and manufacturing sectors.

The reaction in Australia and trading partners in Asia is to condemn Donald Trump’s “protectionism”. Even so, many of his complaints against China are justified. Despite “America First” attracting far more criticism than Xi Jinping’s “Made in China 2025” blueprint, the latter represents a far greater danger to the wellbeing of the global economic system than the former. If Australia and other countries are to champion free trade, then greater opprobrium of Chinese practices and encouraging the US to respond more constructively ought to shape the national conversation.

At the broader level, and following lessons learned during the follies witnessed in the first half of the previous century, the World Trade Organisation’s mission remains to entrench and facilitate free and open trade among advanced market economies and to encourage developing economies to adopt free market reforms.

The emphasis on such reforms does not merely reflect biased Western ideology. The core principles of free and open markets include fair competition through abiding by agreed rules, and “reciprocity” with respect to access to one’s markets. The more than 160 members of the WTO claim to support these principles, including China which joined in 2001.

It is true the US offered special deals to several nations in the second half of the previous century. Japanese, South Korean, Taiwanese, Malaysian, Singaporean, Thai and Filipino firms were given good access to the vast US consumer and investment market even though these Asian countries did not reciprocate. For periods of time, the US tolerated protectionist policies from these countries in the form of artificially depreciated currencies, special subsidies and tax breaks to local firms, and severe restrictions for outside firms seeking to invest in their market.

This was done partly in anticipation of a strategic dividend. As those Asian economies became richer and more advanced, they were expected not only to wind back their protectionist policies but become allies and/or partners offering diplomatic, economic and even military support to the US-led order in the region.

More generally, they were expected to become champions of the rules-based order and international law which was underwritten by American power — an order which is under strain but remains in place to this day.

The same approach was tried with China and is clearly failing. Strategically, a country which views itself as the “Middle Kingdom” was never likely to accept American pre-eminence in Asia for long. Its military and diplomatic efforts are largely designed to challenge American power and erode the effectiveness of its alliances and Washington’s standing in the region, despite being the greatest beneficiary of the US-led order that it seeks to undermine.

Economically, China’s size and role means that its actions will have immense impacts for the global order. China is decisively moving further away from the principles of reciprocity and fair competition. Beijing is imposing greater “behind the border” restrictions on foreign firms when it comes to the expanding list of strategic sectors identified by the government. As sectors become more lucrative, policies are enacted which ensure Chinese and not international firms become the inevitable winners in those markets.

Cheap credit and subsidies are offered to state-owned and well-connected private local firms to overwhelm foreign competitors. Beijing will tolerate inefficient and even loss-making firms so long as the competition is subdued or eliminated. Never mind that such policies are ultimately subsidised by Chinese citizens receiving poor or no returns on their savings or that they exacerbate financial risks in its economy.

Intellectual property theft or forced transfer of know-how has become industrial policy, either through cyber means or compulsory joint ventures when foreign firms operate in China. Broadly drafted anti-monopoly legislation is used against foreign firms to prevent them becoming too successful in China.

Indeed, the “Made in China 2025” blueprint to upgrade the country’s manufacturing base and dominate advanced industries such as robotics, aviation, advanced material and IT represents the mercantilist mindset: China seeks self-sufficiency at the same time as it wants to dominate global markets when it comes to exports of these technologies.

Behind the rhetoric and tweets, these are the complaints being raised by US negotiators. At the World Economic Forum in Davos, Trump made the point that unless trade is fair, it will not stay free for long. This is not the logic of disruption but common sense. One cannot expect the US to continue to underwrite a trading system when that system is being gamed to the extent that it is by its second largest player.

The tariffs against China are unlikely to help America’s cause or render the global economic system fairer, while withdrawing from the Trans Pacific Partnership has denied Trump opportunity to put collective pressure on China to play by the rules.

A more protectionist America is not in any one’s interest, including its own. But responding poorly, as Washington is doing, is a lesser offence than causing problems in the first place.