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Is Trump Gearing Up for a Trade War With China?

Irwin M. Stelzer

Circuses feature sideshows and main events. So it is with the circus that performs daily at the Trump White House when it comes to trade policy. The sideshow currently on offer is the renegotiation of the 1994 North American Free Trade Agreement (NAFTA) that creates a more-or-less free trade area encompassing Mexico, Canada, and the United States. The negotiators are hard at it, with America demanding revisions that create more American jobs, the Mexicans fighting to keep the huge American market open to their goods, especially automobiles, and the Canadians—well, their latest demand is that new chapters be inserted to reflect the leftish Trudeau government’s “commitment to gender equality and … improving our relationship with indigenous peoples.”

All trade agreements create winners and losers, and NAFTA is no different. Now, the losers, mostly trade unions and the workers they represent, want to become winners by changing rules that favor “exploitative sweatshop jobs in Mexico, while the winners—farmers and the auto industry—want to avoid becoming losers. President Trump says that he doubts that a new deal to replace “the worst deal in history” can be reached, in which case the agreement will be terminated.

That’s what ousted strategist Steve Bannon and a good part of Trump’s (shrinking) base are demanding. The reality is that termination would disrupt the auto industry’s supply chain, badly hurt farmers in the states won by Trump, and violate the first guiding principle laid out by Commerce Secretary Wilbur Ross: “Do no harm.” Instead, there will be a deal that allows Trump to claim that he has “created” millions of new jobs, while keeping U.S. corn, soybeans, rice, wheat and other farm commodities flowing south to Mexico, beef and pork moving north to Canada, Canadian oil flowing south to U.S. refineries, and products made or assembled in the maquiladoras that dot the Mexico side of the border moving north.

So much for the sideshow. On to the main event, Section 301 of the Trade Act of 1974. That little-used provision authorizes the president to “take all appropriate action … to obtain removal of any [trade] practice that is unjustified, unreasonable, or discriminatory, and that burdens or restricts U.S. commerce.” U.S. Trade Representative Robert Lighthizer has launched an investigation to determine whether China’s policies toward intellectual property are in violation of Section 301. That could take a year to complete.

If Lighthizer concludes that China is in violation of Section 301, and Trump exercises his authority to retaliate, this will be no ordinary trade war. China has staked its economic future on its IP policy, and America will have been made aware that we are not talking here merely about the odd billion dollars of imports and exports. The communist regime has announced a $300 billion plan to assure it becomes self-sufficient, with 80 percent of the domestic market to go to Chinese firms, and attain global leadership in 10 industries by 2025. Premier Li Keqiang told the National People’s Congress that those industries of the future will include artificial intelligence, integrated circuits, biopharmacy, 5G mobile communications, robots, and electric cars, among others. Low-end manufacturing is to be phased out.

The encouragement of the targeted industries will take three forms. First, the government will provide low-interest loans, subsidize research, and finance the acquisition of foreign high-tech firms. Second, it is requiring foreign firms that want to do business in China to turn over their IP to a Chinese partner in return for access to China’s enormous market. Third, China will continue to steal all the American intellectual property on which it can get its hands. A report by the Commission on the Theft of American Intellectual Property puts the annual value of stolen IP, counterfeit goods, pirated software, and stolen trade secrets at as much as $600 billion, with China, named in the report “the world’s principal IP infringer.” That’s 3 percent of our GDP being hijacked every year.

Trump, no instinctive free trader, could ordinarily be counted on to move quickly to “retaliate,” presumably by imposing tariffs that in effect close our market to China—he frequently mentions a figure of 45 percent. China’s Ministry of Commerce says a trade war “would harm both sides.” True, but not equally. A new report by the nonpartisan Conference Board, a New York-based think tank, reckons that China would be the loser. Our exports to China account for only 0.7 percent of our national economic output, while Chinese exports to the U.S. come to roughly 3 percent of its GDP. “A trade war between the U.S. and China, as seen through these data, doesn’t appear to be a major threat to the U.S. economy,” says Erik Lundh, a senior Conference Board economist. And it would be a major threat to China, which is heavily dependent on exports to keep its economy moving at its target growth rate of around 7 percent.

The problem is that President Trump can’t make a decision “as seen through these data.” In his first truly presidential speech last week, announcing a continued commitment to Afghanistan that ran contrary to “my instincts,” (instincts such as those that produced the threat of 45 percent tariffs), he said, “decisions are much different when you sit behind the desk in the Oval Office.”

Trump needs China’s help to rein in North Korea’s nuke-rattling regime before Kim Jong-un develops the ability to mount nuclear warheads on his country’s intercontinental ballistic missiles. And is getting at least some cooperation: China has cut its exports of petrol to North Korea by 90 percent, and voted for (porous) U.N. sanctions on the regime. That’s not much—China continues to buy North Korean coal and, until we put sanctions in place this week, Chinese companies have handled the regime’s international banking needs—but it is at minimum a warning shot across Kim Jong-un’s missile sites.

While Trump awaits the results of his trade representative’s report, American firms, among them Apple, Intel, Qualcomm, and IBM, continue to turn over their IP to China in the hope, forlorn in all likelihood, of getting a durable piece of China’s market. Unlike China’s president Xi Jinping and his communists colleagues, our CEOs are not students of Lenin, who famously said, “The capitalists will sell us the rope with which to hang them.” And the technology with which to dominate their country in years to come.

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