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Trump's Looming Trade War with China

Irwin M. Stelzer

If Trump set your teeth on edge in 2017, prepare for a grinding 2018. The story coming out of the White House is that the need to garner congressional support for his tax cut forced the president to restrain his reformist-populist-belligerent instincts until his signature legislation was on the books. It now is, for better (Republicans) or worse (Democrats), and the president promises we will see Trump unleashed in this new year. So buckle your seat belts; you ain’t seen nothing yet. No more Mr. Nice Guy.

Most people paid little attention when the Committee on Foreign Investment in the U.S. (CFIUS) refused to approve the acquisition of MoneyGram International by Ant Financial Services, which is controlled by Chinese billionaire Jack Ma (the founder of Alibaba). Or when the president, acting on the advice of CFIUS, blocked an attempt by Canyon Bridge Capital, backed by the Chinese government, to acquire Oregon-based Lattice Semiconductor Corp. Both deals were shot down on national security grounds. Here’s why:

Trump has decided that his faith in Chinese president Xi Jinping was misplaced. Xi was caught red-handed (pun intended) helping North Korea evade U.N. sanctions by arranging mid-ocean transfers of oil to Chinese tankers for delivery to North Korea. So there is no longer any reason to tolerate China’s unfair trade practices. Or to listen politely while Xi travels the world presenting himself as the new champion of free trade, all the while subsidizing China’s exports, stealing American intellectual property, and dumping the products of his over-expanded steel and other industries on world markets.

Don’t mistake what we are in store for this year as just another trade war, fought over jobs and factories. When it comes to trade with Mexico and Canada, the president will settle for tariffs and quotas. That won’t be enough when it comes to China. What is involved is a clash of visions.

One vision was set out by Xi when “re-elected” by the Communist Party to lead it to new heights or, as he prefers to see it, restore it to former heights of military and industrial prominence. The competing vision, which treats trade as a geopolitical weapon, is laid out for Trump in our new National Security Strategy: “China and Russia challenge American power, influence, and interests, attempting to erode American security and prosperity.” Military strength depends on economic strength, and economic strength on “no longer turn[ing] a blind eye to violations, cheating or economic aggression” as previous administrations have done. This is not an attack on free trade as such: “Competition is healthy when nations share values and build fair and reciprocal relationships.”

Having decided that enough is enough, Trump has consulted his undoubtedly dog-eared copy of The Wealth of Nations and taken Adam Smith’s advice, “When some foreign nation restrains . . . the importation of some of our manufactures . . . Revenge . . . naturally dictates retaliation . . . like duties or prohibitions upon the importation of some their manufactures.”

The Great Scot didn’t get around to advising what to do about barriers to inbound investment, but the same principle clearly applies to China’s insistence that U.S. companies have a Chinese partner, to whom it must turn over its intellectual property. I recently met a couple from the north of England, both of whom work in a factory in which the Chinese have made an investment. The deal includes a requirement for a reciprocal exchange of intellectual property. “That’s a one-way street; we send everything, they send nothing,” they told me. Which is probably the best working definition of what China means by “reciprocity.”

If we do get into a trade war with China, American consumers will bear some of its cost. But we are China’s biggest market: the far greater loser will be the People’s Republic. A regime without democratic legitimacy must deliver improvements in material life or face a serious challenge, as the ayatollahs of Iran are discovering. The loss of Chinese goods in America means slightly higher prices for consumers. The loss of American markets for China means shuttered factories, joblessness, and a potential challenge to the political order.

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    China is only one item on the president’s domestic agenda for 2018. Another is a large infrastructure program, which Trump costs out at $1 trillion—my guess is to make certain that it is larger than President Obama’s $825 billion stimulus package. Of course, “yooge” does not suffice when “yoogest” can be claimed, as we’ve seen with the tax cut, which Trump claims is “the biggest in the history of our country.” Never mind that Presidents Truman, Johnson, Obama, and Reagan all reduced taxes by a larger percentage than Trump’s 0.9 percent of GDP, which in fact was only the eighth largest cut since 1918.

Still, the tax cut will increase the national debt over the next decade by around $1 trillion—in effect allowing us to spend more by leaving an even higher pile of IOUs for our children and grandchildren.

Republicans, who reluctantly went along with these debt increases probably will resist imposing another trillion dollars of debt on future generations in the name of infrastructure. No problem: Team Trump is devising incentives to induce private-sector players to fill the potholes, repair crumbling bridges and modernize decrepit airports. One plan is to provide government guarantees for privately issued bonds backed by user fees—a form of government expense that is less obvious to the casual observer.

But Democrats will not agree to what they see as “profiteering” by the private sector. Or to the waivers of environmental and other permitting restrictions that drag out delivery times, waivers on which Trump is insisting. So the compromise solution might turn out to be having projects such as toll roads and airports paid for by user fees, other projects paid for with taxpayer money.

Finally, high on the agenda is entitlement reform, without which red ink will never turn to black in the federal ledgers. It’s ranking on the agenda is due more to Paul Ryan, for whom entitlement reform has been a lifetime quest, than to Trump, who promised during the campaign to leave many entitlements undisturbed. No matter: Republicans don’t have the votes to take an axe to entitlement spending. But they believe they can develop incentives to induce recipients to move from welfare to work, lowering government costs and adding supply to a tight labor market. That agenda item will probably have to wait the conclusion of the congressional elections in November.

All of this, assuming that neither Trump nor Kim Jong-un decides to prove who has the bigger nuke in the coming year.

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