China-United States Trade War: How To Proceed

Background: The following memo is an assignment from my International Politics class, which prompted me to formulate a U.S. response to a Chinese initiative that consisted of Chinese representatives approaching Washington D.C. for resumed negotiations to deescalate the trade war. I was also asked to imagine the date is February of 2020 and that I am a member of the Council of Economic Advisers, which advises the President of the United States on economic policy.

Executive Summary: The United States of America ought to resume negotiations with China to deescalate the existing trade war effective immediately in order to re-stabilize trade relations between the world’s two largest economic powers as well as reestablish the global system of free trade that has been in place for decades. The negotiations between Washington and Beijing should result in the decrease of tariffs by both nations to their prior levels before the trade war had ever been initiated, with the only other stipulation being that there be a crackdown on the theft of American companies’ technology by the Chinese government as well as firms. In the case that a bilateral agreement between the United States and China still cannot be reached, then both parties must approach the World Trade Organization’s dispute settlement court for a resolution. Despite there being a truce on the implementation of further tariffs, the American economy, and by extension the global economy, cannot handle the continuation of this trade war as political relations continue to sour, consumer prices increase, investment confidence decreases, as well as economic growth expectedly lowers.

Introduction: The rise of a right-wing populist president in the United States has brought with it increased skepticism of globalization and its tenet of free trade. This anti-globalization sentiment, that has been apparent since President Trump’s political campaign back in 2016, has translated into real foreign policy changes including the withdrawal from the Trans-Pacific Partnership (TPP) as well as renegotiating the North American Free Trade Agreement (NAFTA). Both treaties of which promoted the flow of free trade between their respective participants, so the presiding administration is clearly favoring protectionist economic policy as evidenced by these reactionary moves. But the problem at hand is Trump’s more recent action to impose staggering amounts of tariffs, anywhere from 10% to 25%, on $550 billion worth of Chinese goods. The President’s rationale behind this decision was that China is simply buying too few of U.S. goods compared to how many Chinese goods the U.S. is buying and that trade deficit, as it’s called, was valued at $419.5 billion in 2018 (The Guardian 2019). There have also been accusations of intellectual property theft by the Chinese committed on American companies, so the Trump administration wants Beijing to change its rules. Anyways, these taxes on Chinese goods began in July of 2018 and have only been expanded to more types of goods as time went on. Unsurprisingly, the Chinese government retaliated with their own set of high tariffs, covering nearly 60% of America’s exports to China, to strike back at Trump’s aggression. Thus, creating a tit-for-tat or back-and-forth situation where tariffs, as well as tensions, are only being exasperated. Thankfully, however, there has been a ceasefire, so to speak, on the application of any further tariffs since October of 2019, but this circumstance is, ultimately, not a solution to the enormous tariff walls still in effect. As of February 2020, Chinese representatives have reached out to Washington D.C. asking for the renewal of trade negotiations and now it is time to decide how the United States ought to proceed from here in its trade relations with China.

Policy Option #1: The United States could refuse to negotiate with the Chinese representatives altogether until both American demands (more U.S. goods being exported to China and a decrease in intellectual property theft by the Chinese) are sufficiently met. However, there are very few benefits to this response beyond maintaining Trump’s political persistence to “win” against China. Realistically, the Chinese would have little reason to import more goods from the United States as international supply and demand have created the trade deficit in the first place, so it is potentially dangerous for this natural order to be forcibly changed. Economists have determined that the role the U.S. plays in international trade is to provide “liquidity to the global economy” and drive “demand around the world,” so its trade deficit is, in fact, essential to international economic stability (Council on Foreign Relations 2019). Furthermore, the consensus among modern economists is that the trade deficit is not a problem as it can even strengthen an economy as “consumers spend and import more while higher interest rates make foreign investors more eager to place their money in the United States” (Council on Foreign Relations 2019). As for American concerns of theft, there is indeed merit to this argument. The Justice Department’s National Security Division has announced that over “80% of economic espionage cases” that came to into their jurisdiction “implicated China” since 2012 and the rate at which these types of crimes occur has risen in recent years as well (CNBC 2019). Despite the credibility of these legal conclusions, attempting to economically harm and therefore pressure China into altering their property rights laws as well as enforcement will not benefit anyone, at home or abroad. For example, American households will have increased expenses of $460 per year on average as a result of these costly tariffs (PBS 2019). Not to mention, the economic uncertainty established from this extreme back-and-forth of taxes is estimated to net in a 1% decrease of America’s GDP, “driven by disruption in investment and industrial production” (PBS 2019). Additionally, the International Monetary Fund has proclaimed that 0.5% of the entire world’s GDP, valued at more than $430 billion, will be lost as well, as a result of this conflict between China and the United States (South China Morning Post 2018). In conclusion, this policy option is highly unlikely to succeed and will make the globe suffer in the meantime.

Policy Option #2: The United States could accept the Chinese representatives’ proposal to reopen negotiations, only seeking to achieve a narrowing in the trade deficit between the two nations and dropping the intellectual property tightening demand. This policy option, much like the last one, is highly unlikely to be achieved for reasons stated above. China has no real incentive to give in to American demands to buy more of their goods as it does not realistically represent supply and demand. The way trade is established “boosts the overall economy [of every nation participating] by lowering prices and increasing productivity” as well as promotes “society-wide advances that improve life for everyone” (Council on Foreign Relations 2019). Once again, this trade deficit is not negative for the United States or the world as a whole and should not be a prerequisite to striking a beneficial negotiation to reestablish an economic equilibrium between these two states.

Policy Option #3: The United States could accept the Chinese representatives’ proposal to reopen negotiations, only seeking to achieve a tightening of intellectual property rights by the Chinese government and dropping that the trade deficit needs to be narrowed. This is by far the most realistic, likely, and fair option at America’s deposal. There is empirical evidence to support the Trump administration’s accusations against the Chinese within the Justice Department, so there is no denying its existence nor its unjustness (theft is universally immoral). There is also plenty of apparently negative effects that prolonging this trade war will continue to have on consumers, businesses, and investors alike as described above. So, Chinese representatives are sure to agree to these terms as they can see that these tariffs must be lowered, without delay, to control damages to the global economy as well as repair their reputation to foreign businesses that find China’s intellectual property theft problem unacceptable. This could increase business deals between China and international firms as a result because companies will no longer fear that their property will be stolen to only boost Chinese interests. Essentially, there are no drawbacks to this option as the problem at hand is solved with global markets being rebalanced and legitimate American concerns being met.

Policy Option #4: If the worst comes the worst, meaning that an agreeable deal cannot be reached by the United States and China independently, then the World Trade Organization must be approached before further damage is done to the economies of the globe. If after this conflict has hit a peak and still has not been solved, then an arbitrator ought to be approached to give an ultimate solution before further problems arise politically or economically. And considering the WTO’s purpose is to ensure free global trade, they will undoubtedly determine that the United States’ as well as China’s tariffs ought to be eradicated to levels before the conflict ever occurred, much like option #3 advocates. Furthermore, there is an obligation that every member of the international institution agreed to that plays heavily in America’s favor: maintaining a certain standard of intellectual property law. The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) is signed by both China and the United States, so the Chinese violations of these rights will most definitely be acknowledged as well as punished by the dispute settlement court. This policy option will result in the same ending as policy option #3 does.

WORK CITED

1. “Cost of the Trade War: US$430 Billion and Counting.” South China Morning Post, 26 Sept. 2018, https://www.scmp.com/comment/insight-opinion/united-states/article/2165755/worsening-us-china-trade-war-might-cost-world.

2. Nancycnbc. “Chinese Theft of Trade Secrets on the Rise, the US Justice Department Warns.” CNBC, CNBC, 23 Sept. 2019, https://www.cnbc.com/2019/09/23/chinese-theft-of-trade-secrets-is-on-the-rise-us-doj-warns.html.

3. Partington, Richard. “Why Is Trump Imposing Tariffs on China and How Could It Affect Global Economy?” The Guardian, Guardian News and Media, 2 Aug. 2019, https://www.theguardian.com/business/2019/aug/02/why-is-trump-imposing-tariffs-on-china-and-how-could-it-affect-global-economy.

4. Russ, Katheryn. “What Trump's Tariffs Have Cost the U.S. Economy.” PBS, Public Broadcasting Service, 11 Oct. 2019, https://www.pbs.org/newshour/economy/making-sense/what-trumps-tariffs-have-cost-the-u-s-economy.

5. “The U.S. Trade Deficit: How Much Does It Matter?” Council on Foreign Relations, Council on Foreign Relations, https://www.cfr.org/backgrounder/us-trade-deficit-how-much-does-it-matter.