Trade tensions will mount, but a destructive trade war can still be averted
DONALD TRUMP’S quest to protect American workers from cheating foreigners has begun. But in his first flurry of policy tweets and executive orders, China, his favourite bogeyman, was conspicuously absent. On the campaign trail he deplored China’s currency manipulation, accused it of flouting global trade rules and threatened a 45% tariff on its exports, all to cheering crowds. Now, the world is waiting to see how much of this he meant.
The promise to label China a currency manipulator has not been repeated. An optimistic interpretation is that Mr Trump has realised that the promise was based on an “alternative” fact. China is no longer squashing its currency to gain a competitive edge, but is instead propping it up. A pessimistic one is that Steven Mnuchin, his treasury secretary, who would do the labelling, is not yet confirmed by the Senate.<iframe class="teads-resize" style="width: 631.34375px; border-style: none !important; height: 0px !important; min-height: 0px !important; margin: 0px !important; padding: 0px !important; display: block !important;"></iframe>
Mr Trump certainly has the power to wreak trade havoc. A big blanket tariff would slice through supply chains, hurt American consumers and fly in the face of the global system of trade rules overseen by the World Trade Organisation (WTO). But, rather than blow up the world’s trading system, Mr Trump may yet decide to take on China within it. The White House website, without naming China, promises “to use every tool at the federal government’s disposal” to end trade abuses.
In the process of being confirmed as Mr Trump’s commerce secretary, Wilbur Ross somewhat reassuringly said that he had learned the lessons of the Smoot-Hawley Tariff Act, which raised thousands of tariffs in the 1930s. (It “didn’t work very well, and it very likely wouldn’t work now”.) His own policy includes a threat to “punish” countries not playing by the rules. He suggested his department might start its own actions against foreign dumping, rather than leaving them to industry. Robert Lighthizer, Mr Trump’s proposed US trade representative (USTR) and a veteran trade lawyer, knows WTO law inside out, and will be keen to scrap in the courts.
A litigious approach to the Chinese would not mark a huge break from the past. Under Barack Obama the USTR challenged China 16 times, on issues from illegal taxes on American steel and cars to dumping and export quotas on rare earths that harmed American importers. Just this week a massive case accusing China of illegal agricultural subsidies, which was filed by the previous administration, kicked off.
Ramping up tensions still risks Chinese retaliation. When America imposed tariffs on surging imports of Chinese tyres in 2009, China started importing chicken’s feet from Argentina and Brazil instead of America. Possible targets for Chinese reprisals this time include American soyabeans and aircraft, which together make up a quarter of American exports to China. China would find it hard to replace its entire supply of American soyabeans. But Kenny Cain, a soyabean farmer from Indiana, worries that prices could plunge by a third if China were to shop elsewhere. Although China cannot yet make high-quality commercial airliners, it could divert purchases to Airbus, a European manufacturer.
A second risk is that the WTO architecture crumbles under the pressure of new cases. Resources are already stretched and decisions delayed. Constrained by a budget cap and a limit of 640 employees, it has struggled to cope with an increased number of disputes in the past few years.
A highly adversarial approach to trade could expose a more fundamental problem: “As written, the WTO rules are just not clear enough,” says Chad Bown of the Peterson Institute for International Economics. Mr Trump is right that China has not always adhered to the spirit of global trade law. But he may find that even holding it to the letter of the law is easier said than done. For example, WTO law offers no watertight definition of a state-owned enterprise, so it is hard to identify and oppose subsidies from state-owned banks.
Mr Obama’s strategy for solving the problem was to craft a multilateral trade agreement that included definitions of state-owned enterprises, a section on currency manipulation and chapters on labour and environmental standards, all meant to protect American workers against “unfair” competition. Called the Trans-Pacific Partnership, it initially excluded China. But the hope was that China would one day have to accede, thereby accepting rules written in large measure by America. Mr Trump scrapped it this week.
His strategy is clearly different. As long as he fights China on WTO rules, the world should avoid a trade war. Even if the WTO finds that American trade measures violate their rules, those rules set limits on the extent of retaliation allowed. Outside the WTO, all bets are off.