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border adjustment tax, China, Gordon G. Chang, intellectual property, manufacturing, natural gas, tariffs, Trade, trade deficit, Trump, value-added tax, VAT, World Trade Organization, WTO, {What's Left of) Our Economy
Last week on CNBC, I surprised one of the anchors by expressing frustration at how President Trump’s China trade policies have been unfolding.
As I tried to explain, I’ve been pleased with the President’s recognition that past efforts to discipline China’s wide-ranging trade predation have failed miserably, and that the alternatives currently being touted by his critics (launching a suit at the World Trade Organization, further bilateral talks, mobilizing a global coalition to confront China) are simply old, spoiled vintages being poured into new bottles.
But I also faulted the administration for not comprehensively describing its end game, and for not employing the considerable power of the presidential bully pulpit to make its case to the public. So I feel obligated at least to lay out the main challenges Mr. Trump needs to meet in order to succeed. The biggest by far? Prioritizing a series of China trade objectives that the President and his aides keep mentioning, but that are far from being satisfactory or even entirely consistent with each other. Here are some examples.
The Trump administration is rightly concerned about China’s many and varied efforts to steal American intellectual property. The technological progress that this theft has enabled the PRC to make has displaced U.S. production and employment in advanced American manufacturing, and has helped China catch up with the United States militarily. And as analysts like Gordon G. Chang have warned, if dictatorial China gains supremacy in key cutting-edge technologies like telecommunications and artificial intelligence, privacy and individual liberty around the world could be profoundly threatened as well.
It should be obvious by now that China’s technology predation won’t stop unless Beijing is made to suffer major consequences – or believes they’re on the way. But American success would breed problems whose solutions aren’t easy to see. Principally, how would Chinese promises to stop either the outright stealing of intellectual property or its extortion (in exchange for access to the Chinese market) be verified?
As I’ve asked previously, as with other proposals for improving Chinese behavior, like improving its labor or environmental standards, how many American officials would need to be running around how many Chinese corporate suites ensuring compliance? And would the U.S. tech and other companies victimized by Chinese rip-offs and blackmail suddenly start complaining loudly, and en masse, about practices they’ve meekly tolerated for decades in exchange for short-term China profits? At least, the burden of proof should be on the optimists.
The administration has also spoken about securing a Chinese promise to reduce its trade surplus with the United States by $100 billion. That’s a worthy goal in principle, and Asian comfort with trade management could easily result in Beijing making major purchases of American services and especially goods simply to reach a compromise solution even if there’s no demand for these imports in the Chinese market. The latter, for example, could simply be stuffed into warehouses.
But not all traded goods create equal economic value. For instance, would Washington really want most of the reduction in the Chinese surplus to come on the agricultural front? Pro-Trump farm states might rejoice, but what’s the justification for favoring commodities as opposed to manufacturing industries – which have long punched way above their weight in terms of productivity increases, knowledge intensiveness, and growth and employment multipliers?
Another idea that’s been floated has been to close some of the trade gap with U.S. natural gas exports. But much cheaper energy prices resulting from such fossil fuel extraction and reduction revolution has turned into a big advantage for domestic U.S. manufacturers. Do Americans really want to share this advantage with their Chinese competitors?
The crucial question of imposing pain apparently needs to be examined more thoroughly as well. Assuming that the main U.S. objective is changing Chinese behavior by creating fearsome consequences for continuing with the status quo, is the best way to hurt Beijing (at least in the short run) tariff-ing its advanced, technology-intensive goods sectors – which employ relatively few Chinese? Such levies could well undermine China’s long-range plans for supremacy in these fields. But isn’t it likelier that in the short run, China would be much more worried about the job destruction that could result from curbing Chinese exports in labor-intensive consumer goods sectors, which are still mass employers?
Yes, the U.S. retailers that import and sell most of these products could obtain them from other super low-cost, barely or unregulated foreign economies – meaning that this step wouldn’t add much, if anything, to American output and job creation. But China at least would be punished.
At the same time, success here, too, raises the aforementioned monitoring and enforcement questions: How can Washington be certain that the Chinese will behave even after they cry “Uncle!”
Finally, however, the President does believes that his China tariffs – including the possible expansion of the round that’s already been announced – will return production and jobs to the United States. Interestingly, previous tariffs have achieved some notable successes along these lines. And America buys lots of Chinese manufactures that can’t be procured from many other developing countries because they can’t match China’s industrial infrastructure, or from many high income countries because they can’t match Chinese prices. So it’s reasonable to expect that the China tariffs will generate some further manufacturing reshoring.
But many of the more sophisticated products imported by the United States can be supplied by other countries, so China-specific tariffs are unlikely to affect those shipments. This problem could be solved – and much reshoring spurred – by more sweeping tariffs. Which is why it’s such a shame that the President was so dismissive of the border adjustment tax contained in the House Republicans’ original version of the tax reform bill.
This levy would have worked like a value-added tax (VAT). U.S. exports would have been effectively subsidized, and U.S. imports penalized. The tax would have likely been legal according to the World Trade Organization (because it would be considered a domestic tax and therefore outside the organization’s purview – which is why most other WTO members use VATs). Both because of its all-embracing nature and the subsidies it would afford, it would have spared the administration and the country most of the task of fine-tuning tariffs on China, or on steel and aluminum imports, in order to minimize domestic economic or political costs. The measure enjoyed strong support from many powerful Congressional Republicans (especially House Speaker Paul Ryan and House Ways and Means Chair Kevin Brady), along with many influential big American manufacturers. And don’t forget all the revenue it would have raised.
Mr. Trump has just expressed buyers’ remorse about the budget deal he just signed. Inserting the border adjustment tax into an alternative proposal just might enable him to accomplish key fiscal and trade policy goals – and avoid many of the headaches in these fields his administration is currently experiencing.
