Is President Trump Right? The Benefits of Trade War

One of Whirlpool Corporation’s production centers boasting the company’s “Invested in America” initiative ( source )

One of Whirlpool Corporation’s production centers boasting the company’s “Invested in America” initiative (source)

With Donald Trump’s September 24th announcement of new tariffs on 200 billion dollars worth of Chinese goods, the Sino-American trade war is in full swing. Critics of the trade war maintain it is short-sighted and antithetical to American interests. Much of Trump’s past economic policies have only accommodated for the short term as well, and opponents claim these quick-fix solutions are not in the best interests of the United States. Despite the detractors, though, a trade war pursued in the right fashion has the potential to fulfill American economic interests and ensure an even playing field for US companies within international markets.

In 2001, China joined the World Trade Organization partly with the hope of expanding its markets. China’s membership might have concluded a period of unfair trade practices within its borders and created an even playing field for foreign investment. Unfortunately, this vision never came to fruition. The Chinese government still restricted access to foreign companies by requiring them to surrender technologies in order to enter the market. The government also maintained subsidies to domestic firms, further manipulating the currency to China’s advantage. In perhaps the most notable instance of such economic maneuvering, China required foreign railroad firms to enter into joint ventures with Chinese. Through this mandated cooperation, domestic railroad enterprises were able to take advantage of foreign technological innovation. More recently, China’s tense business environment has been showcased through heightening media censorship. The Chinese government required Google to create a censored search engine in order for the company to operate in the country. These strict policies concerning international investment have dramatically mitigated the competitiveness of American business in both Chinese markets and the global sphere. Subsidized Chinese companies equipped with American technology could undercut US-based enterprises. As a result, Chinese companies might lean more heavily on US private invention than their own research and development efforts to drive the nation’s economic growth and influence.

The factory floor at Ningbo Bird, a Chinese mobile phone producer ( source )

The factory floor at Ningbo Bird, a Chinese mobile phone producer (source)

The Chinese government currently subsidizes domestic companies at an average of 18.6% in order to undersell foreign companies on products ranging from steel to automobiles. In exchange, the People’s Republic keeps domestic companies in business despite their low prices. It has manufactured a competitive advantage in exporting goods both domestically and internationally. The United States, on the other hand, is struggling to compete, since its products do not sell easily overseas.

Another oft-made complaint against the Chinese government is its devaluation of the Yuan.  To ensure that Chinese goods remain cheap in comparison to its counterpart products in the states, the Jinping regime has pursued a policy of currency devaluation.  While the yuan was most affected between 2003 and 2008, China is still today reaping the economic advantages over the United States. Chinese companies retain an unfair competitive edge when producing goods in comparison to US-based businesses. This devaluation has contributed significantly to the $335.4 billion trade deficit with China; it is cheaper to produce in China than sell to the United States, as the devaluation reduces manufacturing and other outputs. This issue must be addressed in order to ensure that there is an even playing field between the two.

Though many other issues exist, these three are the most significant policies used by the Chinese government to obstruct American interests in the region. The Obama and Bush administrations attempted to address these complaints through negotiations and occasional tariffs on tires and steel. However, these efforts were largely ineffective in convincing the Chinese government to change its policies. Ultimately, the United States would do well to employ more direct tactics rather than soft diplomacy to compete with China. The Trump administration’s tariffs just might do the trick. This kind of bold action might finally place China in a position to cater to the United States’ best interests.

The World Trade Organization’s headquarters in Geneva, Switzerland ( source )

The World Trade Organization’s headquarters in Geneva, Switzerland (source)

At the same time, however, President Trump’s handling of the Sino-American Trade war has much area to improve. The Trump administration’s recent disruption of trade deals across the world, from the European Union to NAFTA, has made it difficult to gather allies and extract meaningful concessions. The United States requires allies and American consumers to import cheap goods in order to maintain their standard of living.  Therefore, the United States needs to find other countries with abundant amounts of cheap labor and pursue free trade agreements with them. The Trans-Pacific Partnership might have been a perfect opportunity for this, as it had the potential to mobilize twelve countries against Chinese influence in the Pacific. Had Trump not withdrawn from this agreement before pursuing a trade war with China, the United States would have been able to buy the cheap goods usually produced in China from countries such as Malaysia, Vietnam, and Peru instead. This, along with trying to renegotiate NAFTA, has made it difficult for the United States to effectively win this trade war.

Ultimately, President Trump’s trade war on China is in line with his campaign promises of prioritizing domestic affairs. Employing strict tariffs ensures that the United States will remain the most potent economy on earth. Furthermore, American businesses will have an equal playing field in the world economy if their intellectual property is defended. Still, this successful pursuit of American economic interests is contingent on President Trump rectifying his most pressing failures in conducting the trade war with the Chinese. He must rejoin the Trans-Pacific Partnership, complete his renegotiations of NAFTA, end the threats of tariffs on European goods, and ensure that he prioritizes the issues he wants to address with China. Only then might he not only win this Sino-American Trade War, but also solidify the United States’ standing as the most powerful and innovative economy in the world.

GlobalSam PritchardComment