Donald Trump is off to China this week and in typical style, he’s blundering his way into the country with all the grace of a bull in a china shop. While most guests bring flowers, the US president brings complaints – especially of the trade variety. He warmed up for the tour by calling the US trade deficit with China “embarrassing” and “horrible.” The US has also announced that it will impose preliminary “anti-dumping” tariffs ranging from 96.81% to 162.24% on aluminum foil from China. Unsurprisingly, Beijing has said that it is “extremely dissatisfied” with these new measures and has declared that the US’s refusal to classify it as a market economy was a “serious distortion of the facts.”
Of course, this grandstanding against China is as much for Trump’s base as for Beijing, but ultimately, it is the US itself that risks being hurt the most by the unintended economic consequences of the president’s policies. Even more significantly, it also means the US risks alienating a key ally it needs to help deal with a much graver problem – North Korea.
That is not to say that the White House doesn’t have fair points to make regarding certain bones to pick with Beijing. However, its economic analysis is let down by its superficiality.
The US has a trade deficit with China and other exporting juggernauts, because China, Mexico et al can produce goods more cheaply than the US. Being able to buy materials at a bargain price isn’t a bad thing for US industry, as it enhances its comparative advantage and enables it to manufacture affordable goods for the domestic and export markets alike. It’s good for the US consumer and good for Washington’s GDP.
Yet in typically bombastic style, Trump sees the deficit as evidence that the US is “losing” and China is “winning” – as if it were as clear-cut as a football match. But most economists agree that a trade deficit is not necessarily a bad thing. For example, as the US has seen with China, a country with a trade surplus must either let its currency rise or take the heat off its own economy by enabling money to flow outside its borders to its trading partners. The fact that the US maintains the global reserve currency is one of the main reasons why it runs a deficit – and why America benefits from lower interest rates, higher stock prices, and a strong standing in global finance. Yet Trump seems reluctant to explore these nuances of global trade, something that was a major factor in his decision to pull out of the Trans-Pacific Partnership (TPP).
Unfortunately, the same sort of muddled thinking infects the Trump administration’s take on import tariffs – which might soon apply to far more products than Chinese aluminum foil. The White House is also considering enacting tariffs on primary aluminum and steel under Section 232, a rarely used law going back to the 1960s that allows the US to limit imports of goods deemed crucial for national security. The move would ostensibly be prompted by China’s massive overcapacity problems, which have depressed prices and put thousands out of work in the US over the past decade.
Imposing import limits or tariffs on such goods would only end up hitting American consumers and industry in the wallet, while doing little to nothing to boost US security
Yet imposing import limits or tariffs on such goods would only end up hitting American consumers and industry in the wallet, while doing little to nothing to boost US security. For instance, invoking Section 232 risks roping in key US suppliers of aluminum like Rio Tinto, which operates smelters in Canada, America’s closest trade and defense partner. It could also increase prices of goods from primary aluminum suppliers like Russian aluminum company Rusal, which is a critical source of low-carbon aluminum to the American market, accounting for approximately 20% of the market. Raising barriers against these suppliers would, in turn, cause negative ripple effects throughout the US economy, hiking up costs for products ranging from aluminum beverage cans to cars.
Such a superficial understanding of import tariffs and quotas is bad enough. But even worse is the impact that Trump’s belligerence towards China could have on international relations. Focusing on pet causes like tariffs and the trade deficit ignores the bigger issue: Trump needs China’s support to tackle North Korea. Yes, trade deficits are important. But the response to events in Pyongyang is far more crucial. The US wants to take a hard line on North Korea whereas China favors a more subtle approach, mindful of potential consequences such as the destabilization of the Communist Party or an unexpected influx of refugees.
A wiser leader would have used the trip to build bridges with the Chinese, and persuade them to change their hard line on Pyongyang by showing them that the US is a sensible and strategic friend. But Trump – as expected – is doing quite the opposite, pouring fuel on the flames of what is already a difficult diplomatic relationship.
And, for all his flattery of the Chinese president – the “King of China” –and with whom he has an excellent president-to-president relationship, he says – Trump has done little to foster the goodwill that the US needs in order to extract what it requires from the country.
And the problem for Trump is that China holds the vast majority of the cards. Xi Jinping himself is touted as the most powerful Chinese leader since Mao and has outlined plans to make his country “a global leader in terms of comprehensive national strength and international influence” by 2050. What Trump needs to realize is that by focusing on point-scoring on issues that he believes will restore the power balance for the US and China but which may actually result in neutral – or negative – outcomes for the US, he may be poking a sleeping dragon. And more than ever, the US needs to stay on the dragon’s good side.