Will President Trump Launch a Trade War?

Caifu Magazine | by CAIFU Magazine

U.S. President Donald Trump signed a memorandum Monday, August 14, ordering his trade office to launch a probe under Section 301 of the Trade Act of 1974, of possible Chinese theft of U.S. technology and intellectual property.

This might look into advanced tech industries such as electronics, mechanical engineering and transportation equipment, including micro-chips and electric cars. Although a probe is far from taking actions against trade with China, it still worries the market that possible sanctions under Section 301 will be in place.

In the China-United States 100-Day Trade Plan agreed upon in April, the U.S. aimed at “increasing export to China to reduce trade deficit,” an expression of Trump’s desire of “adding more jobs for Americans.” In the memorandum ordering the probe into China’s stealing of U.S. intellectual properties, Trump reiterated: “…These laws, policies, practices, and actions may inhibit United States exports, deprive United States citizens of fair remuneration for their innovations, divert American jobs to workers in China, and contribute to our trade deficit with China.” But he stated the theft of intellectual property by foreign countries costs the nation millions of jobs and billions of dollars every year. The essence of his demand stayed consistent.

As for Section 301, the United States used it many times during 1970s through the 1990s to impose sanctions against Japan. Although measures such as Section 301 have not actually led to any sanctions since 1995, it is still a useful tool for the United States to pressure other countries and force them to compromise. And it is not without precedent for Section 301 to be used against China. In October 2010, the United States launched a Section 301 investigation into China’s clean energy policies and measurements. This was resolved through the World Trade Organization’s Dispute Settlement Mechanism, forcing China to revise its policy allegedly involving illegal subsidies in its “Interim Measure on Management of Special-Project Funds for Industrialization of Wind Power Generation Equipment.”

The essence of trade is labour division based on competitive strengths to increase efficiency and facilitate common development. As the country with most advanced technologies, the United States has more competitive advantages in the production and exportation of high-tech products, while China is the country with the most production in middle- and lower-end products. The logical result should be the United States exporting large amount of advanced technological products to China while China exporting middle- and lower-end products. However, China is exporting more high-tech products than the United States is to China. In fact, China has become the biggest supplier of high-tech products for the United States, while the U.S. is exporting a large amount of agricultural products.

In 2007, the U.S. Department of Commerce issued an Export Control List for China, where 20 categories of items were subjected to end-use control, including aircraft and aircraft engines, avionics and inertial navigation systems, lasers, underwater cameras and propulsion systems, certain composite materials, and some telecommunications equipment for space communications and air defense. The policy had immediate result of a sharp drop of 18 percent for an annual rate increase in high technology trade for 2008 compared with 2007. Even U.S. government officials publicly stated that China had been under more strict scrutiny than other U.S. trade partners. Export control had also discouraged U.S. companies’ motivation to export to China. The high-tech deficit ratio to the total U.S.-China trade deficit has been increasing. While the U.S. enjoyed an overall surplus of high-tech export to other countries, it had a huge amount of trade deficit to China, where high-tech deficit contributed over 30 percent.

Under the current trade structure of the United States, the cost will be high for President Trump to follow destructive trade policies. The global trade system had been established under U.S. dominance, and has been an important part of the U.S. economy. Any damage to the world trade system and world value chains will damage U.S. interests of in the end.

The U.S. economy has obviously benefitted from international trade. First, export to China helps the U.S. employment rate. According to 2015 data from the U.S. Department of Commerce, 67 million positions were related directly or indirectly to international trade. Since 2009, goods export has brought about 890,000 new jobs, of which 184,000 were beneficiaries of exports to China. Second, the products imported from China had cut down the cost for U.S. consumers, and lower income populations benefitted even more. Therefore, to impose control over import from China will not reduce the wealth gap. Third, U.S. companies could boost their global competitiveness through importing from China and setting up manufacturing bases in China-U.S. companies.

Historically speaking, no trade war saved any economy, often resulting only internecine outcome, with neither side gaining in the war. After the Great Depression hit the United States in 1929, Congress passed the Hawley–Smoot Tariff Act. They fired a first shot to launch a trade war, resulting waves of protectionism around the world and exacerbating severely later on by tariff elevation, currency depreciation and import quota limitation. This caused global trade to take a deep dive, decreasing by over 50 percent and sent ripple effects of the U.S. crisis to every country around the world.

In the future, it will be impossible for the United States to loosen up its control over high-tech exports to China, yet it’s also hard for the U.S. to forgo the quality and cheap Made-in-China products. The trade complementarities between China and the United States are far greater than their competition. Based on the above analysis, it is not imperative for President Trump to follow through a tough and generalized trade protection. After many years of deepening international trade, China-U.S. ties have been deeply tangled. It is true the United States wants to get more from the trade. However, it also means a low probability of an all-out destructive trade war, while partial and gradual protectionism is inevitable.