Trump: The Bull in the China (Policy) Shop

AP Photo/Evan Vucci

President Donald Trump speaks at the 2018 Conservative Political Action Conference

Trump is right to attack the foreign subsidy of steel and aluminum exports that threaten to wipe out what’s left of domestic industry. And he’s right to resort to tariffs. But by levying tariffs against the entire world, Trump fails to target the prime offender: China.

But Trump’s action has blown open the door to a conversation that America needs to have. The knee-jerk reaction to Trump’s orders shows how orthodox economists and the mainstream press refuse to grasp what’s at stake. Instead, we got the usual sermon about the folly of protectionism and the risks of a general trade war.

If you want to appreciate true protectionism, take a good look at China’s entire economic system. Steelworkers’ union president Leo Gerard put it perfectly: “Some of these idiots that say we are going to start a trade war—well, we are in a trade war now, and we are just sitting back.”

What’s the nature of this trade war? Beijing subsidizes production, floods the world with a glut of products at prices below their true costs, blocks imports, demands trade deals with western “partners” on terms that transfer technology and leadership to China, uses state intelligence agencies to steal intellectual property whose transfer it can’t coerce—and then demands and gets special treatment under the WTO as a developing country! All of this grossly violates free-market norms, and grabs market share in industry after industry at the expense of nations like the U.S. that mostly play by the rules.

And as Josh Bivens of the Economic Policy Institute has astutely reminded us, it’s not as if the U.S. doesn’t selectively protect. Successive administrations have spent great diplomatic and political capital to give exaggerated protections to politically influential industries like Big Pharma, software, and entertainment—just not to the crown jewels of unionized American manufacturing.

China produces over 800 million metric tons of steel, close to half of all the steel produced in the world, and its steel capacity keeps increasing. By comparison, the U.S., once the world’s leader, produces just over 70 million metric tons. Industry experts calculate that more than half of China’s steel output, about 425 million metric tons, is excess capacity.

The mainstream critics who attacked Trump’s action make arguments that miss the deeper point. For starters, they note that China only provides about 3 percent of steel imports into the U.S., so why go after China?

But look a little deeper. In response to past complaints that resulted in tariffs against particular categories of dumped Chinese steel, China simply increased its exports of steel to other nations, such as South Korea, for re-export. The Koreans then fabricated the steel into products like pipeline sections, which they exported to the U.S.

Thus Chinese steel evaded existing U.S. measures by detouring through other countries. But the core of the problem remains China’s predatory excess output.

Other trade complaints have been filed under relatively cumbersome anti-dumping procedures that require extensive documentation by complaining parties. This one was different, in that Trump invoked a seldom-used national security rationale, under Section 232 of the 1962 Trade Expansion Act. In this case, the government wrote its own extensive report and found—correctly—that American-made steel and aluminum faced an existential crisis and that losing those industries would have dire consequences for national defense.

Trump’s timing may be suspicious, with a special election for a vacant House seat coming up in Pennsylvania’s steel country on March 13. Even so, Trump did not just pull these tariffs out of his ear.

The voluminous technical report by the Commerce Department, made public January 11, found that relentless increases in import penetration had reduced U.S. steel production to below 70 percent of capacity, portending “a non-financially viable and unsustainable level of operation.”

The Commerce Department report also found, in the case of aluminum, that,

[T]here is only one remaining U.S. producer of the high-quality aluminum alloy needed for military aerospace,” and that China was a prime source of subsidized global oversupply. In 2000, China produced 11 percent of the world’s aluminum. Today it produces more than half. And, using coal-based smelters, it has the world’s dirtiest production of aluminum in terms of carbon emissions.

In a public statement February 16, Commerce Secretary Wilbur Ross proposed several possible options. One was an across-the-board increase in steel and aluminum tariffs. The second was a targeted tariff increase complemented by targeted quotas aimed at nations that were the source of the problem, most notably China. The third was a quota system generally.

In the case of aluminum, Ross gave Trump a choice of several tariff and quota measures that would “raise [domestic] production of aluminum from the present 48 percent average capacity to 80 percent, a level that would provide the industry with long-term viability.”

Trump, being Trump, went for the most simplistic, sensationalist and headline-grabbing move—tariffs on all steel and aluminum imports. This was hardly a surprise. Back in August, Axios published a leaked summary of meeting between Trump and his senior trade advisers. At that meeting, Trump declared, “I want tariffs.” Trump’s top economic adviser, Gary Cohn, late of Goldman Sachs, was plainly unhappy. Trump ended the meeting by declaring to chief Staff John Kelly: “I know there are some people in the room right now that are upset. I know there are some globalists in the room right now. And they don't want them, John, they don't want the tariffs. But I'm telling you, I want tariffs.”

So was Trump’s move smart or dumb? Basically, it was a dumb variant of a long overdue policy.

The fact that the mainstream has been ducking the reality of China’s state capitalism and its effect on U.S. industry leaves leadership on trade to far-right ultra-nationalists like Trump and his senior economic advisor, Peter Navarro, who are inclined to use a blunderbuss approach that alienates allies as well as adversaries.

For decades, Republican and Democratic presidents alike have waltzed around the deeper challenge that Chinese state capitalism poses, both to the global trading system and to America’s place in it. Intermittently, the West has imposed selective anti-dumping duties (tariffs) against the Chinese, but has not challenged the predatory logic of the entire Chinese mercantilist system.

This stands as one of the greatest intelligence and policy failures in American history—a slow motion, economic Pearl Harbor. The threat of China’s mercantilism was hidden in plain view, but ideological blinders prevented policymakers from seeing it.

The current issue of Foreign Affairs magazine has an article by two mainstream China experts, former Assistant Secretary of State Kurt Campbell and Ely Ratner, a former national security aide to Joe Biden, lamenting “How Beijing Defied American Expectations” and missed the China threat. But it wasn’t “America” that missed the threat. It was the foreign policy establishment. The acknowledgement is a little late in the day.

In part, this reticence is due to the fact that key players in America’s economic elite have figured out ways to profit from relations with a predatory China, even though Beijing is stealing their clothes in the long run. (Like climate change, that long run has arrived abruptly.) Apple loves the fact that it can make its products in China, using a well-trained, dirt-cheap, and docile work force one cut above slave labor. Goldman Sachs makes a fortune brokering financial deals with the Chinese.

Usually, the influence of these players is sufficient to keep American presidents from taking too hard a line against Beijing. So China treats the occasional get-tough order as a bee-sting.

Under Trump, however, the internal White House politics changed. The top officials dealing with trade policy, for once, are hard-liners: Commerce Secretary Ross, a former private equity billionaire who knows the steel industry well; U.S. Trade Representative Robert Lighthizer, who has a long history as a tough negotiator; and Navarro. These three are backstopped by the remaining Bannonite on the senior White House staff, Steve Miller, who reinforces Trump’s impulse to pander to economic ultra-nationalism.

In the internal staff discussions on the steel issue, this group of hard-liners won and the Goldman Sachs alums, Gary Cohn and Treasury Secretary Steve Mnuchin, lost.  But the sheer simple-mindedness of Trump’s move to impose flat tariffs on all steel exporters stunned even the trade hawks.

If the main problem is China, why retaliate against Canada, which actually buys more steel from the U.S. than it sells? Why attack the EU, whose close cooperation America needs if we are to have a general strategy of seriously challenging Chinese mercantilism?

The EU, in fact, has its own history of levying tariffs against Chinese exports, including a 28.5 percent tariff imposed last year against pipes and tubes exported at prices below the cost of production. But Trump, in a stroke, managed to get Canada, the EU, and China all on the same side. Pressured on all sides, Trump may yet walk back the details of his order, so that it targets the prime offender, namely China, and certainly not Canada and the EU.

American trade policy has long been hobbled by ideological blinders, compounded by wishful thinking about China’s evolution into a free-market democracy, and further compromised by conflicts of interest. But in the quest for a drastically different trade policy, Donald Trump is about the last leader to change course competently or constructively. His own view of China is a mass of contradictions.

Last week, we learned that Chinese President Xi Jinping has appointed himself leader effectively for life, turning China into even more of an autocracy. Most in the West recognized the intensified threat. Trump’s reaction was praise—and envy. Speaking at a fundraiser over the weekend at Mar-A-Lago, he said: “He's now president for life. President for life. No, he's great. And look, he was able to do that. I think it's great. Maybe we'll have to give that a shot some day.”

Trump sees Xi more as role model than rival. A serious trade policy would go after the root of China’ state capitalism, enlisting every possible ally rather than alienating them. It would connect trade objectives to the revival of U.S. manufacturing across the board, supercharged by an infrastructure program that favored domestic producers.

Raising tariffs on state-subsidized steel and aluminum is a good and necessary part of the right policy. Trump’s version, so far, has energized his critics and united America’s adversaries. It’s time for the mainstream to take back the challenge of how to deal with China. Otherwise, we leave the field to Trump.

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