…history shows that threats won’t work
By Allison Carnegie
TRADE hostilities between the United States and China continue to escalate. Last week, U.S. President Donald Trump threatened to place tariffs of ten percent on US$200 billion worth of Chinese goods after China retaliated against his previous threats to put tariffs of 25 percent on US$50 billion worth of its products.
Washington has warned of additional trade protection if China retaliates again. The latest move comes in addition to the 25 percent tariff on steel and the ten percent tariff on aluminium that the United States has placed on several countries, including China.
The Trump administration has declared that China must fulfil its demands before it will lift the tariffs. It wants China to cut its trade deficit with the United States, protect U.S. intellectual property, accept restrictions on Chinese investment in sensitive U.S. technology, allow greater U.S. investment in China, and remove trade barriers. Washington also wants a variety of concessions from many of its other trading partners.
Although commentators often describe Trump’s approach as a radical departure, U.S. attempts to strong-arm its trading partners are nothing new. Examining what happened the last time the United States tried to bully China can shed light on the likely outcome this time around. The prognosis is not good, in either the short term or the long term. Trump wants to put the United States first in order to get better deals. History suggests that his strategy will have the opposite effect.
Why threats won’t work
The United States has often used trade policy to try to coerce China into making political and economic concessions. Things got particularly heated after 1979, when Washington gave Beijing short-term tariff reductions (known as “most favoured nation” status) but made their yearly renewal contingent on China implementing a variety of concessions. These included improving human rights, reducing weapons proliferation, and cutting tariffs on U.S. goods. The United States warned that if China failed to comply, it would restore its tariffs to their previously high levels.
It didn’t work. Each year, China would make some minimal gesture, such as releasing a few political prisoners, in advance of the congressional vote over whether to renew its low tariff rates, but it did little else. In 1990, U.S. President George H. W. Bush admitted that overall there hadn’t been much give in China’s human rights policy or other areas in which Washington had demanded reforms. In addition, the threat of raising tariffs seems to have deterred trade and investment between the two countries.
Today, these kinds of tactics are even less likely to work. China now represents roughly 15 percent of the global economy, and the United States’ economic reliance on China has grown considerably over the past 25 years. Washington is now trying to pressure a country that can retaliate. The Chinese government will likely score political points for doing so, since the Chinese people will support standing up to the United States in the same way that Canadians are reacting to U.S. tariffs.
Already, instead of acquiescing, large U.S. trade partners, including China, are fighting back. China has developed its own list of counter-demands and announced retaliatory tariffs, as have other U.S. trading partners, often targeting products in key political districts. Trading partners are also decreasing their dependence on the U.S. market so that the United States will lose leverage over them in the future.
As in the past, these policies are undermining trade between the United States and the targets of the current tariffs, while imposing costs on American people and businesses by raising prices and heightening the risk of layoffs and losses on investments that are no longer worthwhile. Firms thrive on certainty, so these threats of disruption to trade hurt investment. And because investments today can affect trade far into the future, this can have major long-term economic consequences.
After past trade disputes, Washington recognized that its threats against Beijing weren’t winning concessions and were harming the U.S. economy. That’s why it allowed China to join the World Trade Organization in 2001. Joining the WTO was understood as a way to remove trade policy as a tool of political influence in order to reap the benefits of increased trade and investment. Washington and Beijing agreed to a set of rules and to allow the WTO to monitor compliance and adjudicate disputes.
This seems to have worked well. The economists Kyle Handley and Nuno Limão estimate that the reduced uncertainty following China’s accession explains one-third of China’s subsequent export boom to the United States, a boom that dramatically reduced prices on U.S. goods.
The problem now is that the United States is again using trade to try to gain leverage over China and other countries, but all of these countries are already WTO members. Washington is therefore undermining the primary mechanism by which it can reassure its partners that it won’t use trade to bully them.
The Trump administration has claimed that its actions are consistent with the WTO’s rules, so that the United States is just as reliable a trading partner as it has always been. Although the WTO has yet to rule on the legality of the administration’s actions, they clearly violate the spirit of the law and the norms that have been in place for decades.
The United States’ claim that its steel and aluminium tariffs are justified under the WTO’s “national security exception”—a broad loophole that exempts trade restrictions enacted for national security reasons—is particularly worrying. What constitutes a valid national security reason is unclear and is essentially left for countries to determine for themselves. Since a country could argue that virtually anything falls under this exception, governments have largely avoided using it. Indeed, no WTO panel has ever been asked to rule on it before.
In addition, the WTO’s rules say that countries should bring their grievances to the WTO rather than enacting unilateral punishments in response to perceived violations of their trade agreements. The purpose of this rule is to discourage tit-for-tat retaliations that can spiral into trade wars. By enacting new tariffs in response to its allegations of China’s intellectual property theft, the United States is sparking exactly that sort of costly dispute.
More broadly, research I conducted with fellow political scientist Austin Carson shows that openly flouting international norms can weaken them by showing other countries that defections are more common and acceptable than they thought. These countries often respond by violating their agreements, too. After all, no one wants to be the only sucker who follows the rules. Trump’s actions are already prompting defections: the retaliatory tariffs placed on the United States almost certainly violate the WTO’s laws.
In the long term, the United States may thus erode the system of trade that it built for its own benefit. Now that it has demonstrated its willingness to violate international trade norms, both countries and multinational firms will likely use more caution when dealing with the United States. They may even wonder whether it can be trusted on issues unrelated to trade. That could hurt cooperation on other economic and security issues as well.
Alternatives to a trade war
It’s understandable that the United States would want to protect its intellectual property rights and gain more market access for its companies. But using trade to pressure China has real costs. In fact, when China joined the WTO, Congress recognised that it would no longer be able to use trade to threaten China without breaking its commitments. As Robert Underwood, the delegate to the House of Representatives from Guam, explained, “Once China is a member of the WTO, the United States still can impose sanctions on China but they have to be WTO consistent.” So Congress developed alternatives, creating the Commission on the People’s Republic of China to “investigate and criticize” the country and using the Export-Import Bank, the Trade and Development Agency, and the Overseas Private Investment Corporation as alternative means to pressure China.
As well as using these mechanisms, the United States could negotiate a new cooperative agreement with Beijing to address its specific concerns. Since U.S. allies have many of the same complaints about China’s economic practices, it would make sense to craft a broad agreement that included them as well. In fact, the Trans-Pacific Partnership included investment provisions that would have addressed many points of contention, including over technology transfers. The United States has abandoned the TPP, but it could resume long-running talks over a bilateral investment treaty that would cover these issues. That process might seem frustratingly slow, but it has a better chance of success than unilateral threats and demands, which will only undermine the international trading system and fail to win the United States any significant victories.
Confidente. Lifting the Lid. Copyright © 2015