Our tariffs are bigger

I had a post drafted yesterday on American policy toward China, featuring the Senate’s ZTE amendment. Then this happened: the president threatened to apply 10% tariffs to $200 billion more in Chinese exports. Crossed up by the Trump administration — at least it’s a big club.

China made a major mistake early Saturday morning when it pledged to mirror the initial 25% US tariffs on $50 billion of their exports. It did this for the first time in early April and provoked an immediate American vow to go to $150 billion in Chinese goods subject to tariffs. Doing so again was therefore a direct challenge to President Trump’s credibility.

Worse, it was a direct challenge to his credibility on the trade deficit. The trade deficit should not be the focus of US policy. Our partners’ practices, for example their subsidies, are what matter. But the president’s complete rejection of this and laser focus on the deficit go back to 1980s Japan. This year, NAFTA may wither due to our deficit with Mexico.

China mirroring American tariffs serves to maintain the bilateral deficit. And, fitting President Trump’s flip comment that trade wars are easy to win, he has a seemingly easy option: impose tariffs on more Chinese exports to the US than the total for American exports to the PRC. Total American exports to the PRC of goods and services were $188 billion last year, so go to $250 billion. Beijing walked down a path where it was guaranteed to a hit a wall.

What now? China must find a way to let go of tariffs while still retaliating against the US. The bilateral relationship is large and multifaceted; there are many choices. An obvious one is to punish American firms operating in the PRC, which would affect our stock market and create political pressure to negotiate, but won’t boost the trade deficit.

The much-discussed $44-billion Qualcomm acquisition of NXP is again at risk. And Beijing can certainly go farther than that in harassing US technology companies. And car companies. And franchises. Expect China to talk more of such steps and less of tariffs.

Oh look, a way to use what I already wrote, how did that get here? If China targets American companies, would the US reinstate the ban on sales to ZTE that had threatened its survival? Probably not.

Less than 90 minutes before President Trump waved around the $200-billion bat, the Senate ostensibly ordered the administration to re-impose the ban on sales to ZTE. But it’s unclear this would bind even if it passed Congress as a whole. The legislation requires the Department of Commerce to reverse its reversal — no, that’s not a typo — of its April sales ban. It only applies if ZTE has violated American law in the past year or is not cooperating with the US.

ZTE is currently cooperating. The original Commerce order argued ZTE violated the law on July 20, 2017. In a month that won’t matter. Commerce also complained ZTE did not correct its mistake until March 8, 2018. Not correcting a mistake does not appear to be a fresh legal infraction (and would be challenged in court). Finally, the Senate language will likely not survive conference with the House, which has taken no such step.

There’s also no sign yet of the White House changing its stance that Congress should leave the ZTE agreement alone. This suggests the Trump administration still sees value in negotiating with China and will be open to making trade talks, not tariffs, the next step.

A little perspective to close: This potential “ war” was started by a fully justified inquiry into Chinese theft of and coercion with regard to intellectual property (IP). The best American response is to target Chinese firms which have used stolen or coerced IP to become unfairly competitive. Targeting large state firms would especially pressure the Communist Party.

Instead, we may apply tariffs with little relation to IP. Further, because state enterprises don’t tend to be competitive exporters, tariffs might miss them almost entirely.  President Trump is justifiably angry about the PRC trying to continue its predatory trade behavior. This still isn’t the right way to respond.