Why Trump is right: China isn't playing by trade rules

One of the greatest risks in President Trump’s policy agenda is that he’ll start a trade war, tanking the global economy as he lashes out against allegedly unfair practices of other nations including China.

That’s been a common refrain for months, including this week as he met for the first time with Chinese leader Xi Jinping.

A “global depression” will occur if Mr. Trump follows through on his threatened 45 percent tariff on Chinese goods, rival candidate Jeb Bush warned during the presidential campaign last year.

No one wins in a trade war, said President Xi himself in a speech two months ago.

The grain of truth here is that, yes, an all-out trade clash between the two largest economies would have immediate and negative consequences for workers and consumers around the world. But all of this may, at the same time, miss a key point: The global trade system has deep flaws that are related to China, not Trump.

For years, China has been welcomed by the world into trade linkages, on the expectation that over time it will play the game of commerce the way others generally do. Trade experts say that hasn’t happened. Even many of the same CEOs and economists who warn against a trade war say China has been violating both the letter and spirit of global trade rules.

Trump’s election win stemmed partly from the resonance of his critique of trade policies as harming US workers. While outside experts may not paint the issue with the president’s broad brush, some say a tougher stance toward China is needed, that a damaging trade war isn’t the most likely outcome, and that the “just be patient” strategy carries its own deep risks.

“His diagnosis is correct. It's very frustrating, I find, listening to the Washington trade establishment” view about not risking a trade war with China, says Robert Atkinson, an economist who studies the ties between global trade and national economic performance. “The war has been going on for 15 years, and in earnest for the last eight. The notion that if you respond you're a protectionist, or you're starting a trade war, ... that's incorrect.”

Damage to nations 

Mr. Atkinson, who heads the Information Technology and Innovation Foundation, a think tank in Washington, doesn’t endorse all of Trump’s espoused trade views. But he argues China is a unique challenge because of its sheer size, coupled with its determination to parlay that market power into acquiring a leadership role in advanced industries from aerospace to computing. That means that when Beijing doesn’t play by accepted rules, the damage to other nations including the US is considerable.

Under President Barack Obama, the office of the US Trade Representative ramped up its engagement on alleged violations by China. The USTR’s annual report covering 2016, for example, lists an array of settlements reached with China last year – over subsidies, taxes, or other policies in industries including aircraft, autos, financial information, wind power, and green technologies.

That’s a sign that progress can come when pressure is applied.

The problem, say critics of China’s trade policies, is that much more needs to change. Among the biggest sore spots is the way foreign companies doing business in China are pressured to transfer knowledge to Chinese partner firms in industries such as aerospace. The World Trade Organization prohibits countries from making such demands, yet the Chinese arrangements are, in practice, hard to prosecute.

“It’s not just a manufacturing [jobs] issue,” says Edward Alden, a trade expert at the Council on Foreign Relations in Washington. “There are very legitimate questions about what can be done to make China a fairer partner not just for the United States but for the world.”

Jamie Dimon, CEO of the banking firm JPMorgan Chase, included some policy commentary in his annual letter to shareholders, and singled out China for “serious trade issues ... which have grown over the years – from cybersecurity and the protection of intellectual property to tariffs, non-tariff trade barriers and non-fulfillment of World Trade Organization obligations.”

Few signals from summit

As Trump and Xi met at the Trump-branded Mar-a-Lago resort in Florida, there were few early signs of either progress or breakdown.

A White House statement said the US president "noted the challenges caused by Chinese government intervention in its economy and raised serious concerns about the impact of China's industrial, agricultural, technology, and cyber policies on United States jobs and exports." 

But both leaders talked in largely positive terms about their meetings. And US officials announced that the two sides planned a 100-day push to discuss trade issues. [Editor's note: The article has been updated by adding the previous two paragraphs.]

Before a side-by-side dinner Thursday, Trump offered that “we’ve had a long discussion already, and so far I have gotten nothing, absolutely nothing. But we have developed a friendship – I can see that – and I think long term we are going to have a very, very great relationship and I look very much forward to it.”

Is the friendly comment a sign that Trump will go just as soft on China as critics say some of his predecessors have been?

That’s actually just one of many unanswered questions about Trump and trade policy. For all the concern in some quarters that he’ll go too far, resulting in tit-for-tat sanctions that cause a recession, leading Democrats in Congress are urging him to get tough.

Mr. Alden says it’s still too early to gauge the tenor of Trump’s policies. His trade team is far from complete and some of his appointees differ in tone.

One crucial decision will be how much to seek a broader international coalition to press China. Trump has voiced a penchant for bilateral dealing and dealmaking. But Alden echoes many experts when he says “you're always better off working with allies than working alone.”

Atkinson says the goal isn’t to block China’s development but to insist on a rule-of-law system under which all parties can benefit.

Coupled with innovation policies to maintain America’s dynamism at home, such a strategy could avert the potential loss of key industries, he says.

“When we have pushed the Chinese in the past, in a respectful but firm way with our allies, we have prevailed,” Atkinson says.