Trade War? Not So Fast!

Steve has published a post on President Trump’s order on trade with China, and Paul is working on one. I will add my thoughts briefly.

Trump’s order, which expresses the intent to place tariffs on certain Chinese products in retaliation against China’s unfair trade practices, prompted a wave of hysteria yesterday, including a selloff in the stock markets. This assessment in the Minneapolis Star Tribune is typical:

President Donald Trump on Thursday announced that he will place punitive tariffs on Chinese products sold to U.S. companies to make up for what the White House says is $50 billion worth of unfair trade practices.

The administration will also restrict Chinese investments in U.S. companies.

The U.S. trade representative will propose a specific list of products to be taxed. Senior White House officials said the list of targets was “long” but weighted toward high-tech products that the U.S. says were “acquired in an unfair way.”

The moves against the Chinese brought a quick threat of retaliation, with Beijing announcing that it could raise tariffs on U.S.-produced pork, aluminum and other goods. U.S. financial markets sold off sharply in reaction to the prospect of a trade war, with the Dow Jones losing more than 700 points.

With the exchange of tariff actions, the relationship between the world’s top-ranked economy, the United States, and the world’s second-ranked economy, China, formally moves from cooperative to adversarial.

You can read the fact sheet underlying President Trump’s order here:

* In August, President Trump’s Administration launched an investigation into Chinese acts, policies, and practices related to technology transfer, intellectual property, and innovation.

* The U.S. Trade Representative (USTR) led the investigation under Section 301 of the Trade Act of 1974, which gives the USTR broad authority subject to Presidential direction to eliminate unfair trade practices or policies that burden U.S. commerce.

* This was the first Section 301 investigation since 2013. USTR led an extensive investigation based on a thorough analysis of evidence and comments received from academics, think tanks, law firms, trade associations, and American companies and workers.

* The investigation concluded that China uses foreign ownership restrictions, such as joint venture requirements and administrative review and licensing processes to force or pressure U.S. companies to transfer technology to Chinese entities.

* China requires foreign companies that access their New Energy Vehicles market to transfer core technologies to a joint venture and disclose development and manufacturing technology for the entire vehicle.

* The investigation concluded that China forces U.S. companies seeking to license technologies to Chinese entities to do so on non-market based terms.

* China imposes contractual restrictions on the licensing of intellectual property and foreign technology into their country, but does not put the same restrictions on contracts between two Chinese enterprises.

* The investigation concluded that China directs and unfairly facilitates investments and acquisitions to generate large-scale technology transfer from U.S. companies to Chinese entities.

* A Chinese government-backed fund helped Apex Technology Co., a Chinese investment consortium, acquire a U.S. computer-printer maker which had previously sued Apex over patent infringement.

* The investigation concluded that China conducts and supports cyber intrusions into U.S. companies to access their sensitive commercial information, such as trade secrets.

* In 2014, the U.S. charged five Chinese military hackers for cyber espionage committed against U.S. corporations and a labor organization for commercial advantage.

* An interagency analysis estimates that China’s unfair acts, policies, and practices cause tens of billions in damages to the United States each year.

So what is going on is essentially what I predicted here. I doubt that we will see anything like a trade war, but what will happen–what is happening–is that President Trump is taking long-overdue steps to redress unfair trade practices on the part of other countries, especially China. The Obama administration was, as I wrote in the linked post, “shamefully supine” when it came to protecting America’s economic interests.

In my view, this is one of a number of policy areas–North Korea, Iran and Syria are others that come immediately to mind–where President Trump has inherited a mess that was kicked down the road by at least one prior administration. To his credit, he is taking action to protect American interests rather than, like Barack Obama, following the path of least resistance. How all of this eventually will play out remains to be seen, but my guess is that if we forgo politically-motivated hysteria and ultimately look at the results of Trump’s calling out objectionable Chinese practices, America will come out ahead.

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