How to Win a Trade War With China

There’s a smart way to do it. But Trump seems intent on fighting a kind of enemy that no longer exists.

What Trump's Trade War with China Would Look Like

With the ascent of Donald Trump, fears have risen that China and the U.S. might be headed for war. At least for now, any conflict is most likely to be economic. Ever since Richard Nixon’s famous visit with Mao Zedong in 1972, the U.S. has striven to treat Beijing as a partner, help its economy develop, and lure the emerging giant into the global order Washington has crafted. Trump, though, believes that policy has allowed China to prosper at America’s expense, and that it’s high time Washington stood up for U.S. workers, industry, and power. The Chinese “haven’t played by the rules, and I know it’s time that they’re going to start,” he said in December.

Much of what Trump says about China is nonsense. But embedded in his rhetoric is an astute and significant point: China is an economic rival to the U.S., and Washington has to start acting like it is. A new approach to defend U.S. economic interests against the ascending Chinese superpower may be necessary, perhaps even critical.

A man wearing a hard hat walks past a sign reading ‘Made In China’ at the China Guangdong Pilot Free Trade Zone in Shenzhen.

A man wearing a hard hat walks in the China Guangdong Pilot Free Trade Zone in Shenzhen.

Photographer: Qilai Shen/Bloomberg

The problem is that Trump is fighting old battles with archaic weaponry and an outdated strategy. In his eyes, China remains primarily a jobs thief, using unfair trade practices, such as currency manipulation, to pilfer U.S. factories and wealth. The blame, he says, falls on America’s previous leaders, who chose global over national interests and stood by while China committed “the greatest theft in the history of the world.” He’s vowed to stand up to China, reverse the tide, and bring factories and jobs home.

The China that Trump rails against, however, no longer exists. There was a time when Beijing did manipulate its currency to promote its exports, but nowadays its central bank is desperately trying to stop the yuan from weakening. Competition from Chinese manufacturing has also likely cost Americans some jobs—by one estimate, at least 2 million from 1999 to 2011. But now wages for shop-floor workers in China are the highest in developing Asia, and the nation is losing jobs to countries with lower costs. In fact, more and more American manufacturers are in the process of “reshoring,” or shifting production back to the U.S. from China.

That’s not to say China is no longer a danger to the U.S. Just the opposite. The two countries are still engaged in an economic struggle. It’s just over different things. First and foremost, it’s a battle for the high-tech industries of tomorrow. No longer content to churn out T-shirts and TVs for U.S. consumers, China wants to develop its own products based on homegrown technology and labeled with Chinese brands. Its goal is to nurture champions to compete with and supplant U.S. companies. This strategy is fully backed by all the resources and powers of the government. Beijing adopted a new industrial policy in 2015, called Made in China 2025, which intends to upgrade manufacturing capabilities for high-tech products including medical devices, electric cars, and robots. Ample government cash and other favors are usually offered to such targeted sectors. A report released by an advisory council in the Obama White House in early January outlined China’s efforts to dominate the global semiconductor industry, supported by $150 billion in public or state-linked funds.

A worker tests the cameras of OnePlus X smartphones at the OnePlus manufacturing facility in Dongguan, China.

Photographer: Qilai Shen/Bloomberg

This is a serious risk for America’s future. When China started assembling stuff such as iPhones, it may have claimed a few jobs, but it wasn’t threatening U.S. economic primacy. If China designs the next groundbreaking product with its own software and chips and under its own brand, then the country can truly undercut America’s main economic strengths and challenge its global leadership.

Furthermore, Beijing won’t play nice to achieve its goals. Despite perennial promises to continue “opening up,” it’s tilting the playing field at home toward its own companies, using continued investment restrictions on foreign companies and other barriers to trade, forced technology transfers, go-slow red tape, and other methods. In a survey by the American Chamber of Commerce in China released in January, 8 of 10 respondents said they feel less welcome than in the past, while more than 60 percent have little or no confidence that China will open markets further over the next three years. Cracking the country open to U.S. business is critical. Companies from General Motors to Starbucks need free and fair access to ever-wealthier Chinese consumers to keep their profits growing.

The big question is: What should the U.S. do about all this? Trump’s idea is to shake things up. He’s threatened to impose a high tariff on Chinese imports to counteract Beijing’s supposed “cheating” and force open its market. Rather than honoring past agreements with Beijing, Trump has indicated he would place them back on the negotiating table.

Workers assemble monitors at a TCL Corp. factory in Huizhou, Guangdong province, China.

Photographer: Qilai Shen/Bloomberg

It’s hard to know what Trump’s China policy will be. For instance, after angering Beijing by questioning Washington’s acceptance of the “One China” policy, in which the People’s Republic is recognized as the sole Chinese government, Trump quickly backtracked in a February phone call with his counterpart, Xi Jinping. Still, the aggressive approach Trump has seemed to favor will almost certainly achieve the opposite of what he intends. Beijing officials have already warned they would retaliate against U.S. imports if Trump hikes tariffs on Chinese goods, sparking a trade war that would be destructive for both parties. Similarly, if Trump labels China a “currency manipulator,” as he’s vowed to do, he’ll be picking a fight with Beijing over an issue that is, at the moment, almost irrelevant to U.S.-China relations.

A better option would be carefully targeted tactical weapons. One method is to use reciprocity as a guideline—in other words, match Beijing’s restrictive policies with similar measures on Chinese activities in the U.S. That could protect vital know-how from falling into Chinese hands, press Beijing to open its market, and counteract undue advantages the government gives Chinese business. For instance, in sectors where China throws up barriers to foreign companies, Washington should impose the same on Chinese companies in the U.S. Washington could also take a page from Beijing’s playbook by identifying and protecting critical technologies and strategic companies. “U.S. policies should expand to take into account the differences between the U.S. and Chinese systems,” argues James McGregor, author of One Billion Customers: Lessons From the Front Lines of Doing Business in China.

Washington has already been moving in that direction. Members of Congress have called for greater government scrutiny of Chinese acquisitions of American assets in industries as diverse as agriculture and entertainment. The U.S.-China Economic and Security Review Commission, which advises Congress, advocated last year for a ban on purchases of U.S. companies by China’s state-owned enterprises, considering them agents of the state. The White House’s semiconductor report recommended the government take sterner action to prevent sensitive chip technologies from being acquired by Chinese investors.

Others say Washington can employ domestic laws and regulations in a broader sense to pressure China. For example, it can apply rules that already allow the U.S. to impose duties on goods dumped, or sold below cost, in the American market to counteract a foreign state that alters the value of its currency in ways that damage U.S. business—if the Chinese try to pull that stuff again. “There are ways to have a more assertive policy toward China that would not single out China,” says Jacob Parker, vice president at the U.S.-China Business Council.

There could be pitfalls. China might take its revenge by further hampering U.S. business in China. Or Washington could scare off Chinese investment in the U.S. that could create jobs and revitalize industries.

The bottom line is that the U.S. has to see its economy the way China envisions its own. China is unlike any other country participating in the U.S.-led global economy: It intends to benefit from the openness and security offered by that system without being obligated to abide by its norms. Developing certain industries is perceived as core to China’s national security, not something to be left to the whims of shareholders and stock markets. If the U.S. is to win this new economic war, its leaders have to start thinking more about what is and what isn’t good for long-term national interests in dealing with China. Trump may have realized the need for this shift in the relationship. But he’s fighting the war with the wrong strategies.
 
Schuman, a journalist based in Beijing, is the author of Confucius: And the World He Created.

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