How to win a trade war

By Peter Morici 

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For decades, China has waged a trade war, targeting U.S. industries and stealing jobs from ordinary American workers, while multinationals, Wall Street banks and the Ivy Leaguers and engineers they employ have been co-opted, made rich and used as advocates of appeasement to both Republican and Democratic administrations. President Obama’s weakness on trade — along with the left’s assault on religious liberty and obsessions with guns, race and gender — put Donald Trump in the White House. Unfortunately, his administration appears clueless about how to win at negotiations with China, and the recent truce announced by Treasury Secretary Steven Mnuchin will not likely hold up.

To win a trade war or any diplomatic skirmish — be it disarming North Korea, stifling Russian aggression or fixing unfair trade — the president needs to know the enemy, cultivate allies and implement a strategy that imposes more costs on malefactors than on Americans.

Mr. Trump’s hawks, U.S. Trade Representative Robert Lighthizer and National Trade Council Director Peter Navarro, confuse trade with the world and trade with China. The World Trade Organization (WTO) isn’t busted and our allies are not trade criminals.

No Western government fully adheres to the free market ideal embodied in WTO rules, including ours. Its dispute settlement mechanism is there to decide when incidental contact becomes pass interference — WTO panelists are no more perfect than NFL referees.

The Middle Kingdom got rich with mercantilist practices that exploit its developing country status in the WTO. That permits higher tariffs and weaker adherence to other rules, but China is a powerhouse and merits no such special treatment.

Its notorious industrial targeting — opaque administrative barriers to imports that supplement high tariffs, extravagant production and export subsidies and criminal acquisition of Western technology through compulsory joint ventures and outright piracy — is virtually impossible to police through WTO dispute settlement. It would be like prosecuting tens of thousands of white-collar criminals on Wall Street each year. Those are terribly difficult cases for government lawyers to win, even one at a time.

America and our allies need a new deal with China. If Beijing wants to rig trade, then it must be balanced. Otherwise, China accumulates hundreds of billions of dollars it can use to buy influence through its Silk Road initiative and acquire Western technology companies.

Radical change does not require or even make advantage in wrecking the WTO. In a chaotic world, China with its autocratic decision-making would be advantaged over the peacetime political processes of Western democracies.

Sticking fingers in the eyes of NAFTA partners with ludicrous demands — a five-year sunset on a revised NAFTA and scuttling investor dispute settlement — and throwing the EU in with China on steel and aluminum when the real focus should be China, Korea, Turkey and a few others that flagrantly subsidize or trans-ship Chinese products are no way to win friends to finally confront China.

And relying solely on targeted tariffs is dumb.

China can quickly counter duties on $50 billion or $100 billion of its exports by targeting U.S. farmers. Look at how Mr. Trump seems willing to sacrifice national security regarding ZTE phones in America to get relief for soybean and pork exporters for the midterm elections. Think of how inept and facile Washington looks to the Europeans for leaving that flank unguarded and then caving.

Instead, Mr. Trump should impose an across-the-board measure similar to the 1971 import surcharge imposed by Richard Nixon. Grant to U.S. exporters resaleable quotas to import from China in proportion to sales there.

The more China buys from America, the more America buys from China. Conversely, if it penalizes U.S. agricultural products, it sells less here.

The scheme would eliminate the special pleading of U.S. businesses for exemptions from proposed tariffs on Chinese goods — those that value imports more would bid the most to purchase licenses.

Our allies are worried about undermining the WTO and China diverting its subsidized stuff to their markets, but our answer should be simple: Keep trading with China as we are and there will be no WTO worth having — Beijing will soon dictate the rules.

China’s privateers are stealing European intellectual property and bread from the mouths of their workers, too. The Europeans can join the battle by imposing a similar regime, instead of harping, whining and criticizing as they are wont to do whenever a Republican occupies the White House.

• Peter Morici is an economist and business professor at the University of Maryland, and a national columnist.