US economy

US can win China trade war by reforming itself


When US President Donald Trump wrote on Twitter on Thursday that he had had a “good conversation” about trade with Xi Jinping, his Chinese counterpart, fears about global markets and the world economy may have eased. But there is little prospect that the simmering trade war between the two largest economies will fully cool anytime soon. After all, Mr Trump has correctly identified Chinese violation of trade norms as a serious problem.

However, critical economists have rightly pounced on the adverse effects of Mr Trump’s tariffs on American consumers and many US companies that rely on overseas production. They also point out that his administration’s emphasis on tariffs and traditional industries, such as cars and steel, appears to lack a strategic economic endgame.

But there can be one if American policymakers not only address the bilateral US-China trade deficit that obsesses Mr Trump but also the intellectual property concerns and the struggle for dominance in technology. In all three areas, a workable economic strategy begins with the US getting its own house in order.

The bilateral trade deficit is where US policy starts. But the overall current and financial account positions reflect the gap between national investment and national saving. To close it, America needs an increase in national saving, largely through fiscal consolidation to reduce the nation’s structural federal budget deficits.

On the economically important issues of market access and intellectual property, Mr Trump has a good point. China’s barriers against overseas companies in key sectors, and its diversions and theft of intellectual property, are not in keeping with the spirit and often the letter of membership of the World Trade Organization.

Back in 2001, when many policymakers and economists supported China’s accession to the WTO, they presumed its state-directed economy would evolve to become more like the market economies of other leading members. Beijing’s continuing reliance on state-owned enterprises and its regular interventions in corporate governance, credit allocation and competition policy refutes this idea.

There is a strong economic case for a major policy challenge of China in the WTO, including the question of whether its practices are consistent with continued membership. If Mr Trump is contemplating such a confrontation, he could also embolden Chinese reformers to push for changes that will strengthen and open China’s economy over time.

But strategic thinking remains important. That path also requires proper preparation. The US would need to build a consensus for such a challenge among leading market economies including the EU, Japan and Canada. But current US trade policy is alienating these allies over much less pressing trade concerns.

Finally, the US should focus more attention on Beijing’s Made in China 2025 initiative, which is a strategic thrust for dominance in technology. While Mr Trump remains focused on industries that were historically important, China has prioritised technology as a driver of the future economy. The US has little grounds to object, although I believe that China will discover that its top-down approach is less successful than the American tradition of decentralised innovation. Here, too, the productive US response would be to look inward and do what is needed to help America compete.

The Trump administration should pick up two policy threads. It should revive and increase federal support for basic research in science and technology. In the past, defence and non-defence funding played a crucial role in advancing US leadership in computation, software, artificial intelligence and robotics. The best counter to a Chinese push for global leadership in technology platforms is not protest, but to take action. The US government should not only boost spending on basic research but also support university research on applications.

It should also help to prepare American workers for the economy of tomorrow, by investing in community colleges and supporting workers in college completion, training and retraining over their careers. An expanded Earned Income Tax Credit or wage subsidies would do much to reward skill enhancement. This would also address legitimate worker concerns that globalisation and technological change put their livelihoods at risk.

Free trade enthusiasts’ disapproval notwithstanding, Mr Trump deserves credit for highlighting the need to change the relationship between the US and its allies with China. But diagnosing the problems in trade and economic co-operation, and treating them, are not the same thing.

The problem with the current administration’s focus on tariffs and industrial policy is not so much that it is bad economics, but that it misses the opportunity for bold policy action to get the US’s house in order and build America’s economic leadership.

With the midterm elections just days away, it is worth noting that this is not just good politics. That so many US households and companies would benefit from such a strategy suggests it might be good politics, too.

The writer is dean of Columbia Business School and previously chaired the US Council of Economic Advisers



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