Donald Trump declares trade war on China

The Trump administration has presented China with an ultimatum on trade. That is what the US’s “draft framework” for the trade talks with Chinese officials in Beijing last week actually is. China could not accede to its demands. The US administration is either so foolish that it does not understand this or so arrogant that it does not care. This may be a decisive moment for relations between the world’s two greatest powers.

The US side demands the following “concrete and verifiable actions”.

China is to reduce the US-China trade imbalance by $100bn in the 12 months beginning June 1 2018, and by another $100bn in the 12 months beginning June 1 2019.

China should also immediately eliminate all “market-distorting subsidies” conducive to excess capacity. It will strengthen intellectual property and eliminate technology-related requirements for joint ventures.

“Furthermore, China agrees to . . . cease the targeting of [US] technology and intellectual property through cyber operations, economic espionage, counterfeiting and piracy. China also agrees to abide by US export control laws.”

Moreover, China will withdraw requests for World Trade Organization consultations relating to tariff actions on intellectual property. “In addition, China will not take any retaliatory action . . . in response to actions taken or to be taken by the US, including any new US restrictions . . . China immediately will cease all retaliatory actions currently being pursued.”

China “will not oppose, challenge, or . . . retaliate against US imposition of restrictions on investments from China in sensitive US technology sectors or sectors critical to US national security”. But “US investors in China must be afforded fair, effective and non-discriminatory market access and treatment, including removal of . . . foreign investment restrictions and foreign ownership/shareholding requirements”.

By July 1 2020, China will reduce tariffs in “non-critical sectors to levels that are no higher than” equivalent US tariffs. It will also open access to services and farm products as the US specifies.

The agreement is to be monitored quarterly. Should the US conclude that China is not in compliance, it may impose tariffs or import restrictions. China “will not oppose, challenge or take any form of action against” any such US impositions. China will also withdraw its WTO complaint that it is not being treated as a market economy.

What is to be made of these demands? The call for a reduction of the bilateral deficits by $200bn (up from $100bn) is ridiculous. It would require the Chinese state to take control over the economy — precisely what, in other respects, the US demands it not do.

It is a violation of the principles of non-discrimination, multilateralism and market-conformity that underpin the trading system the US created. It should be ashamed of itself. It ignores the overwhelming probability that this will not reduce overall US deficits, particularly given US fiscal irresponsibility. It ignores the inevitable adverse effects on third countries.

The demand that China have exactly the same tariffs as the US is almost as ridiculous. There is no economic case for such a policy. It would be far more reasonable to demand that it move towards the same average tariff as the US or EU.

A serious discussion should indeed be had on the terms of foreign investment in China and Chinese investment in the US. So, too, must there be a discussion of intellectual property protection and cyber-espionage. But China could never accept the idea that the US may prevent it from upgrading its technology.

The notion that the US may insist on unrestricted access for investment in China while reserving the right to restrict Chinese investment, as it wishes, must also be unacceptable.

Finally, the idea that the US will be judge, jury and executioner, while China will be deprived of the rights to retaliate or seek recourse to the WTO is crazy. No great sovereign power could accept such a humiliation. For China, it would be a modern version of the “unequal treaties” of the 19th century.

The Americans seem sure they can force the Chinese to sue for terms, however foolish and humiliating these are. China would indeed be hurt more by a tit-for-tat tariff war than the US. This is because its exports to the US dwarf those from the US to China.

A recent analysis from the Hoover Institution suggests that China’s economic growth might be reduced by 0.3 percentage points in a tariff war. That is far more costly than to the US, but it would be survivable for an economy as dynamic as China’s. To China’s leaders, such costs would be dwarfed by those of abject surrender.

Both economically and politically, the US is going about this in the wrong way, not only because it is seeking to humiliate China, but because it is simultaneously waging commercial war on its potential allies. The right path for everybody would be to make the discussion multilateral, not narrowly bilateral.

China should recognise that, though still a developing country in some respects, it is also a superpower. It should embrace the principles of rules-governed openness and liberal trade. A renewal of the lapsed multilateral trade negotiation, built around opening up the Chinese economy, could, as the Chinese say, be a “win-win” for everybody. China should take the lead. The Europeans and Japanese should support the idea.

Americans who are better aware of the national interest than the administration need to understand that the US will find itself on its own if it seeks conflict. That is what must happen when a leader turns into a self-regarding bully.

Martin Wolf

Wolf is the Chief Economics Commentator of The Financial Times.