If This Is A Trade War, Sign Me Up

We’re Off To A Good Start In The “Trade War”

Yesterday, the Trump administration slapped $60 billion in tariffs on Chinese imports. The tariffs are intended to protect American innovation and competitiveness in the global market. In response, China put retaliatory tariffs to the tune of $3 billion on US imports early Friday morning.

Trump also indicated that this will be the first of many economic actions the White House will take to combat China’s unfair trading practices. Watch below:

As this editorial has argued since it’s inception, tariffs are a good thing and are in fact necessary to bring the US back to a state of autarky. If these tariffs in the recent days are any indication, the US will be fine even if a so-called “trade-war” does erupt.

Trump’s Tariffs Target The Right Things

For starters, the tariffs President Trump’s administration adds are mainly on products advanced industry sectors, such as aerospace, information communication technology, and machinery. This is the right target for a litany of reasons which we have written extensively about, however outside perspectives are helpful, such as Greg Ip’s from the Wall Street Journal:

The classic case for free trade predicts that each country specializes where it has a comparative advantage, lowering costs and raising incomes for everyone. If China subsidizes exports of steel to the U.S., in theory the U.S. still benefits because consumers and steel-using industries will have lower costs, and while some steel jobs will disappear, more productive jobs elsewhere will take their place.

But starting in the 1980s, economists recognized that comparative advantage couldn’t explain success in many industries such as commercial jetliners, microprocessors and software. These industries are difficult for competitors to enter because of steep costs for research and development, previously established technical standards, increasing returns to scale (costs drop the more you sell), and network effects (the more customers use the product, the more valuable it becomes).

In such industries, a handful of firms may reap the lion’s share of the wages and profits (what economists call rents), at the expense of others. China’s efforts are aimed at achieving such dominance in many of these industries by 2025.

And with this national monopoly that China eventually wants, the market has no room to step in and adjust for prices using competition, or the “invisible hand” of the free market. Therefore, free trade doesn’t necessarily work for advanced industries.

By putting tariffs on China in our advanced industries, it will push for less offshoring of our production and cause a clustering of these industries in the United States that will further innovation, making our production more streamlined and efficient.

China Steals American Innovation

Additionally, China steals around $500 billion of intellectual property every year from the US. This is particularly egregious because they do it sometimes within the boundaries of the World Trade Organization’s rules.

Aside from China’s blatant currency manipulation, China engages in predatory trade practices that puts countries like the United States in a vulnerable position when trading with them. China stifles foreign trade within their boundaries by putting up costly barriers to entry that require American companies to give up technology to Chinese ones just to have market access. The White House fact sheet says that the Trump administration is currently addressing this issue specifically (emphasis added):

  • 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.

They further went on to acknowledge the lack of market correction China allows as well:

  • 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.

And the sheet goes on to explain the other countries besides China that have been treating United States goods unfairly in roundabout ways such as unfair licensing regimes and prohibiting subsidies.

China’s Response Is Expected, And Not Concerning

The fact is, China has been saying that if the United States puts tariffs on them, that they will put retaliatory tariffs on US goods. And good to their word, they have done so with new tariffs on dried fruit, nuts, and pork.

However, this doesn’t matter in the long run. The US is currently in a consumption bubble orders of magnitude worse than the housing bubble of yesteryear. The US needs to take back its production of advanced industries. Without this, we will continue our devolution into a mercantile slave colony of China, that supports them with our food while they sell us airplanes and superconductors.

If you have the time, check out our lengthy article on how economies grow to get a fuller understanding of why protecting our advanced industries from predatory nations is important.