The trade war between the United States and China has finally begun. Before July 6, easygoing economists in Tokyo (and elsewhere) predicted that the mutually retaliatory imposition of WTO-incompatible tariffs between the world’s two largest economies would only have a minimal impact on global trade.
The gross domestic product of the U.S., they claimed, dwarfs the potential impact of the additional tariffs that the Trump administration planned to impose on imports from China. Many in Tokyo seemed to have believed this unrealistic macro-economic wishful thinking. Now they have begun to realize that such an affirmative outlook may have been wrong.
What Tokyo started to hear is the shriek of business managers on the front line. With the start of the trade war, corporate decision makers must face the unpleasant and pessimistic reality. In fact, according to a friend’s survey last week, 85 percent of his Japanese clients were bearish as compared to just 15 percent the week before.
U.S. President Donald Trump does not seem to understand the very basic of economics: the law of comparative advantage. The theory, developed by David Ricardo in 1817, demonstrates that a nation can only maximize its economic interests in a free trade environment and, therefore, tariffs must be reduced to the minimum. It remains valid.
The theory prescribes the following: Suppose two nations can produce two commodities in a free market system. Each nation will increase its overall consumption by exporting the commodity over which it holds a comparative advantage while importing other commodity.
That was the reason why we established the regime of General Agreement on Tariffs and Trade and eventually the World Trade Organization, wasn’t it?
What the U.S. and China are doing now is exactly the opposite. Mutually raising tariffs is nothing but a game of chicken in which only reckless optimists believe they can win.
In such a stupid game, you are optimistic if you believe your opponent will eventually back off. Unfortunately, however, Trump seems confident that he can win the trade war against China. Likewise, believing China must and will ultimately win, Chinese President Xi Jinping cannot lose face when provoked by Washington’s notorious trade warriors.
Enough is enough and it’s time for the U.S. government to reconsider its new trade policy. It goes against Ricardo’s classical theory and, therefore, will be doomed to failure. To make matters worse, this policy not only damages domestic manufacturers but also harms more allies and friends than enemies or competitors of the U.S.
This, however, does not justify Beijing’s trade, monetary and economic policies. China proclaimed as early as 2016 its “long-standing view that countries should work jointly to further liberalize and facilitate trade and investment, combat protectionism and create a fair and transparent environment for cooperation.”
I have no objection to economic prosperity in China. The hard-working people of China, not necessarily the members of the Chinese Communist Party, deserve a higher standard of living following the historic humiliation that has taken place since the Opium War, as I wrote two weeks ago in my commentary “Who is making China great again?”
Still, I was appalled to read that statement. How could Beijing claim that China is a fair, transparent and free-trade nation combating protectionism? Since its accession to the WTO, Beijing has been taking advantage of the existing global free trade system without fulfilling the commitments that it made in 2001.
China is still free-riding the global liberal order. It is not a free-trade nation. Beijing is making the best use of an international free- trade regime, while preventing foreigners from competing in China on a “level playing field,” the very expression the U.S. trade negotiators in the 1980s often used in the era of Japan-U.S. trade frictions.
The U.S.-China trade war, however, is much more serious than the U.S.-Japan trade disputes three decades ago. Japan didn’t legally require foreign firms to automatically transfer their corporate secrets. Traditionally Tokyo has respected and proudly valued intellectual property rights.
What is more dangerous seems to be the fact that the Chinese authorities — not private entities — target and obtain, often through cyber or other espionage, state-of-the-art technologies from foreign companies and allegedly allow their Chinese competitors to utilize the stolen high-tech information for commercial purposes.
China cannot and should not become a manufacturing giant by illegally obtaining or confiscating commercial secrets from foreign entities. If so, it is not a trade issue anymore. Rather, it is an issue of national security dilemma that must be dealt with by different means — or at least not by a trade war against Beijing.
The following measures should be taken now:
1. Economists of all lands, unite!
All international economic theories dictate us to uphold the free trade system no matter how politically incorrect it may sound in domestic politics. This is the lesson of 1945 and the serious economists in the world must echo the call, “Stop the game of chicken, Trump and Xi.”
2. Punish China’s trade theft through different means.
Raising tariffs is addictive and ultimately suicidal. The U.S. and its allies must find collective non-tariff measures to restrain and prevent Beijing from resorting to irresponsible measures in dealing with its trade competitors.
3. Separate allies from adversaries.
Trump’s trade advisers don’t have the slightest idea of how important the security environment is for the sound and healthy promotion of international trade activities. Those narrow-minded advisers must think twice before they recommend policy options to Trump.
The real danger, however, is neither Xi nor the trade policy advisers in the Trump administration. It is Trump himself who is the most detrimental factor, not only to the fair and sound international trade regime but also to the equally precious global alliance system from which the U.S. has most benefited.
Rome was not built in a day, but it could have been destroyed overnight. It is too easy to impulsively ruin and dismantle a great trade system that has taken decades to build and maintain. That’s why Washington and Beijing should immediately stop their silly, suicidal game of chicken.
Kuni Miyake is president of the Foreign Policy Institute and research director at Canon Institute for Global Studies.