ith news of a “phase one” trade deal between the U.S. and China, debates about U.S. trade policy towards China have reemerged. Trump’s rhetoric and the National Security Strategy (NSS) state the goal of promoting “free, fair and reciprocal economic relationships” while also discussing the need to address trade imbalances and unfair trade practices. However, the administration’s actions have resulted in little progress towards accomplishing these goals. The “phase one” trade deal is certainly better than an escalation of the trade war with China, but there will still be over $300 billion in tariffs imposed on Chinese goods. Unilateral action from the U.S., which started the trade war, has hurt the U.S. and global economy through rampant use of tariffs. To effectively address China’s unfair trade practices and promote free, fair, and reciprocal trade, the U.S. should instead use multilateral action, through the World Trade Organization (WTO). This will lead to increased pressure on China from the WTO and its members while preserving the established norms that work in the U.S. interest.
The Costs of Trump’s Trade War
Throughout the trade war, tariffs have been applied to billions of dollars of Chinese imports, in addition to tariffs applied to some of our largest trading partners, such as Canada and the European Union. These tariffs go against any semblance of free trade practices and negatively affect American consumers and firms. Consumers suffer as the tariff cost is passed onto them. Firms that rely on Chinese imports in their production processes face higher costs as well. This also affects the labor market, as uncertainty over production costs make firms hesitant to hire new workers.
As a result, the Federal Reserve forecasts a decrease in U.S. GDP by as much as a 1% in 2020 compared to growth in the absence of tariffs. Additionally, some U.S. sectors are suffering more than others, as China shows that it can obtain goods elsewhere. This is the case for the North Atlantic fishing industry, particularly lobster.
Part of Trump’s justification for the trade war is China’s disregard for intellectual property (IP) rights. China has shown that it is willing to force corporations into sharing technology and patented IP. However, a trade war is not going to force China into following established norms regarding IP. Trump has shunned international organizations like the WTO since taking office, threatening to leave the organization all together and blocking appointments of key positions that threaten the WTO’s ability to settle trade disputes. While the “phase one” deal does address some aspects of the unfair trade practices by China regarding foreign investment, what the U.S. has ultimately accomplished is decreased economic growth and weakening of international trade norms and practices.
A Better Way Forward
This trade war is leaving both the U.S. and Chinese economies worse off. The U.S. relies far too heavily on Chinese imports for a trade war to be effective. A better strategy is to use multilateralism, combining the resources of the WTO and close trading partners in a way that will force China to follow established norms. This strategy will be effective because of the collective support it affords the U.S. and the subsequent combined pressure it will apply on China, all while ensuring that the U.S. continues to enjoy the benefits of the established global trade rules. This combined pressure will effectively address Trump’s grievances regarding IP and China’s “developing nation” status. Having all major WTO members continue to follow and support WTO rules will make it clear to China that if they wish to continue the exporting that has led to their historic economic growth, they must cooperate within the confines of the established international system.
A shift to multilateralism can also preserve the norms that have been created in the international trade arena, which the U.S. heavily benefits from. The U.S. wins 91% of the trade disputes it brings against other nations. The WTO also allows the U.S. to work with all WTO members in a collective effort against China, as other members will be enforcing the same norms and dispute settlements that result from the reconciliation process. While this is a long-term strategy, it is an effective one and will bring the positive change that a trade war cannot.
Multilateral action, through the WTO is needed to bring China into the fold and provide the correct incentives to follow the established norms. While the “phase one” deal may provide a few wins for the U.S., it does not fully account for all the damage that has been done.