Trump Has the Winning Hand on China; He Just Needs to Play It

Few can forget when then-candidate Trump took the country by storm with his promise to “Make America Great Again.” Yet making this vision a reality will require now-President Trump to continue building upon a set of pro-growth policies, not imposing new taxes on steel and aluminum imports from China.

The solution to issues with China can be found through better and smarter trade rules, which need to be negotiated with like-minded countries. President Trump remarked at the World Economic Forum in Davos that he would consider rejoining the massive Trans-Pacific Partnership (TPP) if we can negotiate better terms. That’s reason for optimism. Negotiations, after all, are his strong suit. 

But President Trump may be receiving bad advice when it comes to steel and aluminum. Tariffs are import taxes, and these taxes make it more costly to do business in America, which drags down growth. While import taxes may boost steel prices and profits for industry executives, they will do little for the core strength of this long-protected industry, and they’ll do virtually nothing for steel workers.

We saw this first-hand when President George W. Bush implemented steel tariffs back in 2002. The price of steel climbed, steel employment sagged and China did not change its behavior. Even worse, more Americans lost their jobs in steel-consuming sectors than in the entire steel industry itself.

American consumers found themselves paying more at the checkout counter, too, as those steel-consuming industries passed the increased cost along to them. The only winners were the steel-company executives who continued to cash in multimillion dollar compensation packages.

The Trump import taxes will yield the same results. 

There are 140,000 workers in the industry whose jobs the president is nobly trying to protect. But there are 5.4 million U.S. workers in steel-consuming companies whose well-being will immediately be adversely affected by the import taxes that increase steel prices, increase production costs, lower profits and destroy jobs. 

To be sure, the heavy-handed competition from the Chinese companies that receive massive help from their government has created distortions in both steel and many other industries, which are felt all over the globe. The good news is that the Trump administration has other options.

If history is our guide, the negotiating table is an ideal place to address the so-called “China problem.” Major multilateral negotiations like the Kennedy Round, Tokyo Round, Uruguay Round and then the World Trade Organization itself, all resulted in the world’s major economies eliminating their most blatant nationalistic economic policies while tariffs were negotiated downward.

The TPP aimed to deliver not only further market access but also rules on state interference for the Asia-Pacific region with the exclusion of China.

When China acceded to the WTO in 2001, the consensus in the United States and abroad was that China would eventually succumb to an open, market-oriented trade regime. China has certainly come a long way, in part thanks to WTO membership, but it is still far from being a market-oriented economy.

Owing to its sheer size, when China stumbles backward to state interference in the market, the ripple effects are tremendous and leave collateral damage in their wake. Those ripple effects, known as the "China Shock," have been clearly documented

Our allies are just as frustrated. They are, however, unwilling to jeopardize economic growth with import taxes. 

President Trump and his administration should embrace this moment and form alliances with these trading partners and lead the TPP to conclusion. In line with the president’s remarks at Davos, Treasury Secretary Steve Mnuchin confirms that if the United States could get a “substantially better deal,” then rejoining the trade pact is in the cards.

The United States would have to play an essential role in negotiating strong rules on state-owned enterprises and egregious state interference in the marketplace. Importantly, China would be allowed to join only once it can credibly commit to the multilateral agreement on market-based rules.

President Xi Jinping has stated the country’s intent toward market-oriented reforms. These moves will compel China to embrace that direction. 

Trump has the winning hand. He just needs to play it.