Trump calibrates his tone on trade, as big decisions on China loom

Slowly, President Trump is putting together a trade strategy for the US.

It is piecemeal. To some, it is too backward-looking. Nevertheless, the fiery campaigner who once proclaimed the world was driving the United States into third-world status is now building a case for how his America-first policies fit into a global trading system.

“America first does not mean America alone,” Mr. Trump told foreign leaders and business executives at the World Economic Forum in Davos, Switzerland, Friday. He opened the door to bilateral and even regional trade negotiations with nations in the proposed Trans-Pacific Partnership, a trade pact he officially killed in the first days of his presidency. “We are also working to reform the global trading system,” he said.

To convince skeptical trading partners, he will have to follow through with policies that illustrate how the US will take a harder line on trade while still respecting the rules-based global trading system it has long championed. And to effectively confront China, whose policies and actions have generated much of the trade tension today, he will have to build a coalition of those trading partners, trade experts say.

“The US will have to have like-minded trading allies by its side,” says Stephen Ezell, vice president of global innovation policy at the Information Technology & Innovation Foundation (ITIF), a Washington think tank. The US no longer has the economic leverage to single-handedly force Beijing to change its ways, he adds.

Whether a president who has alienated allies from Britain to Africa with tweets and reported comments can create an international coalition remains to be seen.

Earlier in the week at Davos, Indian Prime Minister Narendra Modi and German Chancellor Angela Merkel had warned against protectionism and the dangers of unilateral moves in a multilateral trading system.

There are some promising signs on this front. In December, the US, European Union, and Japan issued a strong joint statement saying they would work within the World Trade Organization and other multilateral groups to eliminate unfair competitive conditions caused by subsidies, state-owned enterprises, “forced” technology transfer, and local content requirements. The US has also strongly defended the EU in its trade dispute with China at the WTO.

Some trade experts worry that the administration is still too narrowly focused on preserving current manufacturing jobs rather than engendering the high paying jobs of the future.

“Right now, trade policy looks very rear-view mirror,” says Mary Lovely, an economics professor at Syracuse University. “Just worrying about 500 jobs here or 1,000 jobs there seems to miss the need for long-term strategy.”

On Monday, the administration slapped 30 percent tariffs on imports of solar cells and panels after a glut of them in China caused prices to plummet and forced many US manufacturers out of business.

Big decisions coming

More telling will be upcoming trade cases, involving imports of steel and aluminum as well as a broad investigation into Chinese trading practices. Depending on how the president acts, those cases could be a turning point in how the US engages China on trade, writes Chad Bown, senior fellow at the Peterson Institute for International Economics, in an email.

At Davos, Trump took a direct shot at China without mentioning it by name: “We cannot have free and open trade if some countries exploit the system at the expense of others,” he said. “The US will no longer turn a blind eye to unfair trade policies, including transfer of intellectual property.”

The US investigation into Chinese trading practices – potentially the most far-reaching trade case the administration has on its docket – includes a look into China’s attempt to boost its domestic know-how by forcing foreign companies to transfer their technology to Chinese joint-venture partners.

It’s part of a larger challenge that China poses to the trading system, says Mr. Ezell of the ITIF.

“There’s a whole theory of economic competition at play,” he says. Global trade rules are based on the idea that trade is win-win. If nation A builds a better mousetrap, nation B is better off buying mousetraps from nation A and using its own resources to make things it can make more cheaply than others. But “China has fundamentally rejected the notion of comparative advantage. China wants absolute advantage while having the unfettered ability to sell in global markets.”

An example is China’s national guidelines for its semiconductor industry, in which it specifically calls for halving US semiconductor imports in 10 years and eliminating them entirely within 20.

The issue is not clear-cut. China has made big strides in opening up many industries at the same time that it protects what it views as strategic areas. Since 1992, China’s average trade weighted tariffs have fallen from 40.6 percent to 4.5 percent by 2014, according to ORF, an Indian policy research group based in New Delhi.

Nevertheless, non-tariff barriers are still alive and well, ORF concluded in March. Forcing foreign companies to transfer technology in exchange for permission to invest in the country "is forbidden in China's WTO accession agreement," the group said. "However, it is blatantly followed in China.”

Shared concern on China

"It doesn't matter which trading partner you talk to – be it the Japanese or the US or neighboring countries or European countries,” Michael Clauss, Germany’s ambassador to China, told CNBC that same month. “They all feel the same, that there's a growing protectionism here."

If the Trump administration can harness that global dissatisfaction, it could challenge Beijing, says Professor Lovely of Syracuse. “There are many things that could be assisted by having other like-minded allies in setting rules for trade.”

And the risks of inaction loom large, in part because China has the scale to build up industries from nothing, in part because it uses practices that were never envisioned by the WTO. With cheap loans and other aid to its domestic solar industry, for example, China had grabbed 50 percent of the world market by 2016, up from less than 1 percent in 2001. The US, which invented the technology, now accounts for less than 1 percent.

“One of the areas that causes the most concerns is high tech,” Lovely says. “China is creating its own internet world. It has its own Amazon. Its own Google. There’s nothing in the [trade] rules to deal with that.”