March 22, 2018 10:57AM

Trump to Impose Restrictions on Imports and Investment from China

This afternoon, for the second time in the space of a month, President Trump is expected to invoke his authority under a rarely used statute to levy restrictions on a vast swath of imports and investment from China. The cause for today’s measures is behavior that the U.S. Trade Representative has characterized as rampant, sustained theft of U.S. intellectual property by Chinese entities and the Chinese government.

Although allegations—and the evidence supporting those allegations—that China routinely transgresses in the realm of intellectual property have been accumulating for many years, it does not follow that the appropriate response is to restrict trade and investment. In fact, the collateral damage inflicted by those restrictions will be widespread.

President Trump’s “remedies” are likely to raise production costs for U.S. businesses, diminish U.S. productivity, squeeze real household incomes, reduce the revenues of U.S. farmers and other export-dependent industries targeted by Chinese retaliation, exacerbate tensions with China and other countries adversely affected by the restrictions, and hasten the demise of the rules-based trading system.

Among the imports expected to be targeted by punitive tariffs are information and communication technology (ICT) products, which are presumed to have benefited from IP theft. As a preliminary matter, it’s important to note that most exports of ICT products from China contain more non-Chinese value than Chinese value. On an aggregate basis, non-Chinese inputs (material, labor, overhead, R&D, etc.) account for nearly 50 percent of the value of all U.S. imports from China.  For ICT products, the percentage of non-Chinese value is much greater than half. 

Remember the inscription on the back of the Apple iPhone? It reads “Designed by Apple in California; Assembled in China.” In 2013, it cost $178.96 to produce an iPhone, but only $6.44 or 3.6% was Chinese value added. Yet, the entire $178.96 is chalked up as imported from China, exaggerating the U.S. bilateral trade deficit, which is the main reason Trump wants to impose tariffs in the first place! It’s important to note that Japanese, Korean, Singaporean, German, and many other (including American) companies will be hurt by U.S. tariffs on Chinese ICTs.

Moreover, ICT products are inputs to value added production in the United States. Raising the costs of computers, devices, and technology components will raise the cost of production or reduce productivity across the U.S. services and manufacturing sectors. Meanwhile, U.S. consumers will have to devote more of their income to ICT products, leaving fewer dollars to spend on other U.S. goods and services or to save and invest in other businesses. The tariffs will make scarce resources scarcer still.

Yet another significant economic cost of Trump’s tariffs is the loss of revenues U.S. farmers and other U.S. targets of retaliation will be forced to endure. China is reportedly preparing to impose restrictions on U.S. soy exports and, almost certainly, other agricultural products will be targeted as well.  Don’t be surprised to see U.S. technology companies hurt as well, as China considers justifying its intrusive forced technology transfer policies as a national security imperative. (With his steel and aluminum tariffs, Trump opened the door to abuse of that excuse.)

The appropriate response to China’s infractions would be to use the evidence collected as the basis for a formal complaint at the World Trade Organization. In fact, that should have been done several years ago, but apparently U.S. multinationals were reluctant to go on record with evidence of those infractions for fear of suffering retribution from Beijing. As the problem worsened and a tit-for-tat high tech trade war began to play out in the shadows, a narrative emerged (which has come to dominate the debate over economic relations with China) that the WTO rules are inadequate to restrain certain discriminatory, predatory Chinese industrial policies, and that even if they could be used to discipline those practices, China wouldn’t comply.

This is a false narrative—or, at least, an untested one. The United States has brought only 21 cases against China (but 116 overall), and China has a strong record of compliance when its practices have been found to violate the rules. By circumventing the WTO under the premise that its rules are inadequate to discipline China, and invoking a law that is incompatible with U.S. obligations under the WTO rules, President Trump has delivered a vote of no confidence in a system that has served U.S. interests well for 70 years.

Whether the system endures or something else emerges to fill the void remains an open question. But for the foreseeable future, an environment of higher consumer prices, higher production costs, unpredictable lawlessness, and tit for tat protectionism is likely to prevail.