US: No Positive-Sum Trade and Economic Strategy

Wariness of a trade war between the United States and China has been rattling investors worldwide. While proponents of free trade will continue to insist that there can be no winner in an all-out trade war, they also are well aware that the current playing field is hardly even.

The Trump administration’s insistence on reciprocity in trade enjoys support from free traders and protectionists alike. The problem, though, lies in the U.S. side placing far too much emphasis on reducing the trade deficit and not enough on investing in future U.S. competitiveness.

Instead of putting up trade barriers to protect select U.S. industries, the U.S. government should learn from Asia’s recent past by investing strategically in key sectors that will strengthen the nation’s economic foundation.

Made in China 2025

That is certainly the approach China is taking with its Made in China 2025 plan. It identifies 10 key sectors as critical for the nation’s future, including biotechnology, robotics, IT and aerospace.

The core driver of the strategy is an acknowledgement that China no longer wants to compete in low-skill manufacturing industries. Moving up the value-added chain is especially pressing as China is already losing out in sectors such as textiles and footwear manufacturing to lower-cost countries including Thailand and Vietnam.

Industrial policies are hardly unique to China or even to Asia. One of the most recent notable government-driven plans is from Germany and its Industry 4.0 plan.

The initiative was adopted in 2013 in an effort to integrate technology and manufacturing to enhance efficiency as well as competitiveness. Chancellor Angela Merkel embraces it as a means to ensure that Germany remains a leading economic power.

Japan’s history of close relations between the government and the private sector, as well as prioritizing resources to targeted areas also remains a lesson in how public policy can bolster growth.

Global leader in technology

Currently, the United States remains the undisputed global leader in technology and more broadly, in the services sector. Indeed, it has a global trade surplus of $262 billion in the service sector, thanks to its competitive edge in 21st century industries such as telecommunications, information technology and financial services.

But the question is whether it can remain in the pole position without proactive support from Washington. After all, other major economies are stepping up their own interventionist policies to challenge U.S. leadership in technology, innovation and the service sectors.

Yet, instead of taking measures to protect and further the U.S. lead in growing industries of the future, Washington has traditionally been reluctant to take the initiative to pursue industrial policies.

Echoing the steps taken in the 1980s and 1990s, when the target was Japan (rather than China today), the U.S. focus is on taking protectionist measures to salvage the U.S. manufacturing sector and reduce the trade deficit in goods, rather than to expand the surplus in services still further.

Wide ranging tariffs

According to White House National Trade Council director Peter Navarro, the administration’s strategy rests on introducing hefty tariffs on a wide range of products including solar panels and steel. The administration’s attack against China extends to over 1,300 products, with tariffs averaging 25%.

For the White House, victory will be measured by how much the U.S. deficit in goods goes down. That has certainly been a key factor driving the Trump administration’s endeavors to renegotiate existing trade deals including the North America Free Trade Agreement and the US-Korea Free Trade Agreement.

Economic advisor Larry Kudlow has stated that successful renegotiation could significantly narrow or even eliminate the trade gap.

Beyond these short-term plans, the White House is also well aware of the economic threat that Beijing’s longer-term economic strategy poses to the United States.

Washington wants to take a preemptive strike against China threatening to take over the United States as a global leader in key areas of future growth, even if China is not flooding U.S. markets with those products at the moment.

This explains the long list of Chinese items that would be hit by the Trump administration’s tariffs ranging from telecommunications to IT equipment.

Threat of tit-for-tat escalation

With China threatening to retaliate with its own tariffs against U.S. products if Washington moves forward with its protectionist measures, the threat of trade wars and prospects of higher prices hitting both countries loom large.

Rather than embarking on a race to raise ever-higher tariffs on an even longer list of goods, what Washington must focus on is how to counterbalance the strategic growth plans being developed not only by China, but also in other countries in Asia and beyond.

Rather than heeding to the interests of specific industries, U.S. competitiveness could be bolstered by developing a comprehensive plan that tackles longer-term concerns about protecting intellectual property and blocking technology transfers.

Making better use of regulations under the Committee on Foreign Investment in the United States (CFIUS) to protect sensitive U.S. industries is a step in the right direction, but such defensive action is hardly enough.

The Trump administration has identified some of the challenges that lie ahead for the U.S. economy. It has also demonstrated that it is willing to take risks and take action on the diplomatic and economic fronts that other presidencies may have shied away from otherwise.

What is missing, however, is U.S. readiness to take action through proactive, positive-sum public policies. The current approach risks zero-sum, if not negative-sum outcomes.

That isn’t the right approach to preserve the U.S.’s standing as the global leader in innovation and technology.