Trump Takes Trade Policy Into The “Gray Zone” – The War We Will Win

The concept of competition short of armed conflict is a hot topic in national security circles now that some American leaders have recognized that the United States is once again competing for world leadership. Some of America’s competitors – China, Russia, India, and even Europe (France and the U.K.) – have nuclear weapons; thus, the new Great Power competition, like the Cold War, must be conducted in fields that will not escalate to actual military conflict between nuclear powers. Instead, competition is occurring in areas often labeled “gray zones,” borderless areas of the global or virtual commons, where limits on state-to-state competition are weak or do not yet exist. China’s military arrogation of the South China Sea and vast theft of American and European intellectual property, along with Russia’s global hacking and disinformation campaigns, are prime examples of “gray zone” Great Power competition short of armed conflict.

An important characteristic of “gray zone” strategies is their asymmetric impact – they cost the implementer relatively little compared to the gains achieved and costs that are imposed on competitors. Trump’s initial set of tariffs on China meet this criterion. And, by imposing the tariffs based on national security concerns, Trump excepted them from WTO rules (Article XXI of the 1994 WTO Agreement), placing this aspect of U.S. competition with China into the Global Commons.

Although China at times appears to be an emerging monolith, it remains vulnerable in a number of ways. Trump’s initial metals tariffs touched some of China’s core vulnerabilities.

An April Washington Post article detailed China’s growing demographic imbalance. Currently, the number of Chinese men exceeds the number of women by 34 million and by 2050 the ratio of men to women will likely be higher than 1.5/1. China’s markets are already distorting as men save in hopes of competing in the marriage market, where bride prices are above $30,000 and rising. This behavior is artificially raising property values. Additional socio-economic impacts of this distortion include rising violent crime, trafficking, and prostitution.

Not surprisingly, labor unrest has been accelerating, the New York Times reported. “During the first ten weeks of 2018, there more than 400 publicly reported strikes, more than double the number during the comparable period in 2017.” From 2011 to 2017, the annual number of reported strikes in China rose from 200 to 1256. In response, the Chinese government has been arresting and assaulting labor activists.

According to a March Forbes article, the world needs about 400 million metric tons of steel production capacity, but today’s output is 730 million tons. As Foreign Policy reported in July, China recorded all-time highs in steel output in June 2017 and now China is producing 50% of global steel output, along with 53.5% of global aluminum production. Most of this production is low quality output from subsidized Chinese state-owned enterprises (SOEs), which employ tens of thousands of workers.

China’s monetary policies have been structured to maintain political stability provided through its SOEs. For years, China has been leveraging its foreign currency reserves and earnings from its trade surpluses to subsidize SOEs, domestic construction, and other public investment to sustain economic growth and employment. According to Business Insider, China’s gross and net foreign currency reserves have been falling steadily between 2014 and 2017 before stabilizing. Some of the expenditures between 2014 and 2017 went into supporting a range of unfair and predatory “beggar thy neighbor” trade practices, including direct subsidies, export “friendly” exchange rates, and dumping to sustain markets for its excess steel and aluminum production.

In addition to pressuring China’s demographic and financial vulnerabilities, the Trump tariffs exploit a clear trade asymmetry between the two countries. China needs access to U.S. markets to sustain growth and more importantly, employment in its SOEs. The large bilateral trade imbalance in China’s favor is indicative of this dependence. Conversely, the United States can replace lost Chinese imports from other countries and from increased domestic production. As a recent Rand study showed, the United States depends less on trade for economic growth than China, and is therefore less susceptible to trade disruptions.

China’s imposing of retaliatory tariffs, filing of a WTO complaint against the U.S. tariffs, and bellicose rhetoric about them demonstrates the degree to which the Chinese government sees them as a political threat. That China’s retaliatory tariffs targeted U.S. imports manufactured or grown in regions that voted for President Trump and Republican candidates in 2016, reflects this view. However, the inherent trade asymmetry between China and the United States is taking effect. In the third round of tariffs, China was unable to match the United States’ escalations dollar for dollar. This, along with roiling Chinese financial markets and decreasing economic growth rates, as compared to a continued expansion of U.S. stock market indices, record unemployment levels, surging manufacturing orders, and expanding new business formations suggest that Trump’s policies, including his “gray zone” tariffs on China, are succeeding.

As Americans go to the polls in November, voters should recognize that China has joined Russia as a meddler in our political processes, although China has a subtler strategic approach. Russia’s crude strategy is to raise tensions between extremist partisans of both parties in hopes of destroying political comity, undermining trust in democracy, and perhaps inciting civil violence, if not war. China, on the other hand, has thrown its substantial economic power behind one American political party, the Democrats. One hopes that voters can suspend emotion, recognize the beneficiaries of foreign meddling, and make choices based on policy success.