Matthew Kandrach – President, CASE

June 6, 2018 – https://bit.ly/2JtkmNI

If imposing tariffs on China is a bad idea — and it is — then the immediate consequence of such a clampdown is worse: that China retaliates against U.S. companies and a trade war erupts.

The burden ultimately would fall on American consumers — and there’s no telling where the economic damage could end up.

China has already said it would slap tariffs on 128 American products in response to a separate White House plan to tax their steel and aluminum exports. The logical conclusion should be don’t make the first blunder so you’re not forced into making the even worse second blunder. Lowering the boom on China’s exports of cutting-edge technologies — a total of $50 billion worth of Chinese products each year — will only hurt American businesses, making them less competitive while passing on costs to consumers. And it won’t advance meaningful reform in China’s trade practices.

Make no mistake, President Trump is right that a bad trade deal is worse than no deal. The failure of previous administrations adequately to enforce the rules of existing trade agreements and their inadequate protection of American workers whose lives have been changed by globalization have shaken confidence in trade deals. But the way to deal with this problem is to develop new and better rules — not to abandon trade deals altogether.

For now, the best path forward for the United States is to recognize the importance of cooperating with China while pursuing changes in its trade behavior. For example, the United States might limit Chinese firms’ access to the U.S. market in areas where China’s economy remains largely closed to U.S. companies, such as the internet. Or we could make it clear to China’s leaders that they need to take on issues like intellectual property theft and counterfeit goods or trade relations will suffer.

The reality is that China really has no choice but to adopt reforms, no matter what its leaders may claim. Since the mid-1990s, China has become a net oil importer.  Its import needs are expected to mushroom by 10 million barrels a day over the coming decade, and it’s projected to account for more than a third of global growth in oil demand through 2040. China is already relying on oil and natural gas exports from the United States for economic growth and to meet the needs of its expanding middle class. Rapid increases in the size of China’s automobile fleet guarantees that its demand for energy will accelerate in the years ahead.

As China’s energy needs grow, its sources of supply will become increasingly important. For fuel supplies, China has turned to the United States, now the world’s dominant producer of oil and gas, thanks to the shale revolution. In the years ahead, U.S. oil and gas exports will continue to play a critical role in China’s economy.

You can be sure that increasing reliance on U.S. energy resources will rise on the political agenda of China’s decision makers. If China thinks it is more vulnerable in energy, it could become more amenable to meaningful trade reform.

There is no escaping the importance of trade. At home, energy trade is having profound effects beyond the American jobs and economic growth that the production and export of oil and natural gas catalyzes. Recent progress on the energy front suggests that the main assumption of trade — that countries will become more interconnected over time — was a reasonable bet.

Although clamping tariffs on China cannot halt progress on trade in the long run, it can still hurt the U.S. economy, especially if it triggers a sharp rise in global oil prices. High prices are not the only things to fear.  Both the United States and China will suffer in a trade war, as will the rest of the world.  For all these reasons, the Trump administration should put the trade war on hold and resume negotiations with China.