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Are U.S., China Headed for 'Hot War' on Trade?

The Wall Street Journal. logo The Wall Street Journal. 3/7/2017 Andrew Browne

SHANGHAI—China’s stunning advance as an industrial power has no historical precedent: Its share of global manufacturing rocketed from 3% in 1990 to around one-quarter today. The disruptive shock helped deliver Donald Trump to the Oval Office on a barrage of protectionism rhetoric.

The question now is whether it will splinter the U.S.-led global trading system.

Mr. Trump’s threatened tariffs have failed to materialize. Nor has he declared China a currency manipulator, another campaign pledge.

Still, global markets may be underestimating both the antitrade forces gathering in the White House, and the hardening of Chinese mercantilism.

On Sunday, Chinese Premier Li Keqiang warned in his annual “work report” to the National People’s Congress that “the deglobalization trend and protectionism are growing.” Yet, he offered little new thinking from Beijing on a way forward.

Market reforms are on hold ahead of a key Communist party gathering at the end of the year that President Xi Jinping hopes will crown his power. To serve that purpose, state aggrandizement remains the overarching goal of economic policy-making.

That means growth is China’s priority. Beijing is doubling down on a zero-sum strategy that has flooded global markets with surplus steel, aluminum, cargo ships, paper and glass.

The stage is set for a titanic tug of war over trade that clouds the future of the World Trade Organization itself.

The trade hawks in Mr. Trump’s administration are seized with a common conviction: that China’s 2001 entry into the global trading body was a catastrophe for the U.S. economy.

In their telling of the story, China cheated its way into U.S. markets under WTO cover, laying waste to American jobs and prosperity as its bilateral trade surplus exploded by 300%.

Peter Navarro, the White House industry guru and a former economics professor, has called this “one of the great obscenities in global economic history.” In a speech on Monday he raised the specter of a “cold war” and even a “hot war” against an unnamed power buying up “our companies, our technologies, our farmland and our food supply chain, and ultimately controlling much of our defense-industrial base.”

Mr. Navarro and Commerce Secretary Wilbur Ross claimed in a paper last year that eliminating the $500 billion U.S. trade deficit—the bulk of it with China—would add to growth, create millions of jobs and generate trillions of dollars in revenue to pay for tax cuts. A dollar saved on trade is a dollar gained in GDP, they argued.

Many orthodox economists deride this theory. Larry Summers, the former U.S. Treasury secretary, called it “voodoo economics.” There is no consensus on whether trade deficits are good or bad (they tend to swell when the U.S. economy is doing well, and shrink when it’s ailing). And the theory glosses over other challenges to U.S. factory jobs, like the self-inflicted financial crisis of 2008 and the march of automation.

Besides, U.S. manufacturing output is at, or close to, record levels.

Yet China has brought on this fight. Its wholesale theft of intellectual property, requirements forcing foreign investors to disgorge their technology, and a digital “Great Firewall” that blocks most of the world’s top internet sites, have provided ample ammunition to White House trade warriors. The latest survey by the American Chamber of Commerce in China showed that more than 80% of its members felt less welcome in the country.

Meanwhile, armed with a half-trillion-dollar war chest, China is shopping for U.S. and European tech companies to build advanced manufacturing capabilities that it will foster in its own protected markets—and then unleash on open economies in the West.

China is rightly worried about a U.S. response. “I’m seriously preparing for a trade war,” a former commerce minister, Chen Deming, told reporters in Beijing this week, according to a Bloomberg report.

Last week, the Trump administration opened hostilities in a policy paper that threatened to bypass the WTO in handling disputes, a dramatic departure that, if implemented, would risk triggering a global free-for-all and undermining much of the organization’s raison d’être.

Trade has traditionally supplied the ballast to U.S.-China ties, now at their lowest point in decades. Without a comprehensive settlement, the relationship could run aground. That would strike at both Mr. Xi’s “China Dream” of national rejuvenation and Mr. Trump’s campaign to “Make America Great Again.” Nobody wins in a trade war.

To the dismay of Asian governments fearful of conflict between the world’s two largest economies, Mr. Trump has ditched the most promising framework for a grand bargain—the Trans-Pacific Partnership, which covers some of the touchiest areas of U.S.-China trade such as the role of state enterprises, intellectual property and labor standards.

China was never included in that arrangement, although it didn’t rule out membership. Beijing is now rushing to fill the vacuum by promoting its own, lower-quality trade agreement with its neighbors.

Charlene Barshefsky, the former U.S. trade representative who negotiated China’s entry into the WTO, argued at recent public forum that TPP “should be fixed, not jettisoned.”

She added: “Miscalculation is too costly for both sides—and the world.”

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