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U.S-China: Headed for Trade War?

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A trade bill approved by big margins in Congress and about to be signed by Obama will allow existing tariffs on imported goods from China to stay in place after they were threatened by a court ruling. At a time when there seems to be little bipartisan support for anything, it is surprising that this piece of legislation enjoys popularity from both sides of the aisle. Certainly, there is a broad perception in the U.S. that China does not play by the rules, that the U.S. engages in free market capitalism while China engages in mercantilism.

Unfortunately, like all disagreements, the truth is not black and white, but shades of gray. While there may be incidences of violations by the Chinese, the issue is complicated by the fact that there are just as many grievances levied against the U.S. by not just China, but by many other countries charging U.S. with hypocrisy when it comes to global trade practices. Global Trade Watch and other international organizations document these long lists of U.S. violations so I won't belabor them in this post, but it is safe to say that cases have been made that the U.S. is as much a transgressor. Meanwhile, the broader belief that the U.S. believes in free markets while China doesn't is problematic. The U.S. corporate tax code, as we hear often, is filled with huge tax breaks, credits, and subsidies to a variety of industries. The U.S. government also makes or backs billions in low-cost loans to private companies -- as the Solyndra episode has spotlighted. The U.S. regularly grants Indefinite Quantity Contracts (IQCs) which basically amount to indefinite wire transfers of federal money to private entities that win these lifetime government contracts. Such practices sound pretty similar to China's relationship with state-owned enterprises even if these American entities are technically private. Thus, hostile rhetoric accompanied by hostile actions by Washington will not be met with much sympathy by foreign ears while leaving U.S. competitiveness and job creation unaddressed.

However, this trade bill is misguided and dangerous on even other levels because it actually aggravates U.S. economic problems. Rather than protect American jobs, punitive duties will make products more expensive to American consumers and companies while at the same time make American employers and employees less competitive in the global economy because they are shielded from competition in the U.S. but not in foreign countries. But because companies must compete globally to survive in this day and age, this inability to compete abroad will translate into lost American jobs anyway. This punitive trade bill to punish the Chinese will just backfire if these American companies cannot bring their costs down and be as nimble as the Chinese when competing in other markets. Worse, it could kick start a trade war in which everyone in the global economy will lose by creating spillover effects. For instance, competitive American companies may face reciprocal duties slapped on them from foreign countries, causing a downward spiral similar to the conditions that led to World War II.

A more productive bill will be one in which America invests in industries that still have a chance at winning. Germany, for example, uses feed-in tariffs to support the development and use of green technologies. If America invested more in high tech and biotech R&D, where it has more advantages, and provided easier access to capital for small and medium-sized companies, then America will be more actively and directly creating jobs without creating ill will with its trading partners. America already subsidizes agriculture, banks, autos, and other large industries that have benefited tremendously as witnessed by their record profits. The problem is that those who benefited have largely been the ones with heavy lobbying power and who also failed to distribute their profits more evenly to their employees. Let's get Congress to write bills that look forward, not backward.

This post has been updated since its original publication.