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Brief #16—Civil Rights

Policy Summary
In a stunning, but not surprising reversal of policy, the Trump administration last week decided to impose proposed tariffs it had previously put on hold on China, the EU, Canada, and Mexico.

The administration decided to implement 25% tariffs on 50 billion USD of Chinese goods, despite Treasury Secretary Mnuchin indicating last week that the “trade war” would be put on hold. The tariffs are meant to address “China’s discriminatory and burdensome trade practices.“  The targeted goods contain “industry significant technology” and are related to the “Made in China 2025 program” – a strategy approved by the Chinese State Council designed to transform China into a “high tech powerhouse” in industries like robotics, Artificial Intelligence, information technology, sensors and energy.

The US government maintains this program is designed not to help China join the ranks of many advanced economies but rather to outright dominate them. Allegations against “Made in China 2025” claim Beijing is seeking to replace foreign technology, gain self sufficiency, and become a manufacturing powerhouse that dominates global high-tech industries. Foreign companies that do business in China chains could be affected. For example, foreign high tech companies are at risk of getting pushed of mainland China’s markets as the Chinese government will provide preferential consideration to its own companies. The US also maintains such policies violate WTO anti-technology substitution rules  and gives Chinese companies an unfair advantage as they are subsidized by the the Chinese government. By June 15, the US is stated to list goods targeted by the tariffs and by June 30, the US will announce investment restrictions and capital controls so China can’t buy up technology significant industries. China, on the other hand, has announced retaliatory trade measures, ultimately bringing both countries to an impasse in the midst of ongoing negotiations. Chinese response to the sanctions have been mixed. Initially, China threatened to retaliate by tariffs on 50 billion USD of imports on soybeans, small aircraft, electric vehicles and orange juice. Soon after, in an effort to curb potential government, China offered to purchased 70 billion USD of US products. The Trump administration still remains steadfast on tariffs.

In a slightly more puzzling announcement, the Trump administration said that the US will also follow through on proposed tariffs on the EU, Canada and Mexico – 25% tariff on steel and the 10% on aluminum. The US cited “national security concerns” as the impetuous for implementation. The announcement was met with harsh criticisms from G7 countries saying that the tariffs “undermine open trade and confidence in the global economy.” Prime minister Justin Trudeau of Canada strongly rebuked the announcement  describing tariffs as “totally unacceptable” and as an “affront to the long standing security partnership and to the Canadians who have fought alongside with their American brother in arms.” Naturally, the EU, Canada and Mexico announced retaliatory measures including: “dollar for dollar” tariffs on US goods and a joint complaint to the WTO. The EU Commission president Jean-Claude Juncker described the unilateral tariffs as “unacceptable” and the that “whatever the US does the EU could do the same.”

Although the Trump administration has a confusing, possibly incoherent policy when it comes to trade, many experts would agree that Trump has correctly identified unfair trade policies of the Chinese. China has violated many rules and regulations of the WTO, artificially devalued the Renminbi to make their exports cheaper in the past, has little respect for intellectual property rights (consider the numerous Chinese knockoffs), care even less of labor laws and conditions, conducts robust business-related cyber espionage activities, and finally it is very concerning to many countries that the communist party has actively encouraged Chinese companies with strong ties to the government to buy foreign companies in sensitive industries. It’s only natural other countries would worry about “Made in China 2025” due to China’s poor track record of engagement.

However, starting an uninhibited trade war is not the answer. Trade wars would most likely hurt millions of Americans (many of whom voted for Donald Trump) just as much as it would hurt the Chinese, if not more so. Trade wars have an inflationary reaction and increase prices across many different industries. Historically, every time the US has engaged in a trade war, it has hurt job growth rather than help it. In 2002 President George Bush imposed steel tariffs which he immediately  reversed after the WTO declared the tariffs in violation of its rules and in  1980s President Ronald Regan imposed tariffs on Japanese products which initially hurt American consumers. However, perhaps the most notable example occurred during the Great Depression in the 1930s. Shortly after the depression began, Congress bowed to the nationalist rhetoric and passed the Smoot-Hawley Tariff Act which placed a tax on American imports in hopes of saving American factories. The logical response by European countries was to place counter tariffs, quid pro quo, on American products. Global trade decreased by over 25% due to the tariffs. Ultimately, this only further exacerbated the Great Depression.

After World War II, the WTO was created to ensure the 1930s protectionist era, tit-for-tat tariffs would not occur again. Unfortunately, just as President Herbert Hoover’s administration ignored the advice of economists about the harmful effects of tariffs in the 1930s, the Trump administration appears to be following a similar path. The very people Trump is seeking to protect are the very people who will be hurt the most by a trade war.

The Trump administration’s logic as it pertains to China is at least somewhat understandable. However, their logic pertaining to Mexico, EU and Canada is completely illogical. Mexico, EU and Canada are America’s allies. These countries do not commit the trade abuses China does. It makes little sense to punish your friends who play by the rules. The trade deficit between the EU, Canada, and Mexico with the US is largely a product of market forces and America’s propensity for consumerism rather than unfair trade policies as it is more so in regards to China.

Instead of building walls, the US should be building bridges. It would be better policy if the Trump administration strengthens ties with allies like EU, Canada and Mexico and build trading coalitions with these and other countries. Instead of starting a trade war with China, the US should build coalitions with the international community (especially the EU, Canada and Mexico) to put maximum pressure on China to follow WTO rules, respect intellectual property laws and to force China to reign in its economic-cyber espionage and predatory trade activities. There is power in numbers. If the Trump administration consulted on trade policy with allies, it would go a lot further than just indiscriminately evoking tariffs on rivals and allies alike. This may leave China with an opportunity to drive a wedge between US and its allies against Trump’s tariffs. The Trump administration also should be focusing on supporting the development of new industries and infrastructure investment legislation to provide new job opportunities for economic disenfranchised citizens in economically depressed states.

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