While large and persistent trade deficits are not, by themselves, evidence of flaws in the international trading system, the Chinese approach to trade does present problems which require an appropriate response. I have indicated in a previous post that our choices come down to two: beat ’em or join ’em. What would that mean in practice?
Any analysis of this situation has to begin with an understanding of the fundamental differences between the American and Chinese political and economic systems. The “Chinese dream” is about the wealth and power of China, not its individual citizens; the Chinese culture emphasizes the collective over the individual; and the Chinese Communist Party asserts the right, and often uses it, to intervene in every aspect of society. Mercantilism is a logical outgrowth of that approach. Chinese businesses are correctly viewed as agents of the state, because that, in fact, is what they are, and the Chinese government has every right and reason to pick winners and distribute assets as it sees fit.
The American system, on the other hand, is built around limited government, individual freedom, the rule of law, and a level playing field. American businesses are emphatically not agents of the state, and any attempt to pick winners would be met with outrage.
With this in mind, Trump may think that he’s emulating the Chinese by imposing tariffs, but is he, really? If you genuinely wanted to fight fire with fire, you would have to force Chinese companies to turn over their technology to specified American companies in order to gain access to our market. You would have to identify and subsidize national champions. You would impose lots of regulations on Chinese companies and force them to take on American partners. Trump isn’t proposing any of that, because it would be unthinkable under our system. His failure to do so means that his approach cannot work.
The alternative is to work closely with our friends throughout the world to create and strengthen rules-based institutions (e.g., the TPP) that effectively prohibit obnoxious mercantilist practices. As big as the Chinese economy is, if China were confronted with a united world demanding change, it would come. Unfortunately, Trump rejects multilateral action on trade, and appears to believe that our European and Asian allies are just as bad as the Chinese, which simply isn’t true. As a result of this fundamental blunder, the world may well support the Chinese in the trade war to come, and it will fail.