Is Trump Prepared to Lose $1 Trillion to Tackle China on Trade?

This article first appeared on the American Enterprise Institute site.

The Trump administration's National Security Strategy (NSS) document has received generally favorable, though certainly mixed, reviews — ranging from " daring " and " clear-eyed " to " confusing, contradictory, and incoherent."

The interest here, however, is narrower: What are the implications from the NSS premises and declarations for a potential US-China clash over trade and investment policy?

Expert opinions on the China portion of the NSS are also divided. My AEI colleague Dan Blumenthal argues the Trump administration has "crafted a strong and comprehensive" NSS that recognizes that "under the rule of the Chinese Communist Party, China will never be a 'responsible stakeholder' in a US-created liberal world order, as it would rather be the sole owner of a China-led world order."

But AEI also published a piece by Oriana Mastro dissenting from this view. Mastro holds that the NSS swings "so far to an extreme, it eliminates the strategic foundation for managing China's rise peacefully."

In presenting her case, Mastro does make a valid point: that China should be seen — as with the US — as pursuing its own national interests, not necessarily trying to upend the entire international order. Mastro, however, posits as her main dissent the fact that the NSS

basically states that the nature of the Chinese system, not necessarily how it behaves, makes it a potential enemy of the United States. . . .

Tying the threat to the political system is dangerous, because this is something that is unlikely to change and that we cannot shape. . . .

China's biggest fear is that the United States will not accommodate its newfound position no matter how it wields that power because of the nature of its domestic system.

On this latter contention, Blumenthal has the more accurate vision.

Let me illustrate with the fractious trade and investment issues. The Chinese defense of its highly protectionist policies in these areas is tied directly to its authoritarian political system.

Again and again, particularly with the advent of the Xi Jinping administration, Beijing invokes national security or "public order and public morals" as the basis for its economic restrictions on foreign firms.

The Great Firewall, its all-pervasive censorship system, is thus both a central pillar in upholding a still-Leninist Communist Party structure, and also a key element in implementing an anti-competitive domestic industrial policy.

In recent years, even better security/protectionist combinations have emerged with the passage of the National Security Law and Cybersecurity Law.

Against this background, my major worry about the Trump administration's plans to counter the Chinese mercantilist security state is that the administration will ultimately lack perseverance and thoroughness.

Blumenthal noted that the "US is a tad late in the game." The "tad late" point is key to understanding the large challenges the Trump administration faces.

For the last two decades, Chinese leaders have — with few interdictions — constructed a web of policies and regulations that systematically restrict and exclude foreign companies (particularly in high-tech sectors) from competing in the Chinese economy.

The term Great Firewall, then, should be seen as encompassing policy areas well beyond the extensive censorship system, to include forced technology transfer, forced partnership with Chinese partners, ever more sophisticated theft of intellectual property, demands that internet data be "secure and controllable," legislation allowing government officials to demand access to software source code, and denial of access for major internet platform companies such as Google, Amazon, and Facebook.

To its credit, the Trump administration has tasked the US Trade Representative to document and recommend responses to Chinese IP theft and forced technology transfer.

But it is not clear that the president and his advisers understand that the web of policies behind the Great Firewall will necessitate a sustained set of challenges to policies already in place for many years.

Nor have they given any indication that they have established priorities in tackling this protectionist web.

While Japan and the Europeans have recently signaled support for such challenges, in the end the US will bear the brunt of the trade and investment action.

Beyond this, there are three other realities: First, whatever actions the US (and its allies) take will provoke retaliation from Beijing; second, the US business community will remain divided over confronting Chinese protectionism, with many companies still holding out hope for successfully competing in the Chinese market; and third, much of US (and other nations') action will have to be outside the purview of the World Trade Organization.

Particularly in the crucial high-tech sectors, WTO rules — last updated in 1995 — have little or no bearing or relevance to current trade grievances.

At this point, as the US moves toward confrontation with Beijing, it is by no means clear that the Trump administration and US political leaders in both parties are prepared to ride through the consequences of a trade/investment conflict involving upwards of a trillion dollars of economic activity.

Claude Barfield is a former consultant to the office of the US Trade Representative. His many books include Swap: How Trade Works with Philip Levy, a concise introduction to the principles of world economics, and Telecoms and the Huawei conundrum: Chinese foreign direct investment in the United States, an AEI Economic Studies analysis that explores the case of Chinese telecom equipment maker Huawei and its commitment to long-term investment in the US.