This Is No Time To Reward China With Increased Commerce

This week’s Courier Herald column:

As this column is filed, President Joe Biden is en route to the Middle East. With domestic policy dominated by increasing inflation, the trip will highlight U.S. economic and security interests via Israel’s role within the region, Iran’s march toward obtaining nuclear weapons, and the headline issue, getting Saudi Arabia to produce more oil in order to relieve the pressure on soaring energy prices.

A debate centered a half a world away has garnered less attention, as the headlines related to it are less flashy and the issues appear to have less urgency.  The United States trade policy with respect to China has also become a world stage bargaining chip with respect to inflation, and the implications have immense long term implications for America’s security with respect to the environment, defense, and economy.

A debate is occurring within the Biden Administration on whether to roll back tariffs on many Chinese goods imposed during the Trump Administration.  The framing of that sentence implies the debate is partisan.  It is not.

Within the Biden Administration, U.S. Trade Representative Katherine Tai is said to oppose lifting the tariffs.  The U.S. Chamber of Commerce – non-partisan but generally more closely aligned with Republican philosophies on economic matters – says removing the tariffs would be “a tonic for the U.S. economy.” 

Thus, this isn’t a Democrat versus Republican, or a Trump versus Biden issue.  It must be viewed on its own merits, and the short term benefits of lower tariffs weighed against the longer term issues of strengthening China’s position as an economic and military rival.

To capture the essence of this debate in the short space a print column affords, I’ll refer to a July 7^th CNBC interview with Kyle Bass of Hayman Capital Management.  You wouldn’t expect a hedge fund manager to be one of the leading voices on China using America’s freedoms against our own long term interests, but he’s long been consistent in his appearances on the subject.  If you need to understand the break with many in his industry on this subject, take his line “It’s a good thing Wall Street isn’t charged with U.S. National Security”.

Bass noted that the amount of inflation that could be reduced by rolling back Chinese tariffs would amount to 8 basis points.  That would be a literal rounding error on this week’s reported 9.1% rate. 

And what would the cost be?  The tariffs were imposed largely to counter Chinese intellectual property theft, as well as using their position as a monopoly producer to sell items below cost in order to bankrupt U.S. industries. 

To accept this line of reasoning, we must understand that “America” doesn’t produce goods, but American based companies do.  In China, the Central Committee of the Chinese Communist Party coordinates and approves everything.  While there are “Chinese based companies”, they act with the specific direction and help of the Central Committee.  In effect, the country acts as one large monopoly with respect to trade.

Bass provided an example of the Chinese targeting America’s aluminum industry.  The Central Committee doesn’t charge Chinese aluminum producers for their electricity in an incredibly energy intensive industry.  Thus, Chinese aluminum is produced below the cost Americans can produce.  The result isn’t “free trade”, but monopoly dumping.

Let’s add insult to this injury.  China continues to add coal burning electric power plants to its grid at an amazing pace.  Bass tweeted a graph this week of China’s carbon dioxide emissions for power generation and cement production, showing that they have tripled since 2000 and have resumed a sharp upward spike in the last few years.  We’re not just importing “cheap” goods from China, but we’re importing climate change with every shipment.

Near the end of the Trump administration, China agreed to a “phase one” plan to purchase more U.S. goods among other promises to abide by trade rules.  Bass notes that they’ve met less than 18% of what they promised in exchange for their tariffs to be rolled back. 

In the interim, Chinese theft of Western intellectual property continues unabated.  Last week FBI director Wray held a highly unusual press conference with British MI5 Director Ken McCallum to highlight the persistent Chinese efforts to steal technology and other proprietary information. 

MI5 noted a seven-fold increase in these activities since 2018.  Clearly the Chinese have just been waiting the tariffs out, much like they’ve been ignoring their own worldwide climate pledges.

In the interim, with much of our international focus stemming from Russia’s invasion of Ukraine, China has not only sided with Russia, but continues to take advantage of the situation by buying Russian oil and refusing to join the international community in any sanctions whatsoever. 

China is using the chaos of the world stage to grow stronger, while it eyes Taiwan – responsible for two thirds of the world’s essential semiconductor manufacturing capacity.  Now is not the time to reward China for their bad behavior.  Quite the contrary, the U.S. should stiffen its resolve rather than strengthen a growing adversarial threat.