Trump's New China Team

Donald Trump has appointed a who's who of China bashers to wage a dangerous new campaign in the US-China conflict.

Donald Trump has quickly appointed a who’s who of China bashers to senior positions in his new administration. Subject to Senate approval, so far, the group includes Marco Rubio (State Department), Pete Hegseth (Defense), and Elize Stefanik (United Nations); executive appointments include Robert Lighthizer (Trade Policy) and Mike Waltz (National Security Council). Trump’s new pal, Elon Musk, may try to muscle in as a counterweight with his obvious conflicts of interest arising from Tesla’s mega-bet on China. However, even MAGA nation has its limits.   

In one key sense, this underscores the sharp contrast between Trump 1.0 and Trump 2.0.  Notwithstanding the intentionally disruptive  choices of an unfathomable collection of ill-equipped wildcards — Matt Gaetz (Justice), Kristi Noem (Homeland Security), and Tulsi Gabbard (Intelligence) — the quick and decisive early appointments of China hawks to the incoming administration stand in sharp contrast with the chaos immediately following Trump’s unexpected first victory in late 2016.  The message is far from subtle: The man who started the trade war with China in 2018 is looking for more.

The clearest statement of what this means for America’s China policy can be found in a recent opinion piece written by Robert Lighthizer for the Financial Times  (“Donald Trump’s trade remedies reflect America’s troubled reality”) that was published a few days before the recent election.  In that essay, the former (and most likely next) US Trade Representative (USTR) offers a scathing attack on the theory and record of trade liberalization. If only America had stayed true to the classical economics of Adam Smith and David Ricardo, he argued, it would not have squandered the “trade dividend” of the sacred theory comparative advantage.

This has a strikingly familiar ring.  In fact, it borrows much of the  case that Lighthizer made against China in the USTR’s “Section 301 Report” of March 2018, the template for Trump’s first round of tariffs. US trade deficits were characterized as an outgrowth of unfair trading practices of America’s deceitful trading partners.  As I pointed out in Accidental Conflict, Lighthizer used that argument in going after Japan in the 1980s as Deputy USTR in the Reagan Administration and then re-packaged it during Trump 1.0 while taking on China.

Nowhere did the Robert Lighthizer of old acknowledge the role that trade balances play in squaring the macro circle between saving and investment — that saving-short economies must import surplus saving from abroad in order to invest and grow. Nor did he acknowledge what that means for foreign trade —  namely, balance of payments and trade deficits that are just as much an outgrowth of America’s unbalanced macro structure as are the imbalances which afflict surplus savers. Lighthizer missed that important point with Japan and has doubled down on it with China. 

To his credit, in his recent FT piece, Lighthizer has attempted to pay lip service to basic macroeconomic accounting identities. He finally acknowledges that, “Of course the trade deficit is equal to the difference between a country’s investment and its saving.” (I italicize the words, of course, to underscore the obvious point that apparently, he has just figured out!) But he then goes out well over his skis by exonerating the US for its historic shortfalls of domestic saving by asserting “the causation goes the other way,” casting America as the victim of a heinous assault. Like he did in 2018, Lighthizer blames US deficits on “predatory industrial policies” of nations like China. Conveniently, he makes absolutely no mention of America’s chronic budget deficits, which, by the way, exploded during Trump 1.0, as having anything to do with America’s domestic saving problem. As befitting a trade lawyer masquerading as an economist, macro has never been Lighthizer’s comfort zone.

I reiterate a point I made six years ago when raising strong objections to Lighthizer’s original Section 301 Report on China: All industrial powers have  practiced so-called state-supported industrial policy. That was true of Japan, with its so-called plan rational development state underwritten by MITI (Ministry of International Trade and Industry); that was the case in Germany with its Mittelstand and the Wirtschaftswunder powering small and medium German enterprises; it also applies to France, which has long embraced so-called indicative planning. And the United States, with its legacy of Pentagon-led R&D seed-corn funding via DARPA (Defense Advanced Research Projects Agency), has actually led the industrial-policy charge in recent years with the Infrastructure Act, the Chips and Sciences Act, and the green technology support of the Inflation Reduction Act. Washington’s urge to single out China’s industrial policies as “predatory” is more about domestic politics than anything else.  Those who live in glass houses, shouldn’t throw stones. 

It is largely for that reason that I draw attention to Robert Lighthizer as a stalking horse for what is shaping up to be the next dangerous phase of the US-China conflict. Since Donald Trump fired the first shot in 2018, a trade war has quickly escalated into a tech war, that has now been followed by the early stages of a new cold war. On the campaign trail, Donald Trump embraced the “tariff solution” to much of what ails America — a depleted manufacturing sector, a shortfall of tax revenues, and a dark sense of US economic malaise.  Harkening back to the so-called glorious days of McKinley era tariffs in the 1890s, this was billed as a surefire recipe to Make America Great Again.  After all, argued Trump, tariffs are “the most beautiful word in the dictionary.”  He has proposed raising tariffs on all US imports by as much as 20%.

Despite the common-sense flaws of this political argument — especially, that US importers, not foreign exporters, pay tariffs — the Trump-Lighthizer message is unmistakable: Whatever Trump does with total US tariffs in his second administration, he has every intention of doing more on Chinese tariffs.  Numbers like 50% to 60% were mentioned on the campaign trail, fully two to three times the already elevated 19% effective tariff rate currently imposed on two-thirds of all shipments from China to the US. While last week I went on record saying that I don't believe Trump will go this far, I still think there is good reason to conclude that, as the chart below suggests, he will continue to go considerably further on tariff hikes with China than for America’s other trading partners

If some semblance of that approach becomes policy in Trump 2.0, it will be destabilizing for three reasons: First, it will boost US costs, putting upward pressure on inflation; that comes, of course, when the Federal Reserve is leaning the other way by cutting its policy rate in the face of falling inflation. Second, by singling out China for special treatment without addressing the underlying domestic saving problem, there will be another round of trade diversion to preponderantly higher cost foreign producers that will both tax American consumers and do nothing to reduce America’s overall trade deficit. Third, there will be swift and powerful retaliation — not just from China, where conviction of US containment efforts will only deepen, but from all of America’s trading partners who have been slapped with Trump’s McKinleyesque fascination with tariffs as a panacea to all that ails America. For that reason alone, the risks of a 1930s style global trade war cannot be taken lightly.

I don’t think it is an accident that Donald Trump has moved so quickly to nominate strident China bashers to senior positions in his new administration.  He stressed his tough views on China repeatedly on the campaign trail this year. He delivered once before and, as he assembles his new team, now seems even better prepared to do so again.  As Trump said in his victory statement in the wee hours of November 6, “I will govern by a simple motto: Promises made, promises kept.” Take the man at his word when it comes to China.