Donald Trump insists on trade reciprocity. But what kind?
IN THE sixth episode of “The Apprentice”, a reality-television show first broadcast in 2004, Donald Trump, as always, fired a contestant vying for a job in his company. She was, he said, the worst negotiator. And she had failed to fight back when belittled by her teammate. The episode was entitled “Tit For Tat”.
That same principle of reciprocity guides Mr Trump’s trade policy as president. And it is animating his tariff war with China. On July 6th America imposed 25% duties on Chinese imports worth about $34bn. (Another $16bn-worth will be hit in due course.) China responded by slapping tariffs on a similar amount of American goods (including a cargo of soyabeans aboard the Peak Pegasus that arrived at the port of Dalian mere hours later).
The two sides disagree, however, about which is tit and which tat. China believes it is responding dollar-for-dollar to American aggression. But America too believes it is retaliating: punishing China for trade and investment transgressions, including the theft of American technology. In Mr Trump’s view, China’s new tariffs are not a reprisal, but a fresh affront, to which he must respond. On July 10th America gave notice of its intention to place 10% tariffs on another $200bn-worth of Chinese goods, including swordfish, magnifying glasses, vacuum cleaners and red dye.
Mr Trump’s view of trade reciprocity is simple. If America imposes a 2.5% tariff on China’s cars, China should levy something similar on America’s. If China has been charging 25%, America’s trade representatives must have been poor negotiators who, presumably, would not have survived past episode six of his show.
Trade negotiators take a broader view of reciprocity. Yes, countries must give and take. But what is given and taken is political gain and pain. A government will not expose a politically sensitive industry to fiercer foreign competition unless the deal provides commensurate political rewards. And so a reciprocal deal may leave all sides sheltering equally sensitive, but entirely different, sectors. America, for example, charges tariffs of 27.3% or more on a variety of textiles, including polyester suits and T-shirts.
Sometimes the pain or gain does not work out as expected. Developing countries did not have to reciprocate the cuts in manufacturing tariffs that America and the European powers negotiated with each other in successive rounds of post-war trade talks. At the time, it was not thought that poor countries would gain much from the rich world’s liberalisation and were not required (or prepared) to offer much in return.
But China did not join the World Trade Organisation until 2001. By then, its manufacturing potential was easier to foresee. It was forced to forswear many of the perks that similar developing countries enjoyed. It agreed, for example, not to raise its tariffs above a ceiling of 10% on average. The equivalent ceiling for Brazil, a founding member of the system, is 31.4%; for India, 48.5%.
In the opening scenes of “The Apprentice” Mr Trump explained the quid pro quo at the heart of the show. After enduring a season’s worth of trials, the successful contestant would be rewarded with a job in Mr Trump’s company and, more important, the chance to “learn enough so that maybe they too can become a billionaire someday”. “As the master,” Mr Trump said, “I want to pass on my knowledge to somebody else.”
This kind of bargain is common to all apprenticeships. Aspirants toil eagerly, and often cheaply, in return for the know-how they will acquire on the job. An analogous kind of reciprocity has also been at work in China’s economic relationship with America. Its aspiring firms have learned a great deal from serving American customers and working with American firms. One attempt to quantify how much they have learned was recently published by Kun Jiang of Nottingham University and her co-authors, who looked at the performance of international joint ventures from 1998 to 2007. These ventures, which were often created at government insistence, were 30% more productive than otherwise similar Chinese companies.
What did China give in return for this knowledge? Some American commentators seem to think: nothing at all. They believe American industry passed on knowledge entirely under duress and without recompense. But that misses the other side of the grand bargain that America implicitly struck with China. Like an apprentice, China provided cheap, but dedicated, labour. The benefits accrued to American companies and consumers (though some of the workers who voted for Mr Trump lost out). Thanks to China’s entry into the WTO, the price of manufactured goods in America fell by 7.6% in 2000-06, according to Mary Amiti of the Federal Reserve Bank of New York and her co-authors.
Tit for tech
When China joined the WTO it promised to stop making American firms pass on their knowledge as a condition for doing business in the country. Americans complain, with some justice, that it has breached the spirit of that agreement and sometimes the letter. They also point out that the WTO is ill-equipped to adjudicate complaints about unofficial and implicit obstacles to investment. But foreign investors, unlike exporters, have a straightforward remedy of their own. If the conditions China imposes on foreign multinationals are too onerous, they can refuse to invest.
Apprentices have always dreamed of surpassing their master. In the 1780s, for example, Samuel Slater served as an apprentice in Derbyshire at one of the first water-powered cotton mills. He memorised the factory’s designs and procedures, decamped to America and helped set up rival mills in New England. After this devastating misappropriation of cutting-edge technology, his compatriots called him “Slater the traitor”. The Americans, however, celebrated him as the father of their Industrial Revolution. None of the contestants on Mr Trump’s show achieved the glory he described in the programme. China may do better. Sometimes the future plays tit for tat with the past.