China does not Play Fair on Trade, Morici Says, and Cutting Trade Deficits would Spur Manufacturing Job Growth an Investment

Economist and MarketWatch columnist Peter Morici of the University of Maryland does not think China plays fair on trade.

Supply Chain Digest Says... Such a system could be phased in over several years and would likely cause the Europeans, NAFTA countries to do the same. What do you say? Click here to send us your comments Click here to see reader feedback

"China accounts for more than 60% of the US trade deficit and habitually subsidizes domestic industries, limits imports in areas of rapidly advancing technology to incubate its own competitors, and forces foreign multinationals to transfer technology as a condition for market access," Morici wrote in a recent column, adding that China also compels foreign companies in China to comply with the Communist Party political agenda and insidious activities monitoring of its citizens."

He says that China has targeted one US industry after another, such as metals, solar panels, computer chips, artificial intelligence and supercomputers, which he says often has significant economic and national security consequences.

Morici is not wild about the move to impose tariffs first on imported steel and aluminum, and then some $100 billion of other imports specifically from China, which he wrote in another column were "well-intentioned but poorly conceived." But he assesses their likely impact nonetheless.

Based on history, Morici expects a brief price spike in the metals, but says that the ultimate impact on material prices should be about half the 25% tariff on steel and 10% on aluminum, as "foreign suppliers will find ways to cut costs and accept slimmer margins, and new domestic supplies will come on-line."

Morici calculates that the impact of the steel tariff on the price of the typical $36,000 car, which contains about one ton, should be $125 to $150. For a $20 12-pack of beer, the aluminum tariff should add about 3 to 5 cents.

Add to that the exemptions the Trump administration have already given to Canada and Mexico, and the reduction in foreign metals coming into the US are likely to be very modest, Morici believes.

But the US needs to do more to shake up global trade, especially with respect to China, Morici says.

"The administration is implementing a much broader response to China - covering a wider range of bilaterally traded products beyond just steel and aluminum - and rules for Chinese investment in the United States, expected to mirror Beijing's restrictions and performance requirements for US and other Western investment in the Middle Kingdom," he says.

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Morici further estimates that cutting the $650 billion annual trade gap by one-third could directly create about 1 million jobs. The manufacturing would naturally benefit most, and because it finances two-thirds of business research and development, investments in intellectual property for new materials, supply chain management, artificial intelligence and the like would substantially boost long-term US economic growth, Morici says.

How to get the overall trade deficit, especially with China, down?

Rather than tariffs, Morici recommends a system that requires import licenses to source products from China.

"Exporters could be issued resalable import permits equal to the value of their sales in the Middle Kingdom," Morici says. "Those wishing to purchase items from China would then bid for these through an on-line marketplace - similar to eBay. Those would be purchased by those businesses and consumers placing the highest value of products from China."

Such a system could be phased in over several years and would likely cause the Europeans, NAFTA countries to do the same.

This move would also create crises for policy makers in Beijing and the World Trade Organization, "but that's what it's going to take to effectively reorder our relationship with China and reform the WTO." Morici concludes.

Can it work? An article on Yahoo Finance last week said that with regard to these US moves on tariffs, "Publicly, Chinese officials deny they are bending to Washington's pressure, but privately, they acknowledge that the trade threats are leading them to accelerate their plans to liberalize."

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