The markets doubt tariffs will bring about any major concessions. The U.S. needs a multilateral approach.

By Jason Furman
Aug. 19, 2019 7:00 pm ET

President Trump’s China strategy is failing. His tougher approach has yielded no meaningful Chinese concessions but is increasingly damaging the U.S. economy. Today China is more integrated with the rest of the world while the U.S. is more isolated. To combat China’s unfair, statist economic practices effectively, the U.S. must change its approach, enlisting allies and international institutions to advance a more focused set of demands.

Tariffs on China have caused clear harm to the U.S. economy in the short run. In the second quarter of this year they contributed to the decline in business fixed investment, and they’re likely subtracting about half a percentage point from growth in gross domestic product this year. This isn’t necessarily an indictment of Mr. Trump’s policy. When workers go on strike, they do so knowing they will lose wages in the short run, but they expect to recoup those losses through larger long-run wage increases.

Yet equity markets have made clear that investors don’t expect potential concessions from China to make up for the short-run losses. The decline after the president announced a new round of tariffs Aug. 1 indicates that, in present value, the strategy is a negative.

China’s growth has also slowed, but much of the downturn can’t be credited to U.S. trade actions. Instead, the slowdown largely reflects the limits of Beijing’s tendency to prop up growth through short-term investment and state-owned enterprises, even as its demography worsens and productivity growth slows.

Market movements have also blunted some of the impact that tariffs might have had, reducing U.S. leverage in the trade war. The yuan has weakened, which offsets the tariffs by making Chinese exports cheaper. This is the inevitable result of Mr. Trump’s de facto strong-dollar policy, driven by larger budget deficits that have increased foreign demand for U.S. dollars as well as tariffs on China that have reduced U.S. demand for the yuan. Before the latest round of the tariff war, China was helping bring about Mr. Trump’s desired weak dollar by intervening in currency markets to keep the yuan strong. Yet when Beijing gave markets more latitude, the administration branded China a currency manipulator.

In January 2018 China had average tariffs of 8% on imports from the U.S. and the rest of the world. In response to U.S. actions it raised its average tariffs on the U.S. to 20.7% by this June while cutting its tariffs on the rest of the world to 6.7%, according to Chad Bown at the Peterson Institute for International Economics. China has cut its imports from the U.S. but increased its imports from elsewhere. China’s exports to the rest of the world are also growing.

No wonder China isn’t in a hurry to make the major concessions Mr. Trump has demanded. It isn’t even clear what concessions would get the U.S. to settle. One set of Trump administration demands is the “shopping list,” insisting that China purchase more U.S. products like soybeans and Boeing jets. Another set is that China change its economic model, relying less on state-owned enterprises, opening more to foreign direct investment, and honoring intellectual property. A third set, regarding alleged national-security threats from companies like Huawei, has moved in and out of negotiations as the administration has sought bans on Chinese technology.

The administration needs to change its strategy radically. The first step should be to work with, rather than against, U.S. allies. That means shelving Mr. Trump’s threatened trade wars against close partners, such as across-the-board tariffs on Mexico or tariffs on car imports from Europe. The U.S. should deepen ties with partners, including by re-entering the Trans-Pacific Partnership, which doesn’t include China.

The U.S. should also use multilateral organizations and international rules, bringing cases against China at the World Trade Organization, where past U.S. administrations have had a remarkable success rate. The Trump administration instead has chosen to undermine the WTO by blocking the appointment of appellate judges who likely would rule in America’s favor.

Another positive step would be to drop the shopping list. Demanding that China buy more Boeing jets isn’t a way to get Europe on our side in the trade dispute. Such a demand could also further entrench China’s statist economic model while doing little for the U.S. economy in the medium and long run.

The final change would be to adopt a consistent protocol for responding to Beijing’s national-security threats. If state-directed espionage through telecommunications equipment is a serious threat, the U.S. should address it as such and not signal that it’s willing to trade security for slightly more purchases of U.S. products. The notion that national-security concerns are merely another trade bargaining chip suggests that the U.S. is negotiating in bad faith, again making it more difficult to gain allies’ support.

These three changes would allow the U.S. to focus on combating China’s forced technology transfers, weak intellectual-property laws, biased treatment of foreign companies in antitrust law, unfair preference for domestic companies through state-owned enterprises, and many other practices about which the U.S. has legitimate grievances.

Such an approach could also win the support of reformers inside China, who understand that most of the practices America wants it to end are impeding China’s ability to shift to a new phase of innovation-led growth. But can it win over President Trump?

Mr. Furman, a professor of practice at the Harvard Kennedy School, was chairman of the White House Council of Economic Advisers, 2013-17.

https://www.wsj.com/articles/trump-is-losing-the-trade-war-with-china-11566255608?mod=rsswn

When these guys at the WSJ start to give up on this trade war, you know the situation is near critical for Trump's trade war. This article is a good summary of what has happened, without the rah-rah our side is winning BS.

However the advice the professor guy dispensed is complete BS. That is why this was written by a professor. A professor gives advice. What a professor does not do is offer a deal.

This strategy of getting allies together with American to confront China over trade, is dumb. All China has to do to under cut it is to offer a better deal. They more or less negotiating on that already it seems.