Trade's importance to America's security and global standing shouldn't be ignored
China, along with the rest of Asia and Europe are bracing for U.S. President-elect Donald Trump's threatened steep trade tariffs.
But Trump should consider how much the world has changed since he first campaigned on a protectionist platform, as well as make the connection between trade and U.S. national security.
Trump's threats come at a time when China's economy is reeling from a property meltdown and erosion in foreign investment. Meanwhile, the EU is trapped in a web of excessive regulations and underinvestment in public infrastructure and private industry - just four of the world's top 50 tech companies are European.
Countering China
To boost its economic growth, China is flooding Western and emerging economies with exports from its state-subsidized manufacturers, and, also thanks to government aid, technology-packed, inexpensive electric vehicles (EV).
China's mercantilist policies and a cheap currency - the World Bank estimates the yuan (CNYUSD)-U.S. dollar (DX00) exchange rate that would equate costs for goods in America and China is about 3.81, not the current 7.23 - impose trade deficits on the United States.
China-U.S. trade flows harm America's growth. U.S. tariffs, properly applied, could offset some of those deleterious consequences. History suggests that U.S. tariffs wouldn't raise prices for Americans by their full amounts.
For example, Trump in his first term raised tariffs on $300 billion of Chinese imports to 17.5% from 2.7% - and calamity didn't follow. The one-time impact on overall inflation was just 0.3%. Until COVID, in fact, Trump's first-term accomplished full employment and 2.8% annual economic growth.
The overall effects of raising tariffs further on Chinese goods in the second Trump administration would depend on phasing them in over several years, rebating tariffs to exporters, the treatment of third-country imports containing Chinese components and the response from U.S. allies in Europe.
With steel and EVs, for instance, Europe followed suit to limit Chinese products into its markets. And in a little-noticed but significant move, just prior to the first Trump presidency the EU substantially raised tariffs on Chinese goods.
China would counter these obstructions as it does with EVs currently - look to emerging markets such as the ASEAN nations in Asia.
Trump may be forced to impose tariffs - because Congress is becoming increasingly impatient.
Trump may be forced to impose tariffs - because Congress is becoming increasingly impatient. Bipartisan support is emerging to revoke Permanent Normalized Trade Relations with China. This would impose the high tariffs mostly in place during the 1930s - sanctions fashioned for a global economy as it was a century ago and certainly not now.
Don't trade away security
Trump also must recognize trade's importance to America's security. China, Russia, Iran and North Korea have forged a menacing Axis. U.S. President Joe Biden has responded by championing NATO expansion and fostering a latticework of security alliances and technology cooperation in Asia.
To meet challenges from this Axis in the Pacific, Europe and the Middle East, the United States should increase defense spending from 3% of GDP to 5%.
Tripling the average tariff on Chinese goods - assuming half of Chinese imports phase out - might raise $90 billion tops. That's hardly enough for new defense spending or to finance Trump's promised tax cuts.
Increasingly, American growth depends on advanced semiconductors fabricated in Taiwan with equipment made in Europe. Like it or not, Trump will need to defend U.S. interests in these manufacturing centers.
Sure, he can threaten the Europeans with tariffs, but it would be smarter of Trump to leverage the threats, prodding Europe to increase its defense capabilities and better integrate them with American support.
China, meanwhile, is making economic and strategic inroads in emerging economies by exporting more technologically sophisticated products, sourcing raw materials and building ports, railways and other infrastructure.
If the Trump administration taxes trade with U.S. allies - emerging markets, Japan and South Korea - it would only play into China's Asian strategy. Global markets for U.S. technology products would see limits, and militarily, American influence with its Pacific security partners would be reduced.
It would be better for the U.S. to establish a national sovereign wealth fund that would leverage U.S. private investment in emerging markets and negotiate trade agreements that benefit the U.S. and all Americans.
Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
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-Peter Morici
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