Leaders | “Open for business”
The harm done by America’s new tariffs
Duties on solar panels and washing machines are more damaging than they first appear

ON TRADE, President Donald Trump has launched lots of investigations, withdrawn from one deal (see Banyan) and started the renegotiation of another.


But this week is the first time he has put up a big new barrier.


On January 22nd he approved broad and punitive duties, of up to 30% on imports of solar panels and up to 50% on imports of washing machines.


His backers say that the measure, which affects around $10bn of imports, will protect American workers.


His critics cling to the hope that the damage will be mild.


Start with the claims made by the administration.


Workers are also consumers, and Mr Trump’s actions will whack them.


Tariffs raise prices and dull competition.


Whirlpool Corporation, the washing-machine maker which asked for the duties, knows as much.


When, in 2006, it merged with Maytag, a rival, it quelled concerns about its high market share by pointing to competition from abroad.


One study found that clothes-dryer prices rose by 14% after the merger.


For washing machines, where import competition was fiercer, prices were unchanged.


Even if American wallets are pinched, surely American jobs are safer?


Samsung and LG, two South Korean washing-machine makers, are ramping up their American production.


But their deals were hatched before Mr Trump came into office, spurred in part by the logic of making heavy machines close to customers.


It has about 260,000 workers, a mere 2,000 of whom were making solar cells and panels at the end of 2016.


The government reckons that the fastest-growing occupation over the next ten years will be that of solar installer.


The Solar Energy Industries Association, a body that is enraged by the new tariffs, reckons that the industry will support up to 23,000 fewer jobs because of them.


Meanwhile, as if to underline the irony, the two companies that asked for protection are unlikely to be saved.


And do not forget that the tariffs may harm American industry more broadly.


Restricting markets for imports tends to spark retaliation that restricts markets for exports—especially when, as with these latest tariffs, they affect everyone.


China, supposedly the focus of American ire, produces 60% of the world’s solar cells and is responsible for 21% of America’s imports.


But South Korea will also be hit, and its government is poised to dispute America’s action at the World Trade Organisation.


Other casualties include Mexico, Canada and the European Union.


President, not precedent
Critics of this week’s tariffs draw solace from the fact that Mr Trump’s actions were broadly in line with the steer from the United States International Trade Commission, a quasi-judicial review body, and in both cases were weaker than the petitioners had originally requested.


They point out, too, that occupants of the Oval Office have resorted to global “safeguard” tariffs on 19 previous occasions.


That Mr Trump has stayed within the rules is small comfort: they give him enormous scope to poison world trade.


And it would be wrong to skate over the differences between his administration and its predecessors.


The last time this particular safeguard was applied was in 2002.


Past presidents remained wary of hurting American consumers, and mindful of international repercussions.


Mr Trump, by contrast, seems to hold a steadfast belief that protectionism works.


His rhetoric—and now his actions—invite aggrieved petitioners to apply for help.


The logic of his stance on trade is to use tariffs not sparingly, but repeatedly and aggressively.


Mr Trump is now open for business, just not the healthy sort.


Finance & economics | Buttonwood
Markets fret about America’s turn toward protectionism
A trade war would be certain to roil markets and disrupt central banks’ plans to reduce stimulus

IN THE run-up to the presidential election of 2016, investors were nervous about Donald Trump.


They liked his tax-cutting, anti-regulation promises, but fretted about his foreign and trade policies.


Some dubbed the two agendas “Trump lite” and “Donnie Darko”.


Almost as soon as it became clear that Mr Trump would become president, the markets decided to believe in the optimistic version.


His tweeting and decision-making may have been erratic, but investors seemed to forgive the president his peccadilloes as a wife might her errant husband: “He may not be faithful but he’s a good provider.


”
Fears about trade conflict almost disappeared.


In last month’s survey of global fund managers by Bank of America Merrill Lynch, just 5% regarded a trade war between America and China as the biggest risk facing the markets, compared with 45% who worried about a return of inflation or a crash in the bond markets.


The announcement of tariffs on steel and aluminium on March 1st thus came as a nasty shock, especially as it was followed by boasts about trade wars being “easy to win”.


Furthermore, the news came just a few weeks after the stockmarket suffered a nasty wobble as investors worried that higher interest rates might pose a threat to global growth.


Analysts have started to calculate the market consequences if a trade dispute escalates.


Erik Nielsen of UniCredit Bank thinks a trade war would reduce global economic growth by 0.5-1% a year and send the stockmarket into a “measurable correction”.


This would in turn disrupt central banks’ plans to withdraw monetary stimulus, sending both bond and currency markets on a “rollercoaster ride” for several months.


Alan Ruskin of Deutsche Bank thinks that the president’s protectionist rhetoric will be seen by many investors as a sign that America desires a weaker dollar, which is another way of trying to bring the trade deficit down.


Ben Inker of GMO, a fund-management group, says that the rise of economic nationalism has increased the likelihood of a trade war that would be in no one’s interests.


It would cause investors to shorten their time horizons a problem for shares, which depend for their value on an uncertain stream of future profits.


“If one wanted to imagine a scenario in which valuations fall not merely to long-term historical averages but right through onto the other side, a global trade war is a strong candidate,” Mr Inker warns.


Clearly, not everyone feels the same way.


There was a big fall in the American stockmarket when Mr Trump announced his intention to raise tariffs.


But shares quickly bounced back before falling again when Gary Cohn, the president’s economic adviser and a fervent advocate of free trade, resigned.


Adding to the uncertainty is the possibility that America will decide to take separate measures against China for intellectual-property theft.


At the time of writing there was still scope for Mr Trump to change his mind in the face of congressional opposition at home or the prospect of retaliation from abroad.


And even if tariffs are imposed the dispute could soon subside, as it did when the Bush administration pushed through similar measures in 2002.


But the global economy is in unfamiliar territory.


Because restrictions on trade have generally been easing since 1945, investors have no experience of a broad tariff dispute.


The Smoot-Hawley Act, which pushed up tariff rates by an average of six percentage points, is regarded as having been an unhelpful act in the midst of the Depression.


Congress passed it in June 1930 despite a statement opposing it signed by 1,028 economists published in the New York Times.


Although the big crash in the market came in October 1929, the S&P Composite index suffered a further decline of 10% in the month the act passed.


(The tariffs were not the only thing driving the market down, of course; the American banking system was collapsing at the same time.


)
Even if the world manages to avoid a full-blown trade war, the threat to global markets is clear.


Politicians are becoming more nativist, and as they do so, barriers to the free movement of capital, goods and services are likely to rise.


Financial markets, with high equity valuations and low bond yields, are currently priced for perfection.


But a protectionist world is far from perfect.


If the trend continues, markets are likely to become more risky.


After all, when a politician says “America First”, or indeed “Ruritania First”, that suggests that the interests of foreign investors are being left far behind.


|SHANGHAI

Finance & economics | Global trade
A lose-lose trade war looms between America and China
If China cannot placate Donald Trump, it will fight him instead

PRESIDENT DONALD TRUMP has not yet started a global trade war.


But he has started a frenzy of special pleading and spluttered threats.


In the week since he announced tariffs on steel and aluminium imports, countries have scrambled to win reprieves.


Australia, the European Union and Japan, among others, have argued that, since they are America’s allies, their products pose no risk to America’s security.


If these appeals fail, the EU has been most vocal in vowing to retaliate, in turn prompting Mr Trump to threaten levies on European cars.


In China, ostensibly the focus of Mr Trump’s actions, the public response has been more restrained.


Officials have said the two countries should strive for a “win-win outcome”, a favourite bromide in their lexicon.


As a rival to America, China knows that an exemption from the tariffs is not on offer.


It also knows that it needs to conserve firepower.


If this is the first shot in a trade war, it is, for China, small bore.


Its steel and aluminium exports to America amount to roughly 0.03% of its GDP, not even a rounding error.


It is two shots to come that have China more worried.


Mr Trump has asked China to slash its $375bn bilateral trade surplus by as much as $100bn, a nigh-impossible task.


And an investigation into China’s intellectual-property practices is almost over.


Mr Trump wants to punish China for the alleged theft of American corporate secrets.


Reportedly he will seek to place tariffs on up to $60bn of Chinese imports, focused on technology and telecommunications (see Briefing).


Until recently, Chinese officials thought they had the measure of Mr Trump.


During a state visit to China in November, he was treated to a lavish banquet and signing ceremonies for $250bn in cross-border deals.


He still speaks fondly of the dinner, but the glow faded quickly on the deals, many of which were restatements of previous commitments.


The tariffs on steel and aluminium, though negligible in their impact on China, signalled that hawkish advisers to Mr Trump were in the ascendancy.


So behind their mask of calm, Chinese officials are searching for ways to fight back.


The demand that China cut its trade surplus by $100bn is, in a technical sense, risible.


As Mei Xinyu, a researcher in a Chinese commerce-ministry think-tank, observes, America complains that China is not a market economy, but asks for a hard target that only a planned economy could hit.


The true bilateral trade gap is smaller than reported, since Chinese exports contain many inputs from elsewhere.


Add in services, including Chinese students in America, and it is smaller still.


Politically, the demand has helped focus China’s thinking.


“There is a sense that they need to give Mr Trump a win, and that the win must be in the form of a big round number that he can tout,” says Eswar Prasad, an economist at Cornell University, who has spoken with Chinese trade officials.


One possibility is that China might buy more of its oil and gas from America, and perhaps even make a hefty down payment on future purchases.


But if America imposes stiff penalties in the intellectual-property case—along with stinging tariffs, it might also place new restrictions on Chinese investment and travel visas—China will take a much harder line.


A government adviser in Beijing says that regardless of the economic consequences, Xi Jinping, China’s president, will want to show that he is no pushover.


Counter-measures will be varied, says David Dollar, America’s former treasury representative in Beijing.


China will buy more soyabeans from Brazil instead of from America.


It will buy more Airbus planes instead of Boeings.


It will tell its students and tourists to go to other countries.


It will drag its feet on approvals for American companies in China.


Worryingly, each side thinks that in a trade war of attrition, it would have the advantage.


America calculates that China has the bigger surplus, and thus more to lose.


But China’s exports to America are less than 3% of its GDP—large but not critically so.


China, for its part, thinks Americans would object to paying higher prices for manufactured goods from toys to televisions.


But much low-end production is migrating from China to other developing countries and, in a pinch, American consumers might rally round the flag.


To invert China’s much-loved win-win motto, this has all the makings of a lose-lose battle.


Business | A clash over commerce
Donald Trump launches attack on Chinese trade
Tariffs will hurt America too

Now for the real fight.


After unveiling tariffs on steel and aluminium which barely grazed China earlier this month, President Donald Trump took direct aim at Beijing on March 22nd.


His move to hit China for its trade practices is designed to land three jabs.


The first will take the form of tariffs of 25% on up to $60bn of Chinese exports to America.


This, Mr Trump argues, is only a fraction of the economic damage China has done to America by stealing or forcibly extracting its companies’ intellectual property.


The second blow will come in the form of investment restrictions on Chinese companies, to stop the Chinese from hoovering up American ideas and gaining a strategic advantage.


The third will involve litigation at the World Trade Organisation.


China has broken the rules, the president thinks, and needs to be held to account.


China has not lived up to the expectations many had of it when it joined the World Trade Organisation back in 2001 (see briefing).


Its challenge to American technological supremacy is real enough (see briefing).


The metal tariffs have been handled chaotically and were controversial even within the administration; the desire to curb China’s bad behaviour commands much more consensus.


That does not make the Trump administration’s strategy on tariffs a good one.


Mr Trump thinks that America’s position in a trade battle is stronger than that of the Chinese, because they send more stuff to America than goes the other way.


Slapping tariffs on over 10% of Chinese goods exports to America will hit shoppers.


Even outfits who are hawkish on China, such as the Information Technology and Innovation Foundation, a tech-industry-funded think-tank, are critical of the idea of imposing tariffs on ICT products from China.


It warns that this would hurt American productivity growth and benefit China's competitors rather than bringing any jobs back to America.


What would make matters much worse is Chinese retaliation.


On the day of Mr Trump's announcement, Cui Tiankai, the Chinese ambassador to America said "if people want to play tough, we wil play tough with them.


" American agriculture exporters look especially vulnerable.


Paul Burke, regional director of the US Soybean Export Council in North Asia, has heard talk of the Chinese commerce ministry meeting soybean consumers to ask how they would cope if access to American soybeans were to be curtailed.


On March 20th the Global Times, a Chinese newspaper, published an editorial clamouring for tariffs, arguing that subsidised American soybeans were “an important reason for the world’s soybean oversupply”.


Mr Burke thinks that soybeans are an example of how trade with China is working.


Now it looks like the exporters he represents will be caught up in the fray.


Such is the self-destructive logic of trade wars.


Mr Trump claims to be trying to avoid a scenario of punch and counterpunch.


As he signed the punitive measures, he boasted that he was knee-deep in negotiations with the government in Beijing to lower America’s trade deficit with China by $100bn, from $375bn (in goods) in 2017.


Set aside the question of whether Mr Trump’s dislike of deficits makes sense (it doesn’t).


His latest action is unlikely to help those talks.


The Trump administration has signalled that it would defend the interests of American farmers if the Chinese were to treat them unfairly.


One blow always tends to lead to another.


Leaders | The danger of the deal
Even if America wins concessions, worry
Donald Trump’s trade policy is economically muddled and politically toxic

JUST six words suffice to sum up President Donald Trump’s approach to trade (and, you may mutter, too much else): make threats, strike deals, declare victory.


In recent weeks Mr Trump’s campaign-trail threats of 2016 have been turned into tariffs of 25% on imports of steel and 10% on aluminium, and proposed levies on up to $60bn-worth of Chinese goods.


Foreigners have duly queued to sue for peace.


On March 26th South Korea agreed to limit its steel exports to America, and accepted an extension of American tariffs on its pickup trucks.


China is said to be discussing cuts in tariffs on American cars, increased purchases of American semiconductors and the further opening of its financial industry.


With many of America’s allies belatedly exempted from the metals tariffs, and consensus among policymakers and business types that China should indeed change its behaviour, stockmarkets are less fearful of an outright trade war (see Buttonwood).


The man who tweeted that “trade wars are good, and easy to win” may be able to claim a string of victories with scarcely a shot fired.


For one thing, no deal has yet been done with China.


Other countries have politics too, even dictatorships.


Despite the South Korean deal, and keen as China is to avoid a trade war—keener than Mr Trump, it seems—the danger of a transpacific escalation remains real.


Even if conflict is averted and China gives ground, however, the result will be a bad one for the world, and for America.


That is partly because of Mr Trump’s character.


If he thinks he has won one fight, he is likelier to start another.


It is also because his policy is founded on wretched economics and dangerous politics.


The president is obsessed with America’s trade deficits—not just the total, of $568bn, or 2.9% of GDP, last year, but its bilateral ones, especially the yawning $375bn deficit in goods trade with China, which he wants cut by $100bn.


Mr Trump’s bluster cannot change basic economic logic.


America’s total trade deficit reflects the shortfall in saving by its households, companies and government—the excess of their combined spending over their income.


Tariffs and quotas can bring trade into balance only if they somehow encourage national saving or reduce investment.


Protectionism predicts trade balances poorly.


Just look at India, where, historically, high tariffs and high trade deficits have coexisted.


Bilateral deficits, it is true, can more easily be altered by trade policy.


If America slaps taxes on Chinese goods (and nothing else changes), it will buy less of them and the $375bn gap will shrink.


However, unless Americans change their total spending and saving, they will buy more from elsewhere.


The tax cuts that the president signed into law in December make his fixation on trade deficits even more senseless.


Boosting the budget deficit to 5% of GDP in 2019 will, other things being equal, widen the trade gap.


It is hard to imagine Mr Trump blaming himself for that—and all too easy to see him making a new round of threats against foreigners.


The president’s more fundamental error is to see trade as a zero-sum game, in which exporting is for winners (or cheats, if they are foreign) and importing is for dupes.


In fact, the gains from trade come from the specialisation permitted by the free exchange of goods, capital and know-how that allows, for example, Californian-designed iPhones to be assembled in China and sold worldwide by the bucketload.


So long, Geneva’s conventions
Mr Trump’s misunderstanding of economics explains why his politics are so irresponsible.


Rather than join with other aggrieved countries to put legal pressure on China, Mr Trump has threatened putative allies.


Rather than work within the rules-based system of trade, which America helped create and which, despite the system’s imperfections, has served the country well, he bypasses it at will.


He is particularly reckless to claim that the steel and aluminium tariffs are justified by national-security concerns (a get-out-of-jail-free card under World Trade Organisation rules that should be used sparingly).


If America thumbs its nose at the WTO, why shouldn’t others?


Managed trade is a mistake, not a victory.


It substitutes the power of political lobbies for market forces, favouring loud, well-organised producers over silent, disparate consumers and robbing economies of the nimbleness needed to adapt to changing technological conditions.


Other countries will feel freer to follow America’s example, making a trade war a repeated risk rather than a one-off danger.


Mr Trump’s approach threatens to leave everyone much worse off.


Finance & economics | Collateral damage
Asia’s small open economies may suffer in America’s trade war
As supply chains are unpicked, firms in China’s orbit may lose business

CHINA is the stated adversary in Donald Trump’s incipient trade war.


But 30% of the value of the goods China exports to America is added elsewhere.


If the row escalates, countries entwined in Chinese supply chains will suffer.


In absolute terms, Japanese suppliers will fare worst.


Japan is the country that exports most to firms in China that export onwards to America.


But relative to economic size, such suppliers are a bigger part of several small, open Asian economies (see chart).


Between 1% and 2% of some countries’ total output is shipped first to China and then on to America. nario—it could knock 0.1-0.2 percentage points off their economic growth.


China’s competitors in industries that have been threatened with tariffs, namely aerospace, machinery and IT, however, would benefit.


There are many of these in Mexico, Germany and Japan.


Tariffs also encourage companies to switch their investment plans.


When Ronald Reagan forced Japan to restrict its car exports to America in 1981 hIf Chinese exports to America were to fall by 10%—an extreme but not impossible scee (unintentionally) boosted Japanese investment in Thailand’s fledgling car industry.


Manufacturing has already started to shift from China to other, cheaper countries in the region.


Tariffs on goods made in China would speed this up.


If the Chinese retaliate, an early target will be America’s farm exports.


Brazil, the world’s second-largest producer of soyabeans behind America, would be happy to pick up the extra business.


But America’s and China’s competitors should not cheer from the sidelines.


A trade war would damage the world’s two largest economies and hit global growth.


Finance & economics | Blow for blow
A trade war between America and China takes shape
The two countries threaten to descend into a sequence of tit-for-tat retaliations

TALK of tariffs is in danger of developing into cries of trade war.


On April 3rd America published a list of some 1,300 Chinese products it proposes to hit with tariffs of 25%.


Just a day later China produced its own list, covering 106 categories.


“As the Chinese saying goes, it is only polite to reciprocate,” said the Chinese embassy in Washington, DC.


According to the Peterson Institute for International Economics, a think-tank, America’s list covers Chinese products worth $46bn in 2017 (9% of that year’s total goods exports to America; see graphic).


China’s covers American goods worth around $50bn in 2017 (38% of exports).


The sums were enough to move markets on April 4th, though the S&P 500 index soon made up lost ground.


Both countries’ lists are, for now, no more than threats.


Over the next two months America’s list will be open for public consultation (there is no deadline for the tariffs to come into force).


China has said that it will wait for America to move.


There is still a chance the two sides will choose a deal over a trade war.


Although America’s list was drawn up in response to China’s alleged theft of American firms’ intellectual property, Mr Trump regards the trade deficit with China as a separate affront.


Tariffs might yet be avoided by China agreeing to buy more American stuff.


On March 23rd America imposed tariffs on steel and aluminium from some countries, including China.


That prompted tariffs covering around $3bn of American exports to China.


More retaliation is expected, as the Chinese react to separate American tariffs on solar panels and washing machines.


Historians of trade have an advantage over those who study wars of the military kind.


Each side in a trade dispute lays out in detail the products to be affected.


That makes it easier to analyse their strategies.


Mr Trump’s tariffs on steel and aluminium turn out to be rather crude.


They are an attempt to protect a single industry by blocking foreign competition, guided by a mistaken belief that this will make it stronger.


By contrast, China’s retaliation, and the latest American threats over intellectual property, are more sophisticated.


Rather than coddling one industry, they are meant to prod a trading partner into changing its behaviour.


This week’s American list is designed to hit products benefiting from China’s industrial policy, including its “Made in China 2025” plan to dominate certain strategic sectors.


Industrial robots, motors for electric vehicles and semiconductors are all in its sights.


(At least 90 products, including aircraft parts and cars, recorded no Chinese exports to America in 2017 and may be intended as a pre-emptive strike.


)
That might seem fair in Mr Trump’s eyes.


But bureaucrats crafting trade-protection policy face a trade-off between punching the other country and protecting their own consumers.


Even before the latest announcement, some offending products had been dropped from America’s list after government analysts identified them as “likely to cause disruptions to the US economy”, or “subject to legal or administrative constraints”.


The final choice took account of the availability of substitutes from elsewhere.


Analysts at Goldman Sachs, a bank, estimate that of the products proposed for tariffs, only around 20% of America’s imports in 2017 came from China (the share is higher for LEDs, televisions, and printers and copiers).


The element of surprise
Some parts of America’s strategy were unexpected.


Minimising disruption to businesses would suggest tariffs on finished goods rather than their inputs.


Some companies may not realise that their suppliers are buying from China, so higher costs for intermediate goods could travel along supply chains in unpredictable ways.


Pricier parts could make American manufacturers less competitive than foreign rivals.


However, although the two biggest tariff lines by value on America’s list were colour-screen televisions and passenger vehicles, consumer products accounted for less than 20% of the affected imports.


In response to America’s tariffs on steel and aluminium, it placed tariffs on $0.2bn-worth of iron and steel tubes, pipes and hollow profiles, and $1.2bn-worth of aluminium waste.


This echoed Canada’s response to the American Smoot-Hawley tariff of 1930, when it raised tariffs on eggs as retaliation for America doing the same.


Douglas Irwin of Dartmouth College reports that the number of eggs Canada exported to America fell by 40% between 1929 and 1932.


But the number going the other way plunged by 99%.


Such tit-for-tat retaliation is intended to demonstrate that trade barriers make industries weaker, not stronger.


The list China published on April 4th is even bolder.


It makes no effort to comply with World Trade Organisation rules, and aims at pressure points in America’s democracy, including industries with powerful lobbies, such as aircraft and soyabeans, as well as products from politically sensitive states.


Wisconsin is home both to Paul Ryan, the Speaker of the House of Representatives, and a sizeable share of America’s cranberry exporters.


Mitch McConnell, the Republican leader of the Senate, represents Kentucky, home to America’s bourbon exporters.


Both products are included in China’s $50bn tariff threat.


In 2003, when the European Union threatened to put tariffs on American products, including oranges, in retaliation for George W.


Bush’s tariffs on European steel, Mr Bush yielded.


(Florida, a crucial swing state, is home to many orange-growers.


) Mr Trump’s pronouncements do not suggest he is ready to sue for peace.


Nor does he seem aware of the risks of failure.


Finance & economics | Drawing the battle lines
America’s gripes with China make a deal hard to imagine
At the heart of the disagreement is China’s industrial policy

AFTER weeks spent threatening tariffs on an ever-greater share of Chinese imports, President Donald Trump seems to be in a more conciliatory mood.


On April 10th a speech by the Chinese president, Xi Jinping, prompted him to tweet a prediction: “We will make great progress together!


”
Many besides Mr Trump share that hope.


If China offers him a deal that he is willing to sign, a trade war may still be averted.


Or sense may prevail, as it did last month, when American allies such as Canada and Mexico were exempted from tariffs on steel and aluminium.


China hawks in the American administration have long seethed over aspects of the relationship with China that rarely feature on Mr Trump’s Twitter feed.


The rules-based system of international trade works best for problems that are clearly defined, and when it is easy to judge the success or failure of a remedy.


Tariffs, and laws that discriminate against foreign firms, are classic examples.


Some of the Trump administration’s gripes with China, published in a 182-page report on March 22nd, fall into this category.


(The report was the result of an investigation into China’s trade practices under Section 301 of the Trade Act of 1974, which grants the right to threaten tariffs if unfair practices are uncovered.


)
For example, it claims that Chinese law discriminates against American companies by undermining their freedom of contract in several ways.


Chinese firms can negotiate with each other over the terms of technology-licensing agreements, but foreign licensees must bear all the risk of others suing for intellectual-property infringements.


Joint ventures must grant the Chinese partner the right to use the foreign partner’s technology even after their agreement has expired.


Such complaints will be considered by the World Trade Organisation (WTO) and judged against the commitments China made when it joined in 2001.


But resolving America’s other gripes will be harder—whether in the WTO or as part of a bilateral deal.


Some are not to do with China’s written laws, but with its unwritten rules and informal procedures.


Upon joining the WTO (and a further eight times since 2010) China’s government pledged not to make handing over technology a condition for market access.


But the Americans say Chinese officials continue to pressure firms to do so.


Such a claim is hard to prove—all the more so, given the opacity of China’s regulatory processes.


And experience suggests that any deal would be devilishly difficult to enforce.


The Chinese authorities can say that contracts involving technology transfer were signed voluntarily.


They can make life hard for any foreign company that dares say otherwise.


Robert Atkinson of the Information Technology and Innovation Foundation, an American think-tank, accuses the Chinese of playing rope-a-dope, allowing the American administration to exhaust itself in ultimately futile complaints.


He thinks that it should give up on the rules and focus instead on results, for example by arranging for American firms to inform it “off the record” of Chinese infractions.


But any such flexible, unclear arrangement would be fiercely resisted by the Chinese.


Half of the Section 301 report concerns Chinese investment in America.


The Americans take issue with Chinese firms’ acquisitions of American ones, such as Lexmark, a printing company, in 2016, and Mattson Technology, which produces equipment for making semiconductors, in 2015.


In both cases the purchase price was well above market value.


The Chinese maintain that these were fair transactions on the free market; the Americans suspect that they were directed and supported by the Chinese government in a bid to dominate strategic sectors.


Any mutual agreement to curb such purchases would have to outline a legitimate role for the state.


But China’s model of state-directed capitalism makes it hard to distinguish between public and private affairs.


At the heart of the disagreement is China’s industrial policy.


The Americans suspect the Chinese government of enticing their firms with the promise of a vast consumer market, only to use regulatory pressure to strip them of their bargaining power and expose them to the theft of intellectual property by forcing them into joint ventures.


They spy a plot to undercut and eventually surpass American industry.


The Section 301 report relays the story of SolarWorld, a maker of solar panels that claims its trade secrets were stolen.


The result was that cheap Chinese competitors flooded the market, costing it more than $120m in sales and revenue.


The Americans worry that unless the Chinese government changes its ways, other American industries will soon lose out to China, too.


But what the Americans see as unfair the Chinese see as the path to development.


From their point of view, bringing in American firms is a roaring success.


A study analysing joint ventures in China in 1998-2007 found that they boosted both the Chinese partner and the industry in which it was active.


Ventures with American firms were more fruitful than those with firms from Hong Kong or Japan.


During his speech this week, Mr Xi repeated old promises to cut tariffs and relax investment restrictions in some sectors.


The American vision is of more sweeping change.


According to Bloomberg, a news service, secret bilateral talks broke down after the Americans demanded an end to Chinese subsidies for high-tech industries.


It is hard to imagine a deal that reconciles these fundamental differences.


That leaves a choice—between an agreement that is shallow and fragile, or conflict.


|SHANGHAI

Business | Not so phoney war
An American ban puts China’s ZTE in peril
China’s second-largest telecoms firm could become a bargaining chip in the trade dispute

TALK of restricting the use of Chinese telecoms equipment in the West is growing.


This week the curbs went the other way, when America banned its companies from selling hardware and software for seven years to one of China’s state-owned tech champions, ZTE.


On April 16th America’s Department of Commerce said that China’s second-largest telecoms firm had trampled on a settlement reached in March 2017 over ZTE’s illegal shipments since 2010 of American-made technology—telecommunications equipment to Iran, and routers, servers and microprocessors to North Korea—in known violation of trade sanctions.


The one at risk of being crippled by an embargo is now ZTE.


In 2016 UBS, a bank, estimated that 80-90% of its products relied on American parts.


Jean Baptiste Su of Atherton Research, an American technology-research outfit, described the ban as “devastating” for ZTE, especially the loss of chips made by America’s Qualcomm used in about 70% of ZTE’s smartphones.


Although ZTE makes most of its money from its telecoms-equipment business, nearly a third of its revenues come from phones.


Switching to other suppliers (and it must seek out those with zero parts sourced from America) would require handset redesigns to match new specifications that would take years to bring to market, says Mr Su.


The software restrictions are just as bruising.


ZTE’s phones use the Android operating system developed by Google, which under the ban may no longer be able to license its apps to ZTE.


It does not have its own operating system.


As The Economist went to press, ZTE’s shares had been suspended from trading in Shenzhen and Hong Kong for three days.


America had dangled the threat of this sort of ban (known as a denial of export privileges) last year but shelved it when ZTE confessed to wrongdoing and paid $890m in penalties.


As part of the deal ZTE pledged to discipline senior staff.


But although it fired four people, it was found to have neither reprimanded nor cut bonuses to 35 others, as promised.


According to the Department of Commerce, ZTE admitted it had submitted false statements but said it had no intention of misleading the government.


The department decried “a pattern of deception” and “repeated violations”.


ZTE stood out as the only Chinese handset-maker to have cracked the American market; half of its phones are sold there.


It is the country’s fourth-largest seller of smartphones, with a 12% share—despite its inclusion in a report from America’s House Intelligence Committee in 2012 that urged domestic telecoms firms purchasing networking equipment to shun its products over espionage worries.


(The report also targeted Huawei, ZTE’s larger Chinese rival, which, because of deeper concerns over its possible ties to the Chinese government, has struggled to make inroads since.


)
Although the sanctions row predates the administration of President Donald Trump, it will make an example of ZTE, reckons Mr Su, as tensions mount between America and China over trade disputes and technological dominance.


Since the start of the year a bill has been proposed in America’s Congress to block the government from using telecoms equipment made by Huawei and ZTE; and Mr Trump has halted the takeover of Qualcomm by Broadcom, a rival chipmaker, on national-security grounds, for fear it would give China the edge in setting standards for 5G, a wireless technology.


A parallel salvo this week, by the Federal Communications Commission, was all of a piece.


America’s telecoms regulator voted unanimously to move forward with a plan to stop federal subsidies to domestic carriers who use suppliers that are considered to be a risk to American national security.


It pointed in particular to congressional scrutiny of Huawei and ZTE.


Edison Lee of Jefferies, an investment bank, thinks that ZTE has a shot at negotiating the ban away, but that if it fails it will hope to involve the Chinese government in a mediation process.


Even if ZTE’s fate becomes a bargaining chip in a trade dispute, a resolution may take many months.


Until then the firm will at best limp on.


|SHANGHAI

Finance & economics | China chill
Fears that China has hurt innovation in the West are overblown
America’s patents and research spending have soared alongside its trade deficit with China

POPULAR concern about free trade with China has focused on the loss of manufacturing jobs in America and Europe.


Policymakers have an additional worry: that China’s rise is hurting innovation in the West.


This fear is among the small set of issues that unites American Democrats and Republicans.


In 2016 Barack Obama’s commerce secretary said that China’s state-driven economy would weaken the world’s innovation ecosystem.


Donald Trump’s advisers allege that China makes it harder for foreign firms to invest in innovation by squeezing their returns.


Mr Trump’s trade team was expected to raise this complaint, among others, with Chinese officials during talks in Beijing on May 3rd and 4th, as The Economist went to press.


Data suggest that competition with China has coincided with more innovation in America, not less.


The relationship between competition and innovation is complex, even before considering trade with China.


Economists agree that the right competitive landscape fosters innovation.


But they disagree about what exactly that landscape looks like.


More competition might prod companies to try harder to develop new products in the hope of gaining market share.


Alternatively, if competition is cut-throat, profits might evaporate to the point that companies have little incentive to take risks.


The fear is that China generates the wrong kind of competition and stunts the good kind.


Businesspeople elsewhere worry that when the Chinese government decides to fund this or that industry, investment soars and margins collapse.


Overcapacity in steel was caused in part by Chinese investment in steel processing; semiconductor firms think their industry might be next.


At the same time, argues Robert Lighthizer, the US Trade Representative, foreign companies that beat their Chinese competitors are not adequately rewarded because China presses them to transfer their intellectual property.


The two main academic papers on this question looked at the years around China’s accession to the World Trade Organisation in 2001.


Far from settling the matter, they were contradictory.


Economists studying European companies found that competition from Chinese imports both caused firms to improve their technology and led to a shift in jobs to the most advanced firms.


They concluded that 15% of the upgrading of technology in Europe between 2000 and 2007 could be attributed to the increase in imports from China.


But economists examining the impact on America argued that, on the contrary, Chinese competition had led companies to spend less on research as profits fell.


They calculated that imports from China explained 40% of a slowdown in American patenting between 1999 and 2007, compared with the preceding decade.


The IMF has now weighed in with more recent figures.


Its conclusion is rather more cheerful, at least for those who think a trade war with China is a rotten idea.


In a report published in April the fund showed that, following an extended period of decline, high-quality patents granted to American companies had risen sharply between 2010 and 2014.


It also pointed to a big increase in American spending on research and development during the same years—even as America’s trade deficit with China rocketed (see chart).


The growth in patents was more sluggish in Europe and Japan.


But both patents and research spending soared in South Korea, the country most directly exposed to manufacturing competition from China.


A separate IMF working paper late last year unpicked some of what is happening in America.


Competition from Chinese imports has caused research spending to be reallocated within certain industries, away from also-rans and towards the most productive and profitable firms.


At the same time, many researchers left manufacturing industries and moved into service sectors such as data-processing and finance.


Both results are consistent with an American economy that is playing to its strengths.


The IMF’s analysts concluded that Chinese imports were not a threat to innovation in America, after all, and that policymakers could take a deep breath.


No loud inhaling sounds have yet been reported from the White House.


|SHANGHAI

Finance & economics | Jaw-jaw, for now
Trade talks expose a chasm between China and America
Hardline demands from both countries raise the risk of a trade war

START with the good news from the trade negotiations between China and America.


After weeks of threatening tariffs and counter-tariffs, representatives from the world’s two biggest economies are at last talking.


Over two days of meetings in Beijing, which ended on May 4th, Chinese and American officials laid out their grievances and their demands.


That, unfortunately, is where the good news ends.


The positions that both sides took were so extreme and contradictory that compromise appears a remote prospect.


What, until now, has largely been a war of words could easily careen into a full-fledged trade war.


Publicly, the two countries put a positive gloss on the outcome.


Xinhua, China’s official news agency, described the talks as candid and constructive.


It noted that they had agreed on some issues and recognised their “considerable differences” on others.


On the evening the talks closed, President Donald Trump tweeted a sentiment that, by his standards, was sympathetic: “it is hard for China in that they have become very spoiled with U.


S. trade wins” (that is, with beating America in the trade arena, which Mr Trump firmly believes China has).


If those public statements were all observers had to go on, the conclusion might well be that the talks had been successful.


Instead, the two countries’ detailed negotiating positions were widely leaked.


It is clear that they have been talking at, rather than with, each other.


The American demand that made the most headlines was that China should cut its massive bilateral trade surplus by $200bn by the end of 2020.


That would amount to a roughly 60% reduction in China’s surplus within three years, which is far from credible.


More troubling from China’s perspective were demands focused on its economic policy.


The Americans asked China to stop providing subsidies to a range of sectors that the Chinese government has deemed strategic, from robotics to electric vehicles.


They demanded that Chinese tariffs on American products be no higher than American tariffs on Chinese products.


And they told China to open its market much more widely to foreign investors, setting July 1st as a deadline.


Before travelling to Beijing, Robert Lighthizer, the United States Trade Representative (pictured, centre), had said his objective was not to change the Chinese system but to open it up.


Taken in its entirety, though, the American position amounts to a demand for a new economic model in China.


That Mr Lighthizer, long a China hawk, has taken a hardline stance is not surprising.


But it was striking to see his views emerge virtually undistilled as the American position.


Some had thought that doveish members of the American delegation, notably Steven Mnuchin, the treasury secretary, would make for a more moderate stance.


China, for its part, also made a series of demands that were non-starters.


To increase its purchases from America, it asked that the American government ease controls on exports of technology that could have military applications.


These controls, in place for nearly three decades, are not about to be relaxed given that America has just classified China as a rival power.


China asked that America open its market to Chinese information-technology products.


America is going in the opposite direction, viewing more and more Chinese tech with suspicion.


China also asked that America recognise it as a market economy at the World Trade Organisation, lessening the scope for punishment in trade disputes.


If America fails to do so, China said it would likewise treat America as a non-market economy at the WTO.


Had the talks in Beijing gone well, it was expected that Xi Jinping, China’s president, or Wang Qishan, his trusted lieutenant on American relations, would meet Mr Trump’s trade team.


The question about the duelling demands is to what extent they are simply aggressive opening moves.


The countries might soften their stances as negotiations continue.


But there is a chasm between them on foundational issues.


China is determined to become a tech power, and is unabashed about using industrial policy to get there; America sees China’s advance as a threat and believes its industrial policies harm American companies.


The American objection to China as a state-controlled economy cannot be squared with China’s insistence that it is already a market economy.


Starting on May 23rd, America can legally impose its first set of tariffs against China, affecting roughly $50bn of goods.


There were some glimpses of common ground, however limited.


Both countries said they wanted to meet regularly.


Both talked about wanting a balanced trade relationship, in which China buys more from America.


But building on this common ground requires mutual goodwill, which is in short supply.


Mr Trump and Mr Xi have tried to cultivate reputations as staunch defenders of their national interests.


Now that their negotiating positions are publicly known, the worry is that the two leaders, unwilling to look weak, will dig in.


Graphic detail | Daily chart
A trade war will inevitably hurt America’s companies
But the pain will not be evenly felt

OPEN markets have lowered prices and raised living standards for millions of people but a new tit-for-tat trade war now threatens that progress.


After America said on March 8th it would impose 25% tariffs on imported steel, China retaliated with tariffs on dozens of American goods, from pork to wine.


America’s president, Donald Trump, and his Chinese counterpart, Xi Jinping, were due to talk on May 8th in an effort to settle some of their differences.


Mr Trump, for his part, insists that much of America’s trade with China is “stupid” and is confident that America can win a trade war.


Mr Xi, meanwhile, insists that there will be “no winners”.


While Mr Xi is right in thinking that a trade war will leave everyone worse off, the precise impact on American business is more uncertain.


Resilinc, a supply-chain analytics firm, has attempted to model the impact of an additional $50bn of proposed Chinese tariffs on American exports ranging from soyabeans to scrap metal.


Using a trove of data covering transactions and inventories for 30,000 manufacturing companies across the world it demonstrates that the losers will not be evenly distributed.


Electronics businesses will be least affected.


They are reckoned to have the least dependence on China because they do not sell much in the country and have alternative countries to sell to.


By contrast, agriculture and aerospace will be most affected: they sell a lot to China and are the least geographically diversified.


When deciding what retaliatory tariffs to impose the Chinese attempt to hurt Mr Trump where he is most vulnerable: in industries that employ his blue-collar supporters.


So though America’s president may hope to help 400,000 of America’s metal workers he is simultaneously threatening many more jobs in other industries.


At the same time he will be making all consumers worse off by pushing the price of goods up for everyone.


|HANGZHOU

China | The cost of conflict
A threatened trade war between China and America may be on hold
Chinese officials still have plenty of reasons to worry

WANG XINGXING taps the back of his dog which, on command, stands tall, shakes its legs and struts forward.


It is not a well-trained pooch so much as a well-built one.


Laikago, its name, looks like a miniature version of the robo-dogs that propelled Boston Dynamics, an American robotics company, to fame.


Mr Wang, a boyish 28-year-old, started work on his dog as a graduate student.


It can walk on uneven surfaces, carry small loads and steady itself when kicked lightly.


Laikago is a far cry from the Boston Dynamics breed, which is sturdier, swifter and smarter.


That has not stopped China’s patriotic media from asking whether the firm Mr Wang founded, Unitree, could now rival the American one.


But Boston Dynamics has been at it for more than two decades.


It plans to open its first factory soon.


For now it has a cluttered workshop in the city of Hangzhou, a tech hub west of Shanghai.


The government has declared robotics a priority.


On the other side of Hangzhou, a university research team has also started making robo-dogs.


In northern China there are at least three companies doing the same.


China’s robotic technology, by most measures, lags behind America’s.


But the country has abundant talent, money and determination.


Its robo-dogs are snapping at America’s heels.


The pooches also show how a trade conflict with America could hurt China.


Mr Wang admits that their most valuable parts—their semiconductors—are mostly made in America.


Were the American government to block exports of these to China, Mr Wang’s dogs would not work.


But it is the kind that China’s government and companies feel they have to consider as their country’s dispute with its largest trading partner grinds on.


In the past few days, their fears have ebbed and flowed.


On May 20th America’s Treasury secretary, Steven Mnuchin, said his country would refrain for now from its threat to impose punitive tariffs.


“We’re putting the trade war on hold,” he told Fox News after two days of talks in Washington with Liu He, a Chinese deputy prime minister.


He may be mindful of the outrage that Mr Mnuchin’s talk has stirred among China-sceptics in Washington.


After first declaring success in the negotiations, Mr Trump later said he was dissatisfied.


So Chinese officials are still preparing for the worst.


And they know that even if this storm blows over, others lie ahead.


Rivalry with America is getting more intense.


After the talks, the two sides issued a statement pledging to reduce America’s $375bn trade deficit with China “substantially”.


But the agreement was strikingly light on details.


The Americans wanted China to cut its trade surplus by $200bn.


China refused, pledging only to buy more.


Later it said it would cut import duties on cars to 15%, but that was well above the 2.5% level the Americans had demanded.


Mr Trump boasted that China had agreed to buy “massive amounts” of American farm goods.


But this will have a modest impact on the bilateral trade balance.


It will not satisfy some American negotiators who have fumed about China’s industrial policies, calling them mercantilism gone wild.


The next steps will depend to a worrying extent on Mr Trump’s whims.


He could claim China’s offers, however limited, as a victory.


Or he may conclude that Xi Jinping, China’s leader, has played him for a fool and fire off a petulant tweet, nudging the two countries’ relationship back into crisis and reigniting global fears of a full-blown trade conflict.


It may be that Mr Trump does want to ease tensions with China, but only as a temporary ruse to enlist Mr Xi’s support for talks due to be held on June 12th between Mr Trump and Kim Jong Un, North Korea’s dictator.


Once that event is over (if it actually takes place), Mr Trump could again turn up the heat on China.


Trade is one of the few issues on which he is close to consistent.


Impervious to economic logic, Mr Trump thinks that America loses when it imports more than it exports.


China accounts for about three-fifths of America’s trade deficit (see chart 1).


And China is not merely contending with a truculent Mr Trump and his more hawkish economic advisers.


A broad swathe of American opinion has turned against it.


Businesses see a China that is determined to prop up its own companies, both at home and, increasingly, abroad.


America’s national-security officials see a China that is converting economic heft into geopolitical clout and military might.


Kenneth Jarrett of the American Chamber of Commerce in Shanghai says that Mr Trump’s anger about the deficit has at least helped China to wake up to the depth of foreign frustration.


A quick deal in which China pledges to buy more American goods will not ease it.


Leading the charge against China on economic matters has been Robert Lighthizer, the United States Trade Representative.


In March, after an investigation into China’s trade practices, he alleged that China had, time and again, stolen American technology or forced firms to hand it over.


He called on China to stop subsidising industries that it deems strategic, from renewable energy to electric vehicles.


From China’s standpoint, this is a non-starter.


Its plan known as “Made in China 2025” identifies ten high-tech industries and sets out global market-share goals.


For policymakers in Beijing, it is their blueprint for reaching the next level of development—a reasonable desire for a middle-income country, as 19th-century Americans would have agreed.


But foreign governments and businesses see it as a declaration of intent to seek global dominance.


The more the rest of the world complains, the more irascible China sounds.


Mei Xinyu, a researcher in the commerce ministry, likened America’s demands to what are known in China as the country’s “unequal treaties” with foreign powers in pre-communist days.


The most notorious of these accords was forced on China in 1842 by Britain after a war over British opium sales.


It required China to open its doors to foreign trade and cede Hong Kong.


State media have been even more colourful than Mr Mei.


“Anyone who tries to hinder China’s emergence is like a mantis trying to stop a car, or an ant trying to shake a tree, and will pay a bitter price in the end,” said the Communist Party’s mouthpiece, the People’s Daily.


There are four main ways in which its economy could be harmed by a trade war with America.


Although America has delayed these, they may yet happen.


After the talks with Mr Liu, Mr Lighthizer vowed that if China were to fail to change its ways sufficiently, America would use “all of its legal tools”, including tariffs, to protect itself.


Mr Trump has previously threatened tariffs on $150bn of imports from China.


They would throw sand in the gears of Chinese commerce.


But trade fuels less of China’s growth than it used to.


Exports to America were the equivalent of nearly 10% of Chinese GDP before the global financial crisis of 2008.


China has forged closer ties with many developing countries and cultivated its own domestic market.


Moody’s, a credit-rating agency, estimates that Mr Trump’s initial set of tariffs, valued at $50bn, would shave only 0.14 percentage points from China’s growth rate—a rounding error for an economy that is expected to grow by about 6.5% this year.


A second vulnerability is to what might be called America’s industrial policy in reverse.


While China steers investment into favoured sectors, America adopts countermeasures.


In recent years the Committee on Foreign Investment in the United States (CFIUS), which checks whether deals threaten national security, has blocked Chinese acquisition of firms in industries from semiconductors to payments.


The reviews will only get tougher, says Scott Kennedy of the Centre for Strategic and International Studies, an American think-tank.


Previously CFIUS focused on the purchase of controlling stakes.


New legislation will expand its oversight to any investment, however small, that might help a “country of special concern” (read: China) catch up with America’s technology.


Another bill would specifically restrict Chinese investments in the ten sectors targeted by the Made in China 2025 plan.


If America does impose tariffs, they would also mainly focus on these ten industries.


Nearly all the proposed duties affect high-tech products such as avionics and medical devices.


Low-tech goods that China sells by the shipload would be mostly untouched.


He Weiwen, a former diplomat, says that America’s goal is not to shrink its trade deficit but to impede China’s progress.


China’s third vulnerability is to blocks on American exports.


A taste of this was given on April 16th when America punished ZTE, a Chinese telecoms firm, for violating sanctions against Iran and North Korea.


The penalty was a ban on American sales of parts to the company.


But around 90% of its products use American parts, especially semiconductors.


The ban would render ZTE comatose, said its chairman.


In the past few days Mr Trump has appeared to have second thoughts on this.


On May 13th he pledged to help ZTE “get back into business, fast”.


On May 22nd he said there was “no deal”, but later suggested it may only have to pay a big fine and change its management.


Whatever he is pondering, China has learned a lesson about how tech superiority gives America clout.


Chinese officials frankly admit that their technology is far from the global leading edge.


The Made in China 2025 plan can be read as a confession of backwardness.


China’s dream of becoming a semiconductor powerhouse stirs fear abroad.


Its domestic production satisfies only a little more than a tenth of its demand for chips (see chart 2).


China produces nearly a third of the liquid crystal displays (LCDs) in televisions and car dashboards.


But about 50% of the glass substrate used in its LCDs is made by Corning, an American company.


Most of the rest comes from Japanese firms.


China uses more robots than any other country.


But imports account for 72% of the cost of the more complex ones that it makes.


Still more alarming for China is the way that America can weaponise its financial system.


By denying banks access to its market, it can freeze them out of international transactions.


American politicians muse about punishing big Chinese banks for doing business with North Korea.


To reduce its reliance on the dollar, China wants to make the yuan a global currency.


But that would require it to open its financial system to foreigners much more widely than it is now willing to do.


China’s final area of vulnerability, and potentially its biggest, is to a united international front.


Though a conflict with America would be bad, China could eventually work round it.


Since the 1990s America has blocked the export of commercial satellites and their parts to China.


But China was eventually able to get what it needed from Europe.


Its satellite capabilities have almost caught up with America’s.


(Mr Wang of Unitree says he could redesign his robo-dogs for use with non-American microchips—Laikago would live.


)
It would be far worse for China if other countries were also to turn against it.


Governments from Australia to Germany have already started objecting to Chinese investments on security grounds, seemingly emboldened by Mr Trump.


“We’ve become Chinese takeaway in Europe but we can’t get a look at their companies in China,” says Joerg Wuttke, a former head of the European Chamber of Commerce in China.


Twenty-seven European ambassadors to Beijing complained in April that China’s Belt and Road Initiative—its massive overseas investment plan—would harm global trade by subsidising Chinese firms.


A multi-country alliance against China would “almost be a doomsday scenario”, says Edward Tse of Gao Feng, an advisory firm.


But he believes one is unlikely to emerge.


Mr Trump has a tendency to alienate his country’s usual friends.


Were it just a tit-for-tat tariff battle, America would have the upper hand.


America could, in theory, impose duties on its $500bn-worth of imports from China.


China only buys $130bn of American goods, limiting its scope for retaliation.


But it could make the brawl about more than tariffs.


It could disrupt the business of American firms in China.


The government has form in whipping up consumer boycotts, as South Korean retailers and Japanese carmakers can attest.


China is the fastest-growing big market for American companies, from Apple to GM.


If America were to deploy sanctions such as those imposed on ZTE more widely, it would find that China can escalate matters, too.


“From zero to 100, anything is possible,” says a senior Chinese government adviser.


American firms have invested $250bn in China, according to Rhodium Group, a consultancy (see chart 3).


The potential for asset seizures would keep executives up at night.


Apple would no longer be able to use China as its main production base for iPhones.


America’s chipmakers would lose half their sales.


China could further fan the flames by frustrating Mr Trump’s efforts to bring North Korea to heel, or by flexing muscle against Taiwan or in the South China Sea (where it emerged last week that it had, for the first time, landed long-range bombers on a disputed island).


Given America’s entanglement with China, an all-out trade war would be sheer folly.


But even if one is avoided, prolonged strategic competition remains likely.


Some analysts say this would involve a tech war or an economic cold war.


China’s integration with the global economy cannot be undone; there is no real way to cut it off as America once did to the Soviet Union.


But China’s ascent could get much bumpier.


It is likely to face more restrictions on overseas investments, more pressure to open its market and more scrutiny of its economic policies.


China’s options for countering such amorphous efforts are not straightforward.


A complicating factor in China’s handling of the trade dispute is nationalism.


Advisers have highlighted the risk of going too far to placate foreigners.


Zhang Ming of the Chinese Academy of Social Sciences recalls the Plaza Accord, a multinational agreement reached in 1985 under American pressure.


It resulted in a soaring yen, arguably leading to Japan’s economic stagnation in later years.


Mr Zhang says that China must resist such pressure.


Going by their unwillingness to yield to America’s demands for deficit-reduction targets, Chinese leaders seem to agree.


The first involves reducing dependence on foreign technology.


The punishment of ZTE has only reinforced their commitment to this strategy.


China must “cast aside illusions and rely on ourselves”, President Xi said in a speech shortly after the American sanctions against the company were announced.


One outcome has been more money for the semiconductor industry.


China has nearly finished raising a 300bn yuan ($47bn) fund to foster domestic chipmakers, its biggest ever.


Officials are aware that excessive government meddling in industry can be counterproductive.


China has previously tried but failed to create chipmaking champions.


So the state’s fund managers are now operating more like venture capitalists.


They are spreading cash around and monitoring returns.


Much the same is happening in the other industries specified in the Made in China 2025 plan, from biotechnology to aerospace.


A go-it-alone approach to innovation rarely works.


China has been most successful in industries such as high-speed rail, in which it has obtained foreign technology and combined it with domestic know-how.


Hence the second plank of China’s strategy: winning foreign friends, even if not the Americans.


China still needs foreign technology, so is doing what it can to stop antagonism from coalescing.


Diplomatically, it is taking a softer tack.


One recent example was its support for a three-way leaders’ summit with Japan and South Korea.


This was held on May 9th after years of tetchy relations.


Chinese negotiators also want to give Mr Trump at least something he can claim as a victory.


During the talks in Washington they promised that China would buy more farm goods and oil from America.


China has started throwing juicier morsels at foreign firms, too.


It has unveiled a faster timeline for opening its banking industry to foreign investors.


It has pledged to scrap limits on foreign ownership of carmakers.


It has also been arguing that deals generated by its Made in China 2025 scheme will involve foreign businesses.


These steps alone will not disarm critics.


Even with full control of their Chinese operations, foreign companies will encounter regulatory hurdles, written and unwritten.


Foreign governments will continue to bristle as well-funded Chinese companies buy up technology.


The rivalry that has brought China and America to the brink of a trade war will not abate.


But so long as China can keep enough foreign businesses and governments on side for enough of the time, it will be able to carve out space for its economic rise.


Faced with obstructive foreigners, China might well find that the target date of Made in China 2025 is overly ambitious.


If that, in effect, were the outcome, China could live with it.


|SHANGHAI

The Economist explains
Why China has to worry about a trade war with America
Tariffs are just the start

FEW had expected the ceasefire in trade hostilities between America and China to last.


But no one predicted such a sudden demise.


On May 29th the White House announced plans to slap 25% tariffs on $50bn of imports from China, reversing its position of less than two weeks ago, when it placed tariffs “on hold” as trade talks progressed.


The announcement could in theory give America leverage in negotiations, which are set to resume this weekend when Wilbur Ross, America’s commerce secretary, visits Beijing.


Xinhua, the state-run news agency, said the Trump administration had gone back on its word and was undermining American credibility.


The commerce ministry pledged that China would defend its national interests.


Uncertainty about what exactly America might do complicates any assessment of the threat to China.


President Donald Trump has blown hot and cold on China, some days tweeting that he wants to get tough and other days touting his great relationship (as he sees it) with Xi Jinping, China’s leader.


The American move that most shocked China happened in April when it banned ZTE, a major Chinese telecom company, from buying American parts in a sanctions dispute.


However Mr Trump, much to the anger of China hawks in Washington, then called for a lighter punishment.


This week’s announcement of tariffs also gives him room to back down.


The list of affected products is due to be published on June 15th, with the duties imposed “shortly thereafter”.


The Chinese commerce ministry described it as a tactical statement, hinting at its belief that Mr Trump might be bluffing.


Nevertheless, Chinese officials know that it would be foolhardy to downplay the dangers.


Looked at narrowly, China’s economy could easily absorb the impact of $50bn in tariffs.


But the fear is that they would be the start of a much nastier trade war.


China has vowed to retaliate with an equivalent amount of tariffs.


That could prompt Mr Trump to levy yet more duties.


Since China runs a huge bilateral trade surplus ($375bn last year), it can only go so far in a tit-for-tat tariff battle.


But it can target American businesses in China, by organising consumer boycotts or disrupting their factories.


And America could also do more: China’s tech sector relies on American firms for semi-conductors and is thus vulnerable to export controls.


If the fight escalates, the damage to business confidence and supply chains in China and America would be severe.


So the assumption in Beijing, and in global markets, is that a full-fledged trade war will be avoided.


Indeed, before Mr Trump’s latest tariff threat, the two countries seemed to be edging towards a deal in which China would commit to buying more American goods, from beef to natural gas, in order to reduce its trade surplus.


That would not be the end of the story, though.


As China grows more powerful, its rivalry with America is heating up.


The trade spat is just the most visible of the economic spillovers.


Chinese firms already face a tough approval process when investing in America.


The White House is now drawing up even tighter investment restrictions.


It also plans to shorten visa durations for Chinese students in fields such as robotics and aviation, worried that they might be stealing American intellectual property.


And there is broad support from both Republicans and Democrats for the American government to take a harder line in opposing Chinese industrial policies.


It is working to deepen economic ties with other countries and is opening its door a little wider to foreign businesses, partly in a bid to cultivate more goodwill.


It is also redoubling efforts to develop its own technology, notably with large state-backed investments in the semiconductor industry.


But there is no escaping the rise in Sino-American competition.


Even if the tariffs fizzle out, other storms lie ahead.


Finance & economics | Puzzle pieces
There is madness, but perhaps also method, in America’s trade policies
President Donald Trump is seeking to renegotiate NAFTA and slap tariffs on steel, aluminium, cars and Chinese products—all at the same time

DIVINING meaning in the Trump administration’s trade announcements is a thankless task.


No sooner does a policy seem settled than it is thrown up in the air once more.


On May 23rd, days before a scheduled meeting with the European Union and Japan on a joint trade strategy and in the middle of talks to revamp the North American Free-Trade Agreement (NAFTA), it began an investigation into whether car imports are a threat to America’s national security.


On May 29th, days after tariffs on imports from China were supposedly put on hold, official word came that tariffs on $50bn of Chinese imports would be imposed “shortly” after June 15th.


Barring a last-minute change of heart—which would not be the first—as The Economist went to press the administration was expected to announce tariffs on steel and aluminium imports from the EU from June 1st.


Whether America’s partners in NAFTA, Canada and Mexico, would also be hit was unclear.


The chaos is partly the consequence of President Donald Trump’s mercurial temperament, and the fact that he is served by advisers who disagree with each other.


Steven Mnuchin, his treasury secretary, seems more interested than, say, Peter Navarro, his trade adviser, in avoiding a trade conflict with China.


It may also be an attempt, in the style of “The Art of the Deal”, to throw negotiating counterparties off-balance and cow them into submission—and perhaps to convince companies abroad that exporting to America is too risky.


But hidden in the muddle there is also a grim logic.


Mr Trump, and at least some of his trade advisers, believe that when one unorthodox trade move has knock-on consequences, the solution is not to rethink it, but to follow it with another.


The investigation announced by the Department of Commerce on May 23rd, into whether imports of cars and car parts threaten national security, is illustrative.


The suggestion is absurd, and if the conclusion is that they do, it would make a mockery of the global rules-based system of trade.


But the administration would be able to apply whatever tariffs it liked to auto imports while staying within the letter, if not the spirit, of American law.


Tariffs of 25% on cars and car parts, as Mr Trump apparently wants, would be disastrous for Canada’s and Mexico’s car industries, though American buyers of cars and parts would suffer too.


(Around 56% of the light vehicles sold in America in 2017 were assembled in the country, and 22% in Canada and Mexico together.


) On May 24th Justin Trudeau, Canada’s prime minister, wearily told Reuters that the decision to target cars was connected to the NAFTA negotiations.


It seems unlikely that the move will do anything to encourage Canadian and Mexican negotiators to settle quickly—the Department of Commerce hearings will take months.


But it will increase America’s leverage as it tries to reshape NAFTA’s rules on cars in ways it has already signalled.


The NAFTA talks are stalled over the conditions a car must satisfy in order to qualify for tariff-free trade within the bloc.


American negotiators want more demanding national-content requirements, and a rule that at least 30% of a car be made by workers earning above a high wage threshold.


But they have woken up to the possibility that carmakers that find the proposed rules too burdensome might simply ignore them and pay the non-NAFTA tariff of 2.5%.


That would become far less feasible if the tariff were to rise tenfold, with NAFTA members exempted.


A stiff tariff on auto imports might also seem to fulfil other objectives of American trade hawks.


Mr Trump seems convinced that the EU’s 10% tariff on car imports violates the spirit of reciprocity, and that Japan treats American car companies unfairly in other ways, such as subjecting them to onerous inspections (there is no tariff on cars entering Japan).


If these other countries are unwilling to lower their trade barriers, then a tariff would at least shut out their exports.


If NAFTA producers are excluded from any restrictions, then they could even find themselves with a large tariff preference in the American market, which would help offset any extra burdens imposed by the new deal.


If this is the strategy, then carmakers elsewhere should be worried.


Cars are the most traded product in the world by value, according to the MIT Observatory of Economic Complexity.


And America is the world’s largest importer.


In 2017 cars made up 41% of the value of Japan’s goods exports to America, and 14% of the EU’s.


Some companies, including Ford, GM and Honda, already assemble most of the cars they sell in America within its borders.


But other manufacturers seem more exposed to a 25% non-NAFTA tariff, including Mazda, BMW and Daimler, which produce more than 60% of their American sales outside NAFTA, estimates Barclays, a bank.


Whether with imports of steel, aluminium and cars, or the bilateral relationship with China, at some point the Trump administration may decide to show the world that it is not bluffing.


Leaders | Don’t crash it
Could a trade war derail global growth?


Rising tariffs are the worst of many threats to the world economy

LOOK at the headlines, and you would struggle to believe that the global economy is in good health.


President Donald Trump continues to fire off volleys in his inchoate trade war, throwing financial markets into turmoil and drawing retaliation.


The Federal Reserve is raising interest rates—an activity that usually ends in a recession in America.


Tighter credit and a rising dollar are squeezing emerging markets, some of which, such as Argentina, are under severe stress.


Growth has slowed slightly since 2017, but still seems to be beating the languid pace set in the five years before that.


America may even be speeding up, thanks to Mr Trump’s tax cuts and spending binge.


A higher oil price, which in past economic cycles might have been a drag, is today spurring investment in the production of American shale.


Some forecasts have growth exceeding 4% in the second quarter of 2018.


This sugar rush, however, brings dangers.


The first is that it provides temporary political cover for Mr Trump’s recklessness.


The second is that, if America accelerates and the rest of the world slows, widening differentials in interest rates would push up the dollar still more.


That would worsen problems in emerging markets and further provoke Mr Trump by making it harder for him to achieve his goal of balanced trade.


The trade war is the biggest threat to global growth (see article).


On June 15th the White House confirmed that a 25% tariff on up to $50bn of Chinese imports would soon go into effect.


Three days later, after China promised to retaliate, the president expanded, by as much as $400bn, the other goods America is threatening to tax.


If he follows through, nine-tenths of roughly $500bn-worth of goods imported from China each year will face American levies.


Meanwhile, the European Union is poised to impose retaliatory tariffs in response to America’s action against EU steel and aluminium.


No wonder markets have caught the jitters.


I’ll see you and erase you
The president is unafraid of escalating trade disputes because he believes he has a winning hand.


America buys from China almost four times as much as it sells there, limiting China’s ability to match tariffs.


The White House hopes this imbalance will lead China to yield to its demands, some of which (cutting the theft of American firms’ intellectual property) are more reasonable than others (shrinking the bilateral trade deficit).


But Mr Trump overestimates his bargaining power.


If China runs out of American goods to tax, it could raise existing tariffs higher.


Or it could harass American firms operating in China.


More important, the president’s mercantilism blinds him to the damage he could inflict on America.


He thinks it is better not to trade at all than to run a trade deficit.


This folly also dictates his tactics towards Canada, Mexico and the EU.


Mr Trump could yet withdraw from the North American Free-Trade Agreement and slap tariffs on cars.


The problem is not that America depends on trade.


In fact, it is a big enough free-trade area for the eventual damage to GDP, even from a fully fledged trade war, to be limited to a few percentage points (smaller, specialised economies are more dependent on trade and would suffer a lot more).


Such self-inflicted harm would impose a pointless cost on the average American household of perhaps thousands of dollars.


That would be bad, but it would hardly be fatal.


The bigger issue is the vast disruption that would occur in the transition to more autarky.


America’s economy is configured for designing iPhones, not assembling their components; the innards of its cars and planes cross national borders many times before the final product is ready.


Faced with tariffs, firms have to redirect labour and capital to replace imports.


Some analysts attribute Mr Trump’s presidency to the economic shock from trade with China after 2000.


The turmoil caused by reversing globalisation would be just as bad.


One estimate puts American job losses from a trade war at 550,000.


Any adjustment would be prolonged by Mr Trump’s unpredictability.


Without knowing whether tariffs might rise or fall, what company would think it wise to invest in a new supply chain?


It is difficult to imagine such a realignment without a global recession.


Tariffs temporarily push up inflation, making it harder for central banks to cushion the blow.


The flight to safety accompanying any global downturn would keep the dollar strong, even as America’s fiscal stimulus peters out after 2019.


The trade war may yet be contained, to the benefit of the world economy.


But America is the engine of global growth.


In Mr Trump, a dangerous driver is at the wheel.


Finance & economics | Free exchange: Trading peace for war
Sino-American interdependence has been a force for geopolitical stability
A full-blown trade war would harm more than the two countries’ economies

IN THE 1990s America and Europe had a trade dispute over bananas.


No one worried that tanks might soon roll as a result.


The European Union, the world’s most ambitious free-trade area, was founded on the idea that trade integration would make war between members “not merely unthinkable, but materially impossible”.


As the risk of a serious Sino-American trade war grows, attention is mostly focused on the prospect of dearer iPhones and unhappy soyabean farmers.


China’s economic miracle could not help but provoke geopolitical stress, given its size and illiberality.


Relations between America and China are built on mutual suspicion.


Geopolitical rivalry has been moderated, however, by economic interdependence: a mutual entanglement some economics wags have dubbed “Chimerica”.


As China opened up, American consumers hoovered up cheap Chinese goods.


American firms built China into their supply chains, enjoying low labour costs and gaining a presence in a domestic market that would one day be the world’s largest.


Export-oriented development created vast numbers of Chinese jobs, and American investment allowed Chinese firms to gain technological expertise.


As China grew richer, it purchased American bonds to keep its currency low and its exports competitive.


That allowed America to consume beyond its means year after year.


This circular flow of money saw America’s current-account deficit grow in pace with China’s surplus.


Both countries have strained at these ties.


Even before Donald Trump became president, America bristled at the theft of its intellectual property, aggressive government support for Chinese industry, and the destabilising currency manipulation.


China deplored its dependence on foreign technology and consumers.


These vulnerabilities were highlighted by the financial crisis, when plummeting global demand threatened to plunge China into recession, even though it is quite separate from the global financial system.


Support within America for a tougher line with China has been building for a while.


And China is ever keener to achieve technological self-sufficiency.


The share of domestic value-added in its exports has been rising steadily.


“Made in China 2025”, the national development strategy, aims to create high-tech substitutes for foreign products from computer components to robots, cars and planes.


Yet an end to Sino-American interdependence is not inevitable.


China might yet hew more closely to rich-country trade rules, and intervene less in its economy and foreign-exchange markets.


Trade between America and China could continue to grow, even as the technological gap between them, and their bilateral imbalance, shrink.


Expensive goods, investment and services could flow both ways, as between America and Europe.


But this sunny future looks increasingly remote.


America already limits some Sino-American trade on national-security grounds.


Past spats over dumping and other unfair trade practices led to punitive duties on some goods, as allowed under WTO rules.


An all-out trade war would blow the two economies apart.


The higher tariffs being mooted on half, or nearly all, of America’s imports of Chinese goods would cause serious economic pain in both countries.


In America the prices of many goods would jump and those of others, like the soyabeans exported to China by the shipload, would plummet.


A sudden drop in China’s trade surplus with America, now over 3% of Chinese GDP, would be a heavy blow.


Even though a weaker currency would make it easier to export more to other countries, China would probably need both monetary and fiscal stimulus to avoid a socially disruptive rise in unemployment.


Bad break-up
Then the real trouble would start.


However warily American and Chinese leaders eye each other, economic self-interest keeps their most hawkish impulses in check.


The interests of American consumers and firms constrain officials keen to keep sensitive technology out of Chinese hands (or snooping Chinese technology out of American households).


China’s dependence on American spending and technology limits diplomatic and military adventurism.


The break-up of Chimerica would mean an end to those constraints.


It might also shove the world economy back towards mercantilism and competing spheres of economic influence.


China is already cultivating its economic imperium via the Belt and Road Initiative, a plan to build infrastructure for trade and to invest heavily in resource-rich developing economies.


Cut off from American consumers, China would seek to strengthen ties with its neighbours in the hope of selling them more stuff.


As Mr Trump’s economic sabre-rattling has grown louder, China has started to cultivate relations with Japan and South Korea.


Mr Trump would probably view America’s allies strengthening their trade ties with China as a strategic blow—even though he has picked trade fights with them, too.


He might limit access to the American market for countries that do not join his anti-China campaign.


A world of mutually beneficial trade could turn into one in which there are no winners without losers, and no victory without conflict.


America has become embroiled in trade spats with fast-growing upstarts before; with Japan in the 1980s, for example.


But these involved democratic countries grateful for American protection during the cold war—and American presidents with quite different characters.


A closer analogy might be the early 20th century, when economic interdependence proved no match for rising nationalism and bad leadership.


The fear is that Mr Trump’s tariffs are less a way to correct legitimate trade grievances than a step towards a much darker world.


|SHANGHAI

Finance & economics | Theatre of war
As its trade tussle with America heats up, China is on the back foot
But tumbles in Chinese equities and the yuan stem more from domestic causes

FOR months Chinese officials have stuck to the same script: China does not want a trade war, but will win if dragged into one.


As hostilities turn more serious, this confident façade has taken a blow.


Chinese equities have plunged into bear-market territory.


The yuan had its biggest monthly fall against the dollar on record.


Even bombastic state-run media have turned introspective, counselling against arrogance.


All this, and the tit-for-tat trade battle is only just getting under way.


On July 6th, after The Economist went to press, America was due to impose its first major set of tariffs on China: 25% duties on $34bn-worth of imports, notably machinery and electronic parts.


China was set to retaliate with tariffs on goods worth the same amount, hitting products from soyabeans to sport-utility vehicles.


Both countries have listed more tariffs to follow, on goods worth another $16bn.


Both have also warned that they are willing to inflict much more pain if the conflict escalates.


Donald Trump’s bet is that since China has a massive bilateral trade surplus, it stands to lose more than America as barriers go up against imports.


Were their stockmarkets gauges of the two countries’ trade-war prospects, he would seem to have a point.


The S&P 500, America’s leading index of big shares, has fallen by 5% since late January; the CSI 300, China’s analogue, is down by more than 20% over the same period.


Exchange-rate movements reinforce the impression.


The yuan has depreciated by 5% against the dollar over the past three months, a sharp fall for a closely managed currency (see chart).


China is nervous about the perception of vulnerability.


A drumbeat of reports in state-run media have talked up the stockmarket.


On July 3rd the central bank tried to bolster the yuan, saying that the economy’s fundamentals were strong.


But the toll from the trade war is starting to show up in some data.


Surveys of China’s manufacturing sector have pointed to falling export orders.


Mr Trump could take all this as evidence that he was right when he tweeted that trade wars would be easy for America to win.


The turbulence in China reflects domestic challenges more than trade tensions.


The hit to growth from the $34bn-worth of tariffs is likely to be minuscule, adding up to just about 0.1% of Chinese GDP.


Depictions of China as a trade-reliant economy are hopelessly outdated: net exports account for just 2% of national income.


Instead, the bigger cause of China’s market turmoil is homegrown.


After a rapid build-up of debt over the past decade, officials have been working to defuse financial risks.


This has depressed demand for both equities and corporate bonds.


Slower credit growth has weighed on liquidity.


Adding to the gloom was a report published by the National Institute for Finance and Development, a government-backed think-tank, on June 25th, warning that China was “very likely to see a financial panic”.


The institute’s head later clarified that he believed the government could manage the risks.


But jittery investors latched onto his warning, not his reassurance.


Yet seen from a different angle, China’s market troubles demonstrate one of the reasons why its officials think they can outlast America in a trade war.


An authoritarian regime can limit and dictate the public discussion.


After the stockmarket tumbled, authorities warned journalists against citing the trade conflict as an explanation, according to a directive published by the China Digital Times, a website that tracks government censorship.


Reporters were also ordered to emphasise the economy’s bright spots.


In America, meanwhile, the hurly-burly of its public discourse has been on display.


On July 2nd the US Chamber of Commerce, the country’s biggest business group, launched a lobbying campaign to explain how tariffs would hurt the economy.


Republican lawmakers in Congress are criticising the president’s trade policies more openly than heretofore—though on past form, if Mr Trump pushes ahead, they will probably fall into line.


Another source of confidence for China is the knowledge that it is not fighting America alone.


From steel tariffs on Japan to threats of auto tariffs on Europe and negotiations that might wreck the North American Free-Trade Agreement, Mr Trump is taking on every one of America’s allies.


China has tried to rally them to its side.


It has asked the European Union to join it in condemning Mr Trump’s trade actions, according to Reuters (the EU declined because of its own trade grievances against China).


Even as it raised tariffs on soyabeans from America, it removed them from soyabeans from India, South Korea and others in Asia.


Xi Jinping, China’s president, has hinted that its markets will become more open to non-American firms.


Still, China’s preference would be to avoid a trade war altogether.


That is why its officials had tried in May to hammer out an agreement to buy more American oil and farm goods, which they thought might satisfy Mr Trump.


Many in China still cling to the hope that he can be reasoned with.


Hawks in the White House had, after all, pushed for harsh restrictions on Chinese investors in late June, but Mr Trump went for a softer option, refusing to single out China.


Lu Zhengwei of Industrial Bank, a Chinese lender, says the staggered way in which Mr Trump is imposing tariffs suggests that he wants to leave room for talks.


With its financial markets in bad shape, China’s opening move looks wobbly.


But the game is nowhere close to checkmate.


Leaders | World trade
How to rescue the WTO
The American-led trade order is in danger.


But it may yet be saved

THE headquarters of the World Trade Organisation (WTO), on the banks of Lake Geneva, once belonged to the League of Nations.


That ill-fated body was crippled by American isolationism.


The building’s occupant today is also at the mercy of decisions taken in Washington.


President Donald Trump has circumvented the WTO to impose tariffs on steel and aluminium imports, including those from America’s allies.


Complaining of unfair treatment, the administration is blocking nominations to seats on the WTO’s appellate body, which could leave it unable to hear cases after 2019.


Most ominously, America is embroiled in a trade war with China.


Both sides have imposed tariffs on goods worth tens of billions of dollars and are threatening worse.


The WTO was supposed to contain trade disputes and prevent retaliatory pile-ups.


Today it appears to be a horrified bystander as the system it oversees crumbles.


Free-traders are right to be deeply worried, but not yet right to despair.


For the outlines of a plan to save the system are discernible.


It’s the end of the WTO as we know it
That might seem fanciful, given Mr Trump’s belligerence, but for two things.


The first is that the president is not the only person forging American trade policy.


The European Union and Japan have been talking to Robert Lighthizer, his low-profile chief trade negotiator, about WTO reform.


Mr Trump’s tirades make headlines, but Mr Lighthizer wants to remake the WTO, not abandon it entirely.


He could use the president’s threats as leverage to make deals.


Think of it as a good cop/bad cop routine, albeit one in which the bad cop has only a faint grasp that he has been allotted the role.


The second thing to understand is that the focus of much of America’s ire, China, arouses deep suspicion elsewhere, too (see Briefing).


Since joining the WTO in 2001, China has not turned towards markets, as the West expected.


Instead, it has distorted trade on a scale that is far bigger than the dumping and other causes of disputes between market economies that the WTO was designed to handle.


The EU and Japan share America’s desire to constrain Chinese mercantilism.


China’s state-owned firms and its vast and opaque subsidies have distorted markets and caused gluts in supply for commodities such as steel.


Foreign firms operating in China struggle against heavy-handed regulation, and are required to hand over their intellectual property as a condition of market access.


But holding China to account is hard with the existing rule book.


The reforms being talked about by the EU, Japan and America could plug many of the gaps.


They would set out how to judge the scale of government distortions to the market, make it easier to gather information on wrongdoing and set the boundaries for proportionate retaliation.


They would also define what exactly counts as an arm of the government, and broaden the scope of banned subsidies.


And they would lower the burden of proof for complainants, which, given the opacity of the Chinese system, is too high.


Even the sunniest optimist will be able to identify the obstacles to this plan.


Most obviously, why would China ever accept a reform that jeopardises its state-run economic model?


Put plainly, because America could wreak havoc otherwise.


It is in China’s interests to preserve the global trading order because, if China is isolated, the Communist Party cannot achieve the prosperity that cements its legitimacy.


The benefits to China of its WTO membership have come not from lower tariffs in America—they were already low—but from the certainty of stable trading relationships.


Its “Made in China 2025” plan to boost vital industries sounds threatening, but if China were obliged to produce everything at home, its time frame would be delayed by decades.


Sure enough, China and the EU agreed on July 16th to co-operate on WTO reform (see article).


Reaching a global agreement that covered every one of the WTO’s 164 members would also be extremely difficult.


The last big round of global trade talks stalled over demands by developing economies such as India for more leeway to protect farmers.


New negotiations may be held hostage to these old disputes.


Luckily, negotiators can skip around them if necessary, by securing a “plurilateral” agreement between a group of big economies.


The WTO would still enforce the terms, though they would not apply to its other members.


Last comes the greatest block to a grand bargain, Mr Trump himself.


The president is a fierce critic of the WTO and a believer that bilateral deals suit American interests better.


This week he called the EU a “foe” on trade.


If he thinks Mr Lighthizer is manipulating him, he will strike back.