Is a U.S.-China Trade War Heating Up?

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Wharton's Mauro Guillen and Fordham University's Matt Gold discuss U.S. tariffs on solar panels and the U.S.-China trade relationship.

The Trump administration has said that it is protecting domestic manufacturers from cheaper foreign goods with its move earlier this week to levy import tariffs on residential washing machines and solar panels. However, it may also be a politically calculated move aimed to please Trump’s political base, according to experts at Wharton and Fordham. Also in the case of solar panels, the import tariffs will lift prices to levels where it would suppress demand and end up hurting the domestic industry, they added.

Instead of getting into what could be a trade war of attrition, the U.S. should sit down and hammer out mutually acceptable trade policies with China — and also with Mexico — the experts advised.

Monday’s announcement by U.S. Trade Representative Robert Lighthizer levies phased tariffs over four years on imports of solar cells and modules beginning at 30%, and over three years on washers, from 20% for the first 1.2 million imported units to 50% for subsequent units. The tariffs on solar panels follow complaints filed with the International Trade Commission by two manufacturers – Suniva, a Chinese-owned firm based in Norcross, Ga., and SolarWorld Americas of Hillcross, Ore., the U.S. subsidiary of a German firm.

Between the two product groups affected by the announcement, the consequences of the import tariffs on solar panels could be wider and more self-defeating for the U.S. economy as a whole, according to Matt Gold, an adjunct professor of law at Fordham University and a former deputy assistant U.S. trade representative. “Our transition to this renewable energy is going to be slowed down by these tariffs,” he said. “At the same time, anytime you impose trade barriers, you’re helping one part of the U.S. economy but hurting other parts.”

“It’s a little bit naïve to think that by imposing a 30% tariff on solar panels, we are going to be creating jobs.” Mauro Guillen

For one, the move will not help with jobs, said Mauro Guillen, Wharton management professor who is also director of the Lauder Institute. He noted that most of the jobs that are created in the solar industry in the U.S. are not as much in manufacturing solar panels, but rather in the manufacturing of related equipment such as steel frames of the panels, construction, installation and servicing.

“So it’s a little bit naïve to think that by imposing a 30% tariff on solar panels, we are going to be creating jobs,” Guillen said. In fact, if the higher prices depress demand, it could hurt employment, he added. “All of those other jobs – most of them service jobs and in in some cases paying very nice wages – are not going to grow as much. And some of them might actually be disappearing.” Also, the tariffs have little impact on reducing the U.S. trade deficit with China, he added.

In fact, the Solar Energy Industries Association has warned in a press release: “The decision effectively will cause the loss of roughly 23,000 American jobs this year, including many in manufacturing, and it will result in the delay or cancellation of billions of dollars in solar investments.”

Gold and Guillen discussed the tariffs and the larger backdrop of trade issues with China on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

Limited Gain, More Pain

Gold explained why the tariffs on solar panels would have limited upside. “If you’re doing anything that doesn’t involve the actual manufacture of the solar panels, this is going to hurt you because this will cause the prices of solar cells and modules to increase in the U.S. market, and so fewer people will be converting from fossil fuels to solar power,” he said.

Gold clarified that the tariffs, called “safeguard barriers,” are not aimed at improving the U.S. economy, but specifically at “helping one particular small manufacturing sector.” Whenever such safeguards are imposed, “the understanding is that we’re going to hurt the U.S. economy as a whole – equal to or even greater than we’re helping it,” he added. “But for some particular policy reason, we’re still going to help one small sector.”

“If everything goes in a completely different direction, we will see a real blow-up and a risk [to] the global trading system.” –Matt Gold

Chinese exporters of solar panels would of course not relish the new tariffs, but China still has a large domestic market with significant untapped potential. “The country itself is so enormous that it’s a massive market for anything that it uses,” said Gold. “When you have a centrally planned economy like the Chinese have, they can mandate a shift to solar power that could happen much more quickly than it would in a market-oriented economy. So China is a staggering potential market for solar power and everything that goes along with it.”

Precursor to Bigger Investigations

According to Gold, rather than the duties on solar panels or washers, China is likely more concerned about two forthcoming U.S.-driven investigations against it. One is a national security investigation “which could lead to very significant trade barriers on Chinese steel and aluminum,” he said. The other investigation “could lead to very significant trade barriers on Chinese goods in retaliation for China’s stealing U.S. intellectual property rights.” The Chinese are “very nervous” about those two investigations, he added.

Guillen said one political reading of the latest tariff announcement is that “perhaps the administration is not ready” to move on those measures regarding aluminum and steel, or even intellectual property. “The political calculation here is, ‘Let’s do something so that our base thinks we’re doing something about unfair trading practices and about the deficit.’”

According to Gold, China appreciates that the new tariffs on solar panels and washing machines are consistent with global trading rules. “Safeguard [tariffs] are one of the very few types of protectionist trade barriers that are permitted under WTO (World Trade Organization) rules; we impose them rarely,” he explained. “They’re targeted for very particular products in particular countries for temporary periods of time. When you do it right, conduct the investigation properly, do the analysis properly, and show that all the criteria that must be in place are in place, then it is legal.” He said the tariffs on both solar panels and washers will probably be challenged at the WTO, but he expected them to be declared legal.

However, the U.S. will not be successful in imposing the national security barriers on China after the investigations because they will violate WTO rules, Gold predicted. “[Trump] is not going to be able to impose retaliatory barriers on China without getting WTO permission, which will take years – he won’t even be president any more when it happens.” All said, Gold expected the U.S. to decide against moving forward on those national security barriers and restrict imports of Chinese steel and aluminum.

If the U.S. decides to press ahead, then the outcome could be difficult to manage, Gold noted. “If everything goes in a completely different direction, we will see a real blow-up and a risk [to] the global trading system,” he added.

“Let’s not forget that China also has leverage,” said Guillen. For example, China could restrict imports of agricultural produce from the U.S., which could hurt grain producers in the states that supported Trump in the presidential election, he pointed out. China could also stop buying U.S. aircraft for its civil aviation industry and instead decide to buy from Airbus, he added.

“The U.S. and the rest of the world including Europe have always managed China differently than any other country when it comes to compliance with global trading rules.” –Matt Gold

Stability and clarity are needed to avoid such disruptions, said Guillen. “We need a clear long-term trading policy that benefits the U.S. economy, but at the same time that doesn’t assume that China or, for that matter, Mexico are helpless countries that have no resources at their disposal to also shape that relationship,” he noted. “The right way of doing this is to sit down with the Chinese and the Mexicans and see what long-term relationship we [could] have in terms of trade and investment.”

Making Room for China

In matters relating to trade with China, patience has been a necessary virtue. “The U.S. and the rest of the world, including Europe, have always managed China differently than any other country when it comes to compliance with global trading rules,” he said. “We led China into the World Trade Organization because it was a better move to do that than to keep them outside of it. But we understood it was going to take China a very long time to come up to speed. The government is so enormous, it moves so slowly and change is so difficult in the culture of the Chinese government. [But] that’s the only way to achieve progress.”

However, “Trump has slowed down that already-slow progress in favor of a more confrontational approach,” Gold noted. “I don’t think that that’s going to succeed in the long run with China. [It is] doomed to failure.”

Gold specifically referred to the U.S. move last August to launch an investigation into China’s alleged theft of intellectual property, under Section 301 of the US Trade Act of 1974. “Eventually, this 301 investigation will show that China is stealing our intellectual property rights, and that we are entitled to retaliate,” he said. “Then we have to go to the WTO; we will spend years getting the WTO to approve it, and then when we finally get the permission to retaliate against China for this — the kind of retaliation would be so severe that it would change Chinese government policy and hurt the U.S. economy very severely. That would be one reason why we wouldn’t be able to engage in that retaliation when we [finally] have permission to do it.”

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