Rumint and International Trade in 2018

"Rumint"; is a portmanteau word—an amalgam of rumor and intelligence—that is used in Washington to describe the reliability of information being passed on; namely, that it’s usually more or less worthless but fun to talk about anyway. Today I’m going to join the fun and discuss trade rumint, which recently has been that 2018 is going to be a year of bite following a year of bark, which, in turn, has led to speculation about the likely victims. The administration has identified a lot of potential targets, and I would like to offer two guidelines that should influence whatever action it takes:

1. We should go after real problems;
2. We should take actions that actually solve the problems rather than actions that just make us feel better.

By those standards, the North American Free Trade Agreement (NAFTA) and the Korea-U.S. Free Trade Agreement (KORUS) are largely phony problems. They could always be upgraded, NAFTA in particular, and tweaked if all parties are willing, but neither withdrawal nor substantial renegotiation will bring back the blue-collar manufacturing jobs the president has focused on. In fact, the supply-chain disruption that substantial change will cause would probably cost more jobs than would be gained.

China, in contrast, represents a real problem, particularly in the intellectual property (IP)–related areas that are the subject of the Section 301 investigation now underway. There is a widespread belief that the Chinese have indeed engaged in the alleged activities involving IP theft and forced technology transfer. That is not a new view among China watchers, but what is new is the growing number of U.S. companies coming to the same view, which in political terms means an erosion of business support for China.

So, in the case of China, not only is the first guideline above met, but our domestic politics makes action more tolerable than in the cases of NAFTA and KORUS. That leaves the second guideline—what can we do that would address the problems?

Rumint has identified five possible areas for action: investment restrictions, tariffs, World Trade Organization (WTO) challenges, export controls, and visa restrictions. Of those, three are related to the problems being identified: investment, export controls, and visas. The issue is technology transfer, legal and illegal, voluntary and involuntary. Restricting inward direct investment in U.S. companies that have critical technology would be one way to limit future damage. Making sure our export control system, which already controls the export of such technology to China, has adequate tools to fully review license applications and enforce our laws would be another, as would limiting access to the United States by Chinese scientists, engineers, and students.

All of these also have drawbacks. A restrictive investment policy based on reciprocity would be an historic change for the United States and could have significant implications for our attractiveness as a destination for foreign investment from all sources, not just China. Export controls are already tight as far as critical technology is concerned, and their expansion would threaten trade in technologies that are relatively lower risk and widely available from other sources. Enforcement, however, is an important issue, and more resources there would be a smart move. Visa restrictions deny the United States talent that we need to enhance our competitiveness—we do not have a monopoly on smart people—and restricting student entry would eliminate an opportunity to show Chinese young people the advantages of the United States and the market system, as well as cost our leading universities a lot of tuition money.

Challenges to Chinese policies in the WTO are always an appropriate tool, if any more can be found, but the final rumored area of action, tariffs, seems to fall more into the punishment category than something designed to remedy the problems that have been identified. The president seems to have a deep affection for tariffs—he mentions them frequently—and presumably they would target products of companies deemed to be guilty of IP theft or forced technology transfer. But it’s not clear what they would accomplish beyond raising consumer prices, inviting Chinese retaliation, and stimulating WTO litigation against the United States. For the self-righteous, it’s comforting to say, “You’ve been naughty, and now you have to pay,” but the horses in question are already out of the barn, and the costs of payment may fall more on our own people than on the Chinese.

Hopefully, the administration officials preparing alternatives for the president to consider have thought about all these things and are coming up with ideas that maximize the impact on China and minimize the cost to us. The one thing we can say with certainty, and not rumint, is that the Chinese have prepared a response and are ready to act. What worries me is that while we’re playing checkers, they’re playing Go and are already 12 moves ahead of us in their planning.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.

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