Washington sounds ready for a trade war with Beijing over North Korea

Just as our diplomacy with Pyongyang has always failed because we were unwilling to induce a regime-determinative economic or political crisis there, our diplomacy with Beijing over North Korea (and other differences) has always failed because we were unwilling to attach a high enough cost to its willful support for Pyongyang’s proliferation. As Professor Lee put it, Beijing will not enforce sanctions against Pyongyang “unless the costs become unbearable on China.”

A trade war, needless to say, would hurt both the U.S. and China. But for several reasons, I believe it would hurt China more. China is an export-oriented economy whose rising wages and high corruption no longer make it a manufacturer’s ideal venue. In the short term, a trade war would disrupt global markets and spur inflation. Manufacturers would pass those added costs on to consumers, and the result would be inflation. In the mid-to-long term, manufacturers might shift more capacity to Taiwan, Vietnam, Thailand, Malaysia, or Mexico.

A mass migration of manufacturing from China would threaten its stock market, housing market, and banking sector. It could depress China’s growth rates below the level needed to pay its pensions. China’s banks also have a notoriously high debt load, much of which is linked to an inflated real estate market. Its stock market is probably also held up, in large part, by intervention by state-controlled banks. And when China holds its ruling party congress this fall, Xi Jinping will want not distractions to interfere with his installation of cronies in key positions or the extension of his own rule. Thus, while I pray that the rising talk of war in Washington is a bluff — and that it will stop — I hope recent trade threats against China, which are implicitly or explicitly tied to North Korea, are sincere.

One of those threats is to invoke section 301 of the Trade Act of 1974, against Chinese manufacturers that steal or rob U.S. manufacturers of their intellectual property. Section 301 authorizes the U.S. to “to deny U.S. trade benefits or impose import duties in response to foreign trade barriers.” 

Democrats are also pushing for a harder line. Senator Schumer is calling on the President to direct the Committee on Foreign Investment in the United States to disapprove Chinese investments in certain industries that are deemed vital to U.S. national security, and where it has the authority to disapprove foreign acquisitions. Schumer is explicitly linking that threat to China’s non-cooperation on North Korea.

Sections 314, 315, and 321 of the KIMS Act give the President other economic weapons against China, to say nothing of those in section 104 of the NKSPEA.

I have long said that our relations with Beijing and Pyongyang will have to get worse before they can get better. I don’t deny that all of these things would have serious and adverse economic impacts on the United States. But compare them to the humanitarian and financial cost of another Korean War, or any of these consequences, and suddenly, the economic costs of a trade war don’t seem all that bad.

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Update: This Wall Street Journal story says that the White House has delayed plans to take Beijing on over trade because it still hopes to gain Beijing’s cooperation on North Korea. Similarly, this Reuters story says that the U.S. held off on additional secondary sanctions against Chinese banks (which had been the topic of rumors) in the hope that China will enforce UNSCR 2371. Now obviously, it’s much better if we don’t have to use these threats to get Bejing’s cooperation, but for obvious reasons, I’m skeptical.