A potential trade war is scary, but the US has a legitimate beef with China

Key Points
  • Though President Trump has come under fire for his tariff actions, the U.S. has been at the short end of a number of trade deals.
  • Trump has announced a list of 1,300 Chinese goods subject to tariff, prompting retaliation against U.S. products.
  • Economist Alan Blinder likens the moves to the brinkmanship practiced during the Cold War.
  • "A threat of a trade war that doesn't erupt into an actual trade war could conceivably do some good. But it's playing with fire," Blinder says.
Still time for negotiating tariffs and to walk back from where we are, says expert

The U.S. is coming off as the agitator in what could turn into a global trade war. Yet in many ways, it is simply responding to what indeed has been an uneven playing field for decades.

Most notably, the U.S. and others around the world have suffered at the hands of China's rampant intellectual property theft. From designer brand knockoffs to technological innovations to the secret sauce that so many companies use to make their brands special, China is notorious for the practice.

What the White House is doing that has caused so much commotion is taking a more aggressive approach than any of its predecessors to put that practice, and others like it, to an end.

The administration has announced a list of 1,300 Chinese products subject to a 25 percent tariff, a move that drew an immediate retaliation and sparked more fears of a protracted international commerce battle.

"People have known for some time that China has sought quite actively to acquire intellectual property through their relationships with foreign businesses," said Lewis Alexander, chief U.S. economist at Nomura Global Economics. "These are not new problems."

What is new is someone willing to push the argument far enough with China to threaten trading relationships.

U.S. President Donald Trump and China's President Xi Jinping leave a business leaders event at the Great Hall of the People in Beijing on November 9, 2017.
Nicolas Asfouri | AFP | Getty Images

"The question really is how big a difference can you make and what the potential consequences of it are," Alexander said. "Is it worth putting the whole global trading system at risk to achieve these objectives?"

President Donald Trump has been railing against the trade deficit the country has with its counterparts around the world, and in particular the bilateral shortfall with China.

In his annual letter to investors, JP Morgan Chase CEO Jamie Dimon backed, in general, the administration's efforts to level the playing field.

"When the U.S. administration talks about 'free' and 'fair,' it essentially means the same on all counts. This is not what has existed," Dimon wrote. "It is not unreasonable for the United States to press ahead for more equivalency."

Only Trump knows if the latest round of saber rattling is really about dishwashers and veterinary vaccines and golf carts or any of the other items that can be found here. After all, trying to eradicate a $375 billion annual deficit that has come about mostly because Americans consume more than they make and require cheap imported goods to bridge the gap seems unrealistic.

However, Trump may be able to right some previous wrongs while also playing to his middle-America blue-collar base.

"The analogy is to the arms race with the former Soviet Union," said Princeton economist Alan Blinder, author of the recently released book, "Advice and Dissent: Why America Suffers When Economics and Politics Collide." "We had great success with this under Ronald Reagan, in which he basically threatened a slightly wacky escalation of defense spending and the Russians couldn't match it and they sort of caved."

"It could have had a bad ending if they didn't cave. The analogy here is a trade war. A threat of a trade war that doesn't erupt into an actual trade war could conceivably do some good. But it's playing with fire."

Blinder said it's unclear, though, exactly what Trump hopes to achieve.

Trade deficits usually are a byproduct of a growing economy, and U.S. GDP appears well on its way to achieving the administration's 3 percent annual target. Low levels of American savings also make deficits virtually unavoidable.

"I have not the slightest idea of what Trump thinks he wants to accomplish on this. He talks as if he wants a balance of trade on China. Can he really?" Blinder said. "If what he's after is intellectual property protection, he's been really quiet about it."

The actual release from the U.S. Trade Representative office lists "China's Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation" as the overriding impetus for the tariffs. There's a 90-day public comment period that also could serve as a chance for the opposing sides to come to the bargaining table.

Dimon suggested several specific reforms regarding China. He thinks it no longer should be regarded as a developing economy and should be treated the same as the U.S. and other global leaders when it comes to World Trade Organization rules.

Changes toward China should be done in concert with U.S. allies, Dimon added.

But Trump likely has more than China in his sights, and there are, to be sure, other items besides intellectual property. The U.S. would like to get its cars and trucks sold in more countries, and the administration has slapped global tariffs on aluminum and steel in an effort to promote domestic production of those goods.

During his presidential campaign, he vowed to tear up trade agreements that he didn't think were fair to the U.S., placing the NAFTA pact with Mexico and Canada near the top of his grievance list.

The world, then, will be watching what happens with China.

"It would be a wonderful thing to see if the Chinese government would put more handcuffs so to speak on that ability to pillage other people's intellectual property," said Seth Kaplowitz, finance lecturer at San Diego State University.

"Not everybody likes the president, not everybody supports the president. The one thing everyone recognizes is that they need the United States to trade with to get their goods to market as well as to provide American goods to their markets," he said. "I am sure behind the scenes they're discussing or about to discuss how this could be resolved."

Markets also are watching closely.

The Dow industrials opened Wednesday down more than 500 points as trade war fears percolated, then staged a stunning turnaround on seemingly no news.

The day seemed to symbolize that the market is trying to price in both outcomes: a damaging global trade war, or a Trump victory on a tariff gambit that others wouldn't take.

"We're going to see more nervousness, more noise, more volatility, more turmoil than less over the next few months," said Eric Winograd, senior economist at AllianceBernstein. "This, too, shall pass. Both parties have enough incentive from an economic sense to progress toward free trade rather than walk away from it."

WATCH: Economist Steven Roach explains trade war ramifications.

Why a US-China trade war makes America vulnerable: Expert