Trade Wars, Sanctions and Business Appeasement

Journal of Political Risk, Vol. 7, No. 5, May 2019 

By William R. Hawkins

Chinese President Xi Jinping, center, addresses a U.S.-China business roundtable, comprised of U.S. and Chinese CEOs on September 23, 2015, in Seattle, Washington. The Paulson Institute, in partnership with the China Council for the Promotion of International Trade, co-hosted the event. Elaine Thompson-Pool/Getty Images.

In his book Appeasing Bankers, Jonathan Kirshner, the Stephen and Barbara Friedman Professor of International Political Economy at Cornell, argues that “Bankers dread war. More precisely, financial communities within states favor cautious national security strategies and are acutely averse to war and to policies that risk war.” He finds this to be a “universal” trait (at least within capitalist societies) evident throughout modern history. This should be kept in mind when watching the large swings in the stock market in response to reports about the progress, or lack of, in U.S.-China trade talks, Iranian threats and turmoil at the Mexican border. While Kirshner focuses on “stability” with an emphasis on inflation and debt accumulation, he notes the “breathtaking financial globalization” that took place in the post-Cold War period. This has made markets even more sensitive to the dynamics of a contentious international system. Fortunately, the stock market rapidly recovers from panics generated by headlines thanks to the fundamental strength of the U.S. economy.

Major business groups in Washington are dominated by corporations that in the ephemeral post-Cold War period adopted a transnational or globalist perspective based on the airy assumption that international politics were no longer the driving force in world affairs. Having plunged into dangerous waters in their quest for new markets and investment opportunities, they now resist the need to rethink their decisions as the reality of great power rivalry again sets the global agenda. Instead, they offer a number of specious arguments on behalf of the appeasement of America’s adversaries seeking to elevate the “low politics” of commercial self-interest above the “high politics” of national security. Yet, it is the latter that properly set the parameters within which they must operate.

For example, take the opposition of the U.S. Chamber of Commerce to President Donald Trump’s levy of tariffs on Chinese goods that have flooded into America to displace domestic production and transfer wealth and technology to the communist regime. The Chamber claims this policy “will hit American consumers and businesses – including manufacturers, farmers, and technology companies – with higher costs on commonly used products and materials, and as a result, it stands to slow the United States’ recent economic resurgence.” They back their argument by citing concerns from the National Retail Federation whose members have chosen to outsource orders to Chinese factories to pad their profit margins. We are supposed to be sympathetic to these firms and embrace policies that will reward their bad decisions without any reference being made to the millions of jobs lost here or the strategic consequences of their partnerships with the communist regime. This problem is not just limited to Walmart and Dollar Tree. Indeed, these retailers can more easily shift their sourcing because low-level consumer goods can be produced almost anywhere. The real problem in among those firms that outsourced supply chains for higher level goods such as electronics and pharmaceuticals, products with a national security angle that should never have been allowed to transfer overseas in the first place.

Polls indicate that most Americans do believe that tariffs on Chinese goods will raise prices, even though there is some evidence that Chinese producers are eating some of these costs by lowering their export prices to compensate. So far, consumption of low end imports like apparel have dropped by only about three percent in the first quarter of 2019. The larger consequences have been felt by Chinese exporters of electronic and computer equipment whose shipments are down about 25%. This harms Beijing’s strategic industries, which American money should not be supporting anyway. In the broader measure of advanced technology products, the U.S. deficit with the People’s Republic of China has dropped by an impressive 36%; a good start. Meanwhile, American consumer confidence remains high and spending is robust within an economy that is booming. Indeed, the 2019 Cox Consumer Business Pulse survey reveals 70% of Americans want American-made products, not imports. A clear majority said they would spend more money in shops selling exclusively American-made goods.

The emphasis that corporate lobbyists are putting on cheap consumption (generated by cheap labor) is fundamentally the wrong end of the economic process at which to look. Wealth is not built by consumption, but by production. Consumption is what one does with part of the income earned from work. The Industrial Revolution, which created the modern world of affluence, was not based on more efficient ways to buy things. It was based on new ways to produce things, including an array of things that had never existed before. That is what innovation is about. A corporation may not care about where it locates a factory or research lab, but it does matter to nations and communities where important work is done.

The Chamber, of course, takes the corporate view not the national view. Its CEO Thomas Donohue stated, “Supply chains impact every business and every American. That’s why the Chamber will continue to leverage its lobbying muscle, deep resources, and expertise to modernize global supply chains for the consumers and companies that rely on them.” Since China is at the center of these supply chains, appeasing Beijing is a top Chamber priority. The Chamber continues to argue that, “Deepening U.S.-China economic ties must continue.” The priority of rational national policy, however, is to relocate those supply chains to reduce the leverage China can exert on the U.S. economy. Foreign dependency is a very dangerous vulnerability. President Trump has repeatedly said that his tariffs will send a message to business firms that they should realign their international relations to match America’s needs. Trade should follow the flag.

As stated in the National Security Strategy released in December 2017, “The erosion of American manufacturing over the last two decades … has had a negative impact on these capabilities and threatens to undermine the ability of U.S. manufacturers to meet national security requirements. Today, we rely on single domestic sources for some products and foreign supply chains for others, and we face the possibility of not being able to produce specialized components. A vibrant domestic manufacturing sector, a solid defense industrial base, and resilient supply chains is [sic] a national priori­ty. As America’s manufacturing base has weakened, so too have critical workforce skills ranging from industrial welding to high-technology skills for cybersecurity and aerospace.”

While it is hoped that much of the realignment of production will bring capabilities back to the U.S., it is also advantageous if trade shifts to friendly or allied countries where the gains are not used to build weapons aimed at us. What has been lost to us by irresponsible business decisions has too often been a gain for our foreign adversaries, in particular, China.

Just over a year ago, the U.S.-China Economic and Security Review Commission (USCC), a bi-partisan body established by Congress, released a report on Supply Chain Vulnerabilities from China in U.S. Federal Information and Communications Technology. The report takes a broad definition of the entanglements created by firms that chose not to look up at the wider world. It states, “The supply chain threat to U.S. national security stems from products produced, manufactured, or assembled by entities that are owned, directed, or subsidized by national governments or entities known to pose a potential supply chain or intelligence threat to the United States, including China.” It calls for a “national strategy for supply chain risk management…. [which] must include supporting policies so that U.S. security posture is forward-leaning, rather than reactive.”

In its 2018 annual report, the USCC covers a number of vital issues. The organization’s research should be consulted by anyone interested in the nexus between economics and national security. Trade and investment must be treated as part of the larger sphere of international relations and not just set off in a corner as if only an inconsequential set of “private” matters. The USCC notes “The United States has unilateral, bilateral, and multilateral tools to address the Chinese government’s unfair practices” and urges that they all be used to a much greater extent than in the recent past. In a dynamic world, it is business firms that must adjust to a world being shaped by larger events.

While Beijing has been the focus of trade policy actions and business resistance, it is not the only country with which appeasement is urged. The Chamber issued essentially the same tired statement used in regard to China when opposing President Trump’s plan to impose sanctions on Mexico. The Chamber proclaimed, “Imposing tariffs on goods from Mexico is exactly the wrong move. These tariffs will be paid by American families and businesses without doing a thing to solve the very real problems at the border.” Contrary to media reports, this is not a “trade war” but a policy to address the failure of Mexico to control the migrant caravans that have been used as a battering ram against the U.S. border. It is the use of economic leverage in support of diplomacy.

The Chamber always asserts that policies it opposes for reasons of its own will not work for the country, as if it cared. But the tariffs start low (5%) and only increase by steps until they hit 25% in October. The escalating sanctions are meant to give people on both sides of the border time to adjust. Importers can shift their sourcing to other countries and consumers can shift their purchases to other products. And in response to damage to the Mexican economy from such readjustments, officials will have to take action to clean up their act south of the border. That is the best place to solve a problem that has done and will continue to do massive damage to the United States across the board. Mexico’s long support, active as well as passive, of an organized invasion of the U.S. by illegal immigrants makes it a subversive national adversary, not a trustworthy business partner.

The dishonorable business behavior seen today is nothing new. A 1936 memo from a London banking house quoted in The Appeasers by historians Martin Gilbert and Richard Gott, speaks of “Nazi moderates” — Germans with whom the bankers thought it possible to “come to an understanding and co-operate” so as to avoid conflict. A Federation of British Industries memo stated at the time, “Captains of industry had long recommended that meetings of businessmen [rather than diplomats] . . . might perhaps be a suitable means of bringing about a return to common sense.” To that end, major firms formed the Anglo-German Society in 1935 to build bridges to the Nazi regime. This might work between democracies where business has influence over politics. But the same does not hold true in an autocracy, especially one like China where the government controls business. The hope for peace through business relations with companies under dictatorhips was as naive today as it was in the first half of the 20th century. As Teddy Roosevelt (whose nationalism President Trump seems to channel) warned, “There is absolutely nothing to be said for government by a plutocracy, for government by men very powerful in certain lines and gifted with ‘a money touch,’ but with ideals which in their essence are merely those of so many glorified pawnbrokers.”

William R. Hawkins is a consultant specializing in international economic and national security issues. He is a former Republican staff member on the U.S. House Foreign Affairs Committee. JPR Status: Opinion.