Trump's shockingly wise strategy on Chinese cars

It sounds like President Trump is about to pick a trade fight with China over cars.

Axios reported that when he meets with Chinese President Xi Jinping next month, Trump is likely to raise a stink over how American automobile exports to China are treated compared to Chinese imports. And to be perfectly honest, Trump's demands sound pretty reasonable.

First, the background: Under World Trade Organization rules, China still qualifies as a developing country. So it gets to levy higher tariffs on its imports compared to developed countries like America. Chinese tariffs on manufactured items like cars can be especially high, often as much as 25 percent. Meanwhile, automakers in other countries exporting to the U.S. pay just 2.5 percent. A Jeep Wrangler manufactured in Ohio, for instance, will cost $40,530 in America — but $71,000 in China.

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But there's a second wrinkle: One thing automakers in other countries — including American companies like Ford, GM, and Chrysler — will do to get around China's tariffs is just build their manufacturing plants in China, then sell directly to the Chinese market. But Chinese law requires that Chinese companies must have at least a 50 percent ownership stake in any venture within its borders. This is part and parcel of China's odd "state-directed capitalism" hybrid, since many of these Chinese companies are largely owned by the Chinese government.

Add it all up, and less than 5 percent of the cars sold in China are imported from other countries. The number in the U.S., by contrast, is 25 percent. American car companies sometimes even build their cars in China and then sell them right back to American consumers.

Now, it's important to nail down why this is a problem, and why it isn't.

Trump talks about international trade as if it's a winner-take-all deathmatch: If we export more to China than they export to us, we win. If it's the opposite, we lose. But international trade is actually a cooperative exchange. The real problem is that the particular exchange America and China have set up is great for elites in both countries — but has left American workers with a chronic shortfall in aggregate demand that makes it very difficult to create enough jobs for them. Meanwhile, China may be developing and lifting its people out of poverty, but the current setup is also driving skyrocketing levels of Chinese inequality, likely slowing down those other positive forces.

So simply threatening China with retaliatory tariffs isn't necessarily the best strategy. For one thing, it actually makes sense for the WTO to give China greater leeway. China's economy is the second biggest in the world because its population is enormous; on a per person basis, the country is still quite poor.

But even setting that aside, slapping a tariff just on China won't do much good. Rather than fall, exports into America will just shift to other developing countries. The Trump administration is considering a border adjustment tax that would discourage imports from all foreign countries equally — but that risks causing a huge geopolitical debacle with the entire WTO.

So, surprisingly for this White House, Axios reports that Trump's team is considering a more subtle strategy: First, tell the Chinese that if they want to sell cars to America, they need to invest in manufacturing in America. (This could certainly imply the threat of retaliatory tariffs, but gives the Chinese an escape hatch.) Second, Chinese companies can own 100 percent of their ventures within American borders if American companies get the same freedom within Chinese borders. Third, profits from business ventures need to stay within the U.S., and the Chinese can only bring those profits home pursuant to approval from the American government.

This strategy focuses on the more relevant issue: the need to rebalance the flows of trade and capital between the two countries so that Americans actually get more investment in jobs. It also avoids an all-out tariff slugfest and instead uses the lopsided situation created by China's domestic ownership laws to leverage the country into agreeing to a more balanced flow of capital.

And the Chinese may be willing to play ball: Foreign plutocrats and business elites, many of whom are in Asia, seem to have recently developed a greater enthusiasm for investment in American jobs, in order to make nice with the Trump administration.

But this is also far from a cure-all. As long as American workers are stuck with low levels of bargaining power, for instance, they won't be able to claim a bigger cut of profits no matter where that money goes. If we get more capital flowing into America, we still need to fix the aggregate demand problem so that all that capital will have things to invest in.

One idea that would also avoid the problems with tariffs is to have the Federal Reserve rebalance trade flows by doing large scale purchases of assets in foreign currencies like China's. The federal government could also just borrow more to juice aggregate demand, and relearn the virtues of deliberate industrial policy to nurture and encourage domestic job creation.

Whether Trump would be interested in these larger scale fixes is debatable. He clearly likes being the strongman who doles out jobs to his loyal supporters. But he doesn't seem particularly keen to hand workers more power as a class.

Yet Trump is still doing us a service by rejecting the old gospel that more globalized trade is always good and government should maintain a hands-off policy towards markets. His willingness to go head-to-head with China over our screwy trade setup has opened that possibility, politically speaking.

Hopefully smarter, more liberal, and more humane policymakers than Trump will follow him through that door.