Posts Tagged ‘protectionist’

Trump’s trade war isn’t the only thing slowing China’s economy

November 7, 2018

xi jinping china economy

  • China’s economy in the third quarter grew at its slowest pace in a decade.
  • But even after the US and China placed hundreds of billions of dollars’ worth of tariffs on each other, exports have held up better than expected.
  • Economists attribute the slowdown in part to a deleveraging campaign started last year.

As the Chinese economy slows, economists say trade tensions are only part of the equation.

Gross domestic product in China expanded at its weakest pace in nearly a decade from July through September, with growth in the manufacturing sector slowing to a near standstill. The Shanghai Composite is down about 25% this year.

By Gina Heeb

But even in the face of hundreds of billions of dollars’ worth of tariffs between Washington and Beijing, exports have continued to hold up better than expected. China shipped 11% more products out of the country in October than it did a year earlier, according to a Reuters poll, slower than the previous month’s 14.5% export growth but faster than August’s 9.8% rise.

The US was the destination for about 18% of Chinese shipments in 2017. Brad Setser, a senior fellow on the Council of Foreign Relations who previously served as an economist at the Treasury Department, said it would be difficult but possible to offset that loss.

“You would sort of expect that supply chains would reorganize,” Setser said. “But that’s going to take some time.”

To be sure, exports may have received a boost from a weaker yuan and companies rushing orders ahead of expected price increases. But economists say it also shows the slowdown this year is largely thanks to a state-led deleveraging campaign that was started last year in attempt to deal with excess debt. Most notably, authorities had attempted to crack down on risky lending as part of the program.

Stephen Roach, a senior fellow at Yale University’s Jackson Institute for Global Affairs who previously served as chairman of Morgan Stanley in Asia, said tariffs would exacerbate the policy-engineered slowdown that’s already in place. But that doesn’t necessarily mean there is enough pressure to force meaningful concessions anytime soon.

“It’s a tough combination,” Roach said.

“Does that mean that they’re about to capitulate and cut a deal as the Art-of-the-Deal president seems to be hinting at? I think that’s dubious at this point, especially if the US is looking for a deal on these core strategic issues that have driven a wedge between us.”

In addition to reducing the trade deficit, the White House has also called on Beijing to address intellectual-property-theft rules and its Made in China 2025 program. With analysts skeptical that Chinese President Xi Jinping will easily budge on those economic requests, a deal with President Donald Trump at an expected meeting this month appears unlikely.

The US has placed import taxes on roughly half of China’s exports to the US, and Trump has threatened to increase tariff rates and extend those to all shipments from China. Beijing has retaliated, but it doesn’t import enough from the US to match duties dollar-for-dollar. China sold about $506 billion worth in goods and services to the US in 2017, while the US sold roughly $130 billion worth to the Chinese.

“China can outlast the U.S. in an extended trade war, but only if voters here react negatively to it,” said Gregory Wawro, a political science professor at Columbia University.

“That seems to be what Beijing has banked on, but so far the reaction seems to be muted even among those who are experiencing some pain due to the tariffs.”

Photo at the Top: AP Photo/Andy Wong


To Ease Market Fears, Beijing Signals Readiness to Talk

November 7, 2018
China shows a willingness to compromise on trade in an effort to bring back investor confidence
November 6, 2018

A top Chinese official offered an olive branch to America, saying that Beijing wants to resume trade talks with Washington.

“The Chinese side is ready to have a discussion with the United States on issues of mutual concern and work for a solution on trade acceptable to both sides,” Chinese Vice Chairman Wang Qishan said at the Bloomberg New Economy Forum in Singapore on Nov. 6.

Wang’s speech came amid an effort by top Communist Party leaders to calm global investors disturbed by the U.S.–China trade war and a worsening economic slowdown in the world’s second-largest economy.

Escalation of the trade war and a collapsing economy caused panic selling in the Chinese stock market this year. Overall, the Shanghai Composite has lost almost 25 percent of its value since hitting a peak in January. And the smaller-cap Shenzhen Composite Index declined more than 30 percent. Both benchmarks are now deep in bear-market territory.

“China and the U.S. will both gain from cooperation and lose from confrontation. Our relationship will have a direct impact on global stability,” Wang said, adding that negativity and anger aren’t the way to address problems that have emerged from globalization. He also noted that China has rejected a “Cold War mentality and power politics.”

Asia stocks had a mixed response to Wang’s comments. Hong Kong’s Hang Seng Index gained 0.8 percent while mainland China’s markets ended the trading day lower on Nov. 6.

Wang’s speech had a more conciliatory tone than Xi’s confrontational remarks at the opening of an international business fair in Shanghai on Nov. 5.

In his speech, the Chinese leader criticized Trump’s trade approach, denouncing “law of the jungle” and “beggar-thy-neighbor” trade practices. Xi’s comments dented hopes that both sides could end the tension at the G20 summit in Argentina this month.

Xi also tried to ease concerns about China’s economic situation.

“The Chinese economy is not a pond but an ocean,” Xi said. “High winds and storms may upset a pond, but never an ocean.”

Promises for Liberalization and Compromise

Both Wang and Xi portrayed themselves as free traders, promising to lower import tariffs and improve access to the Chinese market.

“China will stay committed to its policy of opening up, letting the market work its charm,” Wang said, adding that Beijing would implement “trade and investment liberalization” and “support immediate reform of  the World Trade Organization.”

Chinese officials, however, have given no indication that they’re ready to meet Washington’s long list of trade demands, such as ending cyber theft, forced joint ventures, and intellectual theft.

According to experts, agreeing to those demands would undermine the communist regime’s plans to achieve dominance in high-technology industries, as outlined in the economic blueprint “Made in China 2025.”

Wang’s promises for more liberalization and compromise weren’t convincing enough, according to Scott Kennedy, head of China studies at the Center for Strategic and International Studies in Washington.

Following Wang’s speech, he wrote on Twitter that Eurasia Group President and founder Ian Bremmer, who was a moderator at the forum in Singapore, asked audience members to raise their hands if they thought Wang’s speech showed a new willingness by Beijing for more liberalization and compromise.

“Almost no one raised their hand. Wang didn’t win the room over,” Kennedy wrote.

Concrete Actions

Europe is also aligned with Washington in its efforts to end the unfair economic and trade policies of Beijing.

European companies are concerned about China’s rules requiring forced joint ventures, intellectual property theft, and unequal treatment of foreign companies, said Carlo D’Andrea, vice-president of the European Union Chamber of Commerce in China.

“What matters is that concrete actions are forthcoming and that reforms are clearly timetabled,” D’Andrea told Financial Times on Nov. 5. “If China really will continue to open up, we would have expected additional and specific commitments to have been announced by President Xi today.”

For decades, Beijing hasn’t taken any concrete actions to fulfill its promises. And that’s the reason why the Trump administration has chosen to take a tougher stance on China’s decadeslong protectionist and trade-distorting policies.

To end China’s “economic aggression,” Washington has levied duties on roughly $250 billion worth of Chinese goods and imposed restrictions on Chinese investments.

“We had all these dialogues that went on for 15 to 16 years, and nothing was accomplished,” said Patrick Mulloy, a former member of the U.S.–China Economic and Security Review Commission and a former assistant secretary at the U.S. Department of Commerce. “The administration’s way in addressing these issues has certainly gotten people to think that we’ve got to resolve this matter.”

The last round of trade talks with China ended in August with no concrete steps toward a deal.

Trump said in a tweet on Nov. 1 that he had “a long and very good conversation” with Xi, offering some hope that trade tensions may cool after the G20 meeting.

Australia central bank raises economic growth forecast

November 6, 2018

Australia’s central bank on Thursday said the economy was “performing well” and lifted its growth outlook while keeping interest rates at a record low but warned there were concerns about global trade.

The announcement comes as worries also begin to emerge about the country’s once booming housing market, which has slowed in recent months.

The Reserve Bank of Australia said this G20 economy continues to chug along and should expand around 3.5 this year and next, a fraction up from its previous forecast and continuing a global record 26 years of continuous growth.

© AFP/File | Australians have looked increasingly jittery, with consumers tempering their spending and confidence steadily ebbing this year

Its main cash rate was left unchanged at 1.50 percent to stimulate consumer and business spending.

But it said there were doubts prompted by the “direction of international trade policy in the United States”, with Donald Trump having embarked on a protectionist agenda sparking standoffs with key partners including China and the European Union.

Meanwhile, at home consumers have looked increasingly jittery, with Australians tempering their spending and confidence steadily ebbing this year.

And a drop in house prices may be good news for renters, but it could hit the broader economy with recent buyers saddled with assets worth less than they paid for.

“It wouldn’t be too much of a concern yet, in the near term,” Jason Yek of Fitch Solutions told AFP. “But I do think housing prices are going to go down over coming quarters.”

House prices in Sydney and Melbourne have increased by around 70 percent this decade, with wage growth lagging well behind, despite low unemployment rates.

Many Australians already find balancing the household books tougher despite the booming market and household debt remains at one of the highest levels of all OECD.

Some analysts predict household finances will only get tighter as a rash of interest-only home loans granted in 2015 end a five-year grace period.

By 2020, Yek said, many Australian home owners will have to start paying down the principle too.

According to NAB’s Consumer Anxiety Index the cost of living is still the biggest driver of Australian consumer angst.


As hefty new tariffs take effect, there is no sign of an end to the U.S.-China trade war

September 25, 2018

Chinese President Xi Jinping probably unwilling to face domestic humiliation by backing down

As hefty new tariffs take effect, there is no sign of an end to the U.S.-China trade war

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The container ship Maersk Emerald is unloaded at the Port of Oakland in July. (Ben Margot / AP)

As hefty new tariffs came into effect Monday in the escalating trade war, China accused America of “trade bullyism,” intimidating other countries and adopting protectionist policies that would harm the global economy.

The largest tariffs yet — U.S. duty on $200 billion worth of Chinese goods and reciprocal Chinese tariffs on $60 billion in American products — kicked in amid fears the conflict will probably drag on at least until next year.

By Robyn Dixon
The Los Angeles Times

Global stocks took small losses on Monday, with industrial companies and banks suffering some of the worst declines among American securities.

China’s retaliation will probably see the Trump administration move ahead with an additional $267 billion in tariffs on Chinese goods. Almost half of China’s exports to the U.S. are now affected by tariffs, making them more expensive and less attractive to consumers.

On top of the trade war, military tensions have sharply exacerbated tensions between Beijing and Washington in recent days following the imposition of U.S. sanctions on China’s military for buying Russian fighter jets and a missile system. China summoned U.S. Ambassador Terry Branstad on Saturday to complain about the sanctions. It argues that its decision to buy Russian military hardware last year was an arrangement between two sovereign countries, and none of America’s business.


China released a white paper Monday, cited by the state-run New China news agency, saying that since the Trump administration’s “America First” policy came in, Washington has “abandoned fundamental norms of mutual respect and equal consultation that guide international relations.

“Rather, it has brazenly preached unilateralism, protectionism and economic hegemony, making false accusations against many countries and regions, particularly China, intimidating other countries through economic measures such as imposing tariffs, and attempting to impose its own interests on China through extreme pressure,” the news agency said.

The tariffs on $200 billion of goods, now levied at 10%, will rise to 25% by the beginning of next year unless the countries reach a deal. China’s new tariffs on U.S. goods have been set at 5% to 10%.

Earlier this year, the U.S. levied tariffs on $50 billion in Chinese goods. China retaliated by imposing tariffs on $50 billion in U.S. goods. President Trump has threatened tariffs on an additional $267 billion of Chinese goods should China retaliate today — which would mean virtually all Chinese imports to the U.S. would be affected.

The white paper, titled “Facts about the China-US trade dispute and China’s stance,” published by the State Council, said China had been “answering the U.S. concerns with the greatest level of patience and good faith. However, the U.S. side has been contradicting itself and constantly challenging China.”

The New China agency reported the aim of the white paper was to “clarify the facts,” spell out the benefits of U.S.-China trade and pose solutions to the conflict.


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Mike Starkey offloads soybeans from his combine as he harvests his crops in Brownsburg, Ind., on Sept. 21. (Michael Conroy / AP)

As well as the white paper, China also took its arguments on the trade war to the swing state of Iowa, one region hard hit by the trade war. The state-owned China Daily paid for a four-page advertising supplement in the Des Moines Register on Sunday, targeting Iowa soybean farmers hurt by China’s moves to switch to imports from Brazil and grow more of its own soybeans. The advertising supplement called the effects of the trade war the “fruit of a president’s folly.”

The main U.S. demands are long-term and fundamental policy changes, such as insisting that China behave more like a market economy rather than subsidizing key state industries, making it difficult for foreign firms to compete. It also accuses China of forcing foreign firms to transfer technological know-how to Chinese partners and of the theft of American technology.

Trade talks in recent months have not narrowed the gap between the two sides, and no resolution is expected this year. As it drags on, the trade war will probably hit the global economy. Some companies may be forced to shift production out of China, but others, such as furniture companies, will find it difficult to find manufacturers elsewhere able to produce at the scale of manufacturers based largely in southern China.

In the longer term, China will probably work harder to develop its own high-tech industries instead of relying on American components, a policy already spelled out in its “Made in China 2025” plan. The plan lays out China’s ambition to be a global leader in some high-tech industries such as artificial intelligence, robotics and superconductors.

Both sides say they are open to talks, yet neither side appears willing to budge in a significant way.

The white paper — released on a national holiday — said China was willing to talk, but that negotiations could not be held under “threats of the big stick of tariffs” or at the cost of “China’s rights to develop.” It said talks could only go ahead based on “mutual respect and equality.”

China was due to send Vice Premier Liu He to Washington this week for negotiations on a framework for trade talks, but the trip has been called off.

China had planned to send Vice Premier Liu to trade talks in Washington, D.C., next week.
China had planned to send Vice Premier Liu to trade talks in Washington, D.C., next week. PHOTO: ALY SONG/REUTERS

Narrowing the political gap may be difficult, with Chinese officials failing to offer concessions at the scale Washington wants, and Chinese President Xi Jinping probably unwilling to face domestic humiliation by backing down significantly. Xi has consolidated power since he took office as general secretary of the Communist Party of China in 2012, and a perceived defeat in the trade war would be an extraordinary setback.

Since China imports fewer goods from the U.S. than it exports, it cannot match American tariffs dollar to dollar. While the U.S. has so far imposed tariffs on $253 billion in Chinese goods, China has slapped tariffs on just $130 billion in U.S. goods, but it has vowed to match Washington’s tariffs through other means, without detailing what those would be.

They could include stepping up inspections on American goods, or creating bureaucratic barriers hampering American firms operating in China. However, Chinese leaders have ruled out manipulating the currency to make their exports more competitive.

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The new U.S. tariffs affect 5,745 Chinese items, including frozen meat, fish, vegetables, chemicals, gases, handbags, clothing, furniture, fertilizers and TV components. The original list of more than 6,000 was reduced after consultations with business. Items such as smartwatches, Bluetooth devices, bicycle helmets and child safety equipment such as playpens and highchairs were excluded at the last minute.

Chinese state media have declared that the country is better placed to withstand a drawn-out trade war, but the Trump administration says it is determined to win.

“We are going to win it,” Secretary of State Michael R. Pompeo told Fox News on Sunday. “We’re going to get an outcome which forces China to behave in a way that if you want to be a power — a global power — transparency, rule of law, you don’t steal intellectual property.”

The friction between Washington and Beijing is being felt in other areas as well, including the mounting military tensions in the South China Sea, where China has built military installations on a series of islands and the United States carries out regular “Freedom of Navigation” exercises.

The U.S. has also expressed concern over reports China is holding upward of a million Muslim people, mainly of Uighur and Kazakh ethnicity, in re-education camps in Xinjiang province. A group of lawmakers led by Sen. Marco Rubio (R-Fla.) has called for sanctions on officials responsible.


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Germany Goes More Protectionist to Keep China From Buying Technology Companies — “This is about public order or national security.”

August 7, 2018
Germany plans further foreign investment rules aimed at curbing China’s predatory practices

Threshold to veto deals will be lowered as concern grows over Chinese acquisitions

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Protectionist sentiment has been growing in Germany since the €4.5bn acquisition of Kuka, an industrial robotics company, by Chinese appliance maker Midea in 2016 © Bloomberg

By Guy Chazan in Berlin

Germany is to increase its powers to block foreign investments by significantly lowering the threshold for deals that can be subject to ministerial veto, in a further sign of growing protectionist sentiment towards Chinese acquisitions.
Berlin can veto deals that involve the purchase of at least 25 per cent of the equity of a German company by an entity from outside the EU, and only if they endanger public order or national security. Ministers now want to reduce that threshold to 15 per cent.Peter Altmaier, economics minister, told the newspaper Die Welt that the threshold would be lowered “so that we can check more acquisitions in sensitive sectors of the economy”. Die Welt said the new bill could come into force this year.“We want to be able to take a much closer look at companies in the defence sector and in critical infrastructures, and certain other civilian technologies that are relevant to security, such as IT-security,” Mr Altmaier said.No automatic alt text available.Germany is increasingly intervening to stop Chinese investments, particularly in companies operating in critical infrastructure, amid fears that some of its most advanced technology is ending up in Chinese hands.

Last month, the government directed state development bank KfW to take a 20 per cent stake in 50Hertz, a high-voltage power network operator, to pre-empt the stake’s acquisition by a Chinese state investor.

Last week a Chinese company, Yantai Taihai, withdrew its bid for Leifeld Metal Spinning, a small German machine tool manufacturer that specialises in materials for the aerospace and nuclear industries, after the government moved to block the deal. It would have been the first use of Germany’s foreign investment law to veto a mergers and acquisitions transaction.

Germany’s tougher stance is part of a global backlash against Chinese takeovers. President Donald Trump is expected to sign into law measures to expand the powers of the Committee on Foreign Investment in the US (Cfius), an inter-agency panel that reviews foreign investments for national security threats. Meanwhile the UK recently unveiled a 120-page policy to enhance government powers to prevent foreign purchases of security-sensitive British assets.

China has also hit back. Its recent move to scupper a $44bn bid by chipmaker Qualcomm for a Dutch rival was seen by many experts as retaliation for a string of decisions by Cfius to reject Chinese acquisitions of US companies.

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Protectionist sentiment has been growing in Germany since the €4.5bn acquisition of Kuka, a leading industrial robotics company, by Chinese appliance maker Midea in 2016.

Germany’s wariness about Chinese investment has increased since the emergence of Made in China 2025, President Xi Jinping’s 10-year plan to transform the country from a low-cost manufacturer into a high-tech power dominant in 10 advanced industries.

“They have made clear they will pursue that goal with every means available,” says Mikko Huotari, deputy director of Merics, a think-tank focused on Asia.

Germany’s main business lobby, the BDI, gave a cautious response to the proposed change to the law. “Germany is reliant on its open investment climate,” said Joachim Lang, the group’s managing director.

He said capital was increasingly coming from dynamic emerging markets and “a smart economic policy must take care to ensure that Germany remains attractive for investors”. Nearly 3m workers in Germany are employed at companies that are owned by foreigners, he added.

Mr Lang said the lower threshold must “be focused strictly on protecting national security”.

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This is the second time in little more than a year that Germany has tightened its foreign investment law to expand its ability to block deals deemed to endanger national security.

Last year the law was broadened to apply to all companies operating in “critical infrastructure” such as energy and water supply networks, electronic payments, hospitals and transport systems. It also gave the government longer to investigate takeovers, expanding the timeframe for such probes from two to four months.

The new version of the law will also cover companies involved in the interception of telecoms, cloud-computing services, control systems for power plants and power networks, the provision of drinking water or sewage disposal, systems for cash supply and credit cards and the settlement of securities transactions, among other sectors.

“Of course we want companies to continue to invest in Germany,” Mr Altmaier said. “But we also have a duty to protect the interests of security and public order.”


West begins to close door on Chinese investment

August 1, 2018

Beijing perceives it is harder to do US deals — and that Europe is also tightening up

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Chinese investment into North America plunged to a seven-year low in the first half of 2018, according to a report this month © FT montage; Dreamstime

By James Kynge in London, Sherry Fei Ju in Beijing, Guy Chazan in Berlin and Shawn Donnan in Washington

Nearly 40 years after China began opening its economy to the west, the US and Europe are taking steps to close their doors to Chinese investors.

Large Chinese state-owned funds and companies are feeling the freeze as the US, the UK and Germany signal a cooler attitude towards Chinese acquisitions of vital corporate assets. Beijing also announced proposals to expand the range of foreign investments covered by China’s national security review process.

So far, Chinese investors perceive the US as much more restrictive than Europe.

“We are concerned about our planned investments in the US because of the trade friction [between Washington and Beijing],” said Tony Dong, senior executive at the China Structural Reform Fund (CSRF), a Rmb350bn ($51bn) private equity fund that reports to the country’s cabinet.

Mr Dong said the fund was negotiating roughly 40 investment deals in the US and Europe, mostly in high-tech sectors. He hoped that about 10 to 12 deals would be successful but was worried that protectionist sentiment in the US could take a toll.

“Investing in Europe seems to make more sense to us now,” he added. “Europe is still an important trade partner of China, and we are concentrating our efforts to drive more win-win investments in Europe.”

The west’s toughening stance on China marks a sea-change in Beijing’s 40-year-old contract with the world. Starting in December 1978, Deng Xiaoping, the then-leader, initiated an era of “reform and opening up” under which Beijing welcomed foreign investment and introduced free market reforms.

The essential corollary was that the west would ensure its markets remained open to China. Now the west’s doors are starting to close.

A report this month by Rhodium Group, a consultancy, found that Chinese investment into North America plunged to a seven-year low in the first half of 2018. Total Chinese investments in the US and Canada reached just $2bn, down 92 per cent from the first half of last year.

Europe, by contrast, absorbed some $12bn in completed Chinese investments — six times the North American inflows. In addition, Europe received $20bn in announced Chinese M&A deals, vastly exceeding the $2.5bn in announced M&A in North America during the first half.

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“The overall trend among Chinese companies does seem to be shifting from the US to Europe, especially if there could be obstacles or too high of a barrier from the US side and if there are better opportunities and lower barriers in Europe,” said Xia Aimin, an executive at LONGI Solar, a Chinese solar panel manufacturer.

But chill winds are also starting to blow in some European capitals. “Things have now become very difficult with US-related deals,” said a Hong Kong-based M&A banker, who declined further identification. “Europe is also showing a recent trend of being tightened up.”

The UK unveiled a 120-page policy this month to enhance government powers to prevent foreign purchases of security-sensitive British assets. Although “China” is only mentioned once in the document, UK officials confirmed that it was largely focused on Beijing’s dealmaking.

In Germany, the government last week directed KFW, a state development bank, to take a 20 per cent stake in 50 Hertz, a high-voltage power network operator so as to pre-empt the company’s acquisition by a Chinese state investor.

This week, Berlin is expected to block a Chinese takeover of Leifeld Metal Spinning, a small machine tool manufacturer that specialises in materials for the aerospace and nuclear industries. It is unprecedented for German ministers to intervene in such a way.

Protectionist sentiment has been growing in Germany ever since the €4.5bn acquisition of Kuka, a leading industrial robotics company, by Chinese appliance maker Midea in 2016.

The government subsequently toughened up Germany’s foreign investment law, expanding its scope to cover all “critical industries”. Ministers can now block any deal that “endangers public order or security” when 25 per cent or more of a German company is for sale.

In the US, Donald Trump is expected soon to sign into law measures to expand the powers of the Committee on Foreign Investment in the US, the secretive inter-agency panel that reviews foreign investments for national security threats.

The legislation is a product of a bipartisan consensus in Washington that China’s state-driven strategy to buy up technology and US companies represents a profound threat to the US economy.

Such proposals could represent a hammer blow to China’s ambitions, particularly because its “Made in China 2025” blueprint — an industrial initiative that has unnerved policymakers in both the US and Europe — requires overseas acquisitions to catapult the county to the forefront of global technological prowess.

“We simply can’t let China erode our national security advantage by circumventing our laws and exploiting investment opportunities for nefarious purposes,” John Cornyn, a Republican senator from Texas who led the push for the new legislation, said last week. “The backdoor transfer of technology, know-how, and industrial capabilities has gone unchecked for too long.”

The investment efforts are part of a bigger fight by the Trump administration against Beijing’s efforts to lead the world in technologies such as artificial intelligence and robotics.

Mr Trump’s trade war against Beijing, and his threats to impose tariffs on all $500bn of goods the US imports from China each year, are aimed at changing Beijing’s intellectual property practices and responding to what the US claims has been theft on a grand scale of US intellectual property by China in recent decades.

But Pang Zhongying at the Ocean University in Qingdao added that the Chinese government “should not over-react” to the tougher stance by US and Europe.

“Countries have a sovereign right to conduct [national security] investigations,” he said. “If China takes revenge by imposing stricter inspections on foreign investments, it will destroy previous efforts to open up and attract overseas capital.”


China’s Role in the World Trade Organization

July 28, 2018

When the World Opened the Gates of China

Was it a mistake for the U.S. to allow China to join the World Trade Organization? Assessments of the 2001 deal often determine positions in today’s bitter trade debate.


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With a congressional vote looming in the spring of 2000, President Bill Clinton mustered his best arguments for why lawmakers should approve his proposed deal for China to join the World Trade Organization.

Adding China would link Beijing to Western economies and reduce the government’s ability to control its vast population, he said in a speech that March at Johns Hopkins’s School of Advanced International Studies. “By joining the WTO, China is not simply agreeing to import more of our products, it is agreeing to import one of democracy’s most cherished values, economic freedom,” Mr. Clinton said. “When individuals have the power not just to dream, but to realize their dreams, they will demand a greater say.”

Mr. Clinton’s idealistic rhetoric played well among most of Washington’s elites, but a trade lawyer often dismissed as a protectionist, Robert Lighthizer, was skeptical. As he had warned in a New York Times op-ed a few years earlier, if admitted to the WTO, mercantilist China would become a “dominant” trading nation. “Virtually no manufacturing job in [the U.S.] will be safe,” he wrote.

Mr. Lighthizer is now the U.S. Trade Representative, President Donald Trump’s chief negotiator on global trade. In the administration’s view, allowing China to enter the WTO in 2001 was a historic mistake that cost the U.S. millions of jobs and trillions of dollars in accumulated trade deficits. The U.S. is now bypassing WTO rules and threatening Beijing with tariffs on up to $500 billion of imported goods.

The moves against China are part of Mr. Trump’s wider effort to upend longstanding U.S. policy on trade and also the international institutions and agreements that govern trade. Whether the administration’s shift is a much-needed corrective or a disastrous reversal depends in large part on how one views the original decision to bring China into the international trade regime.

Left, Chinese Premier Zhu Rongji and President Bill Clinton conferred in April 1999, with trade a key topic.
Left, Chinese Premier Zhu Rongji and President Bill Clinton conferred in April 1999, with trade a key topic. PHOTO:GETTY IMAGES

Given China’s enormous presence in the world economy today, it’s difficult to remember how economically backward the country was in the early 1990s. Inflation hit 24% in 1994. Nearly 60% of the population lived on less than $1.90 a day. Bicycles jammed the streets, not cars.

Chinese reformers saw their country’s entry into the WTO as a way to modernize. To join, China would have to reduce sky-high trade barriers and allow a greater role for foreign firms. State-owned firms would finally face competition, and private enterprise, they hoped, would soar. “WTO membership works like a wrecking ball, smashing whatever is left in the old edifice of the planned economy,” said Jin Liqun, China’s vice minister of finance at the time.

The WTO is a membership organization. To get in, China had to cut deals with all the members but most importantly with the U.S., the world’s dominant economy. U.S. officials thought they were driving a hard bargain. The deal forced Beijing to slash tariffs, permit foreign investment in Chinese industries and give foreign banks more freedom to do business. For a dozen years, Beijing also agreed, the U.S. could block Chinese imports that threatened specific American industries.

In exchange for the Chinese concessions, the U.S. just had to surrender its annual rite of deciding whether to grant China “most favored nation” status as a trading partner, ensuring full access to the American market. China’s allies in Congress had succeeded each year in getting the measure through anyway, but by allowing China into the WTO, the annual reviews would end.

Mr. Clinton also linked China’s WTO accession to the democratic vision of President Woodrow Wilson, who dreamed, he said, of “a world full of free markets, free elections and free peoples working together.” The growth of the internet, in particular, would undermine Beijing’s control and make China more like the U.S., Mr. Clinton argued. (He declined to comment for this article.)

Many shared this hopeful view, pointing to the examples of South Korea and Taiwan, which had shaken off dictatorships as they became more prosperous. Henry Rowen, chairman of the Reagan administration’s National Intelligence Council, forecast in 1999 that China would “join the club of nations well along the road to democracy” in 2015, when he expected its per capita GDP to reach $7,000. As it turned out, China hit that mark two years sooner than he had predicted, but even now, it is far from being a democracy.

A coalition of labor, environmental and human-rights groups opposed China’s admission to the WTO.

A coalition of labor, environmental and human-rights groups opposed China’s admission to the WTO. Robert Scott, an economist at the Economic Policy Institute, a labor-backed research group, cranked out alarming numbers. In 2000, he forecast that nearly a million U.S. manufacturing jobs would be lost to Chinese competition.

Donald Trump was absent from the debate. In 2000, he toyed with a run for president and wrote a campaign book, “The America We Deserve,” which called China the U.S.’s “biggest long-term challenge.” But he didn’t mention the WTO decision. He did say he would appoint himself U.S. Trade Representative and negotiate better deals.

Truck carriers at the Port of Long Beach, Calif., loading and offloading cargo containers from China and other countries last March.
Truck carriers at the Port of Long Beach, Calif., loading and offloading cargo containers from China and other countries last March. PHOTO: BOB RIHA, JR./GETTY IMAGES

After the deal, foreign investment in Beijing mushroomed from $47 billion in 2001 to $124 billion a decade later. The lower investment and import restrictions required of China as part of its WTO entry also encouraged multinationals to rush in, as did the prospect of serving the vast Chinese market. China became the world’s manufacturing floor, and Chinese imports to the U.S. soared.

Looking back now, whose expectations for the wider impact of the deal proved most accurate? On the issue of U.S. manufacturing jobs, critics made the right call. A study by the MIT economist David Autor and colleagues calculated that Chinese competition cost the U.S. some 2.4 million jobs between 1999 and 2011, battering factory towns that made labor-intensive goods.

That result haunts one of Mr. Clinton’s senior China negotiators, Robert B. Cassidy, who believes that his work only helped big businesses, not ordinary workers. “When you retire you like to think that you accomplished a lot,” he says now, at age 73. “What kind of benefit did I produce from working around the clock? I was incredibly disappointed.”

Nor did China open up politically, as many WTO advocates had hoped. Beijing tamed the internet by limiting its use to commerce, technology and social media. It blocked political organizing by threatening and sometimes jailing those who posted critical comments. More recently, it has turned the internet itself into an instrument of the state by using it to identify and track dissidents. “It’s Orwellian,” says Jerome Cohen, a New York University law professor and China specialist.

Here’s How China Can Escalate a Trade War With the U.S.

China has pledged to retaliate against U.S. tariffs in “equal scale and equal strength.” In addition to tariffs, here are three ways Beijing could hit back at Washington. Photo: Getty Images

Greater economic growth led to greater political control, said Mark Wu, a professor at Harvard Law School whose research focuses on China and the WTO. China’s leaders believed that they needed unchallenged authority to carry out economic reform in the face of opposition from entrenched interests. According to Mr. Wu, the point of freer markets, in their view, was to encourage competition and prevent the system from becoming sclerotic, not to bolster individual rights.

As for President Clinton and his allies in the WTO debate, they can point to real gains from integrating China into the global economy. According to the World Bank, some 400 million Chinese have been lifted from extreme poverty—that is, from living on less than $1.90 a day—since 1999. And during the global recession of 2008 and 2009, China was able to go on a spending spree that supported global demand. Chinese building projects sucked in iron ore, coal, oil and other commodities, boosting other developing nations.

Today, technology companies tap the Chinese market to boost profits and defray research costs. Last year, about 20% of Apple Computer Inc.’s sales came from China, up from about 12% in 2011. The low inflation associated with cheap imports, together with Chinese purchases of U.S. government bonds, has also helped to hold down interest rates, making it cheaper for Americans to buy not only clothes and electronics but also homes and cars.

Economic reform has waxed and waned in China. The WTO deal was supposed to curb the power of China’s state-owned enterprises, which Beijing pledged would operate on commercial terms only. By some measures, that has occurred. Nicholas Lardy, a China expert at the Peterson Institute for International Economics, estimates that state-owned firms now account for just 20% of China’s industrial output, down from double that share in 2001.

But there has been a reversal in the past few years, according to Mr. Lardy. State investment in the economy is growing as much as three times faster than private investment, he says. State firms have once again become the heart of Chinese economic policy-making.

Mr. Trump touching a wheel loader made by Caterpillar while touring a Made in America product showcase with Vice President Mike Pence on the South Lawn of the White House in July 2017.
Mr. Trump touching a wheel loader made by Caterpillar while touring a Made in America product showcase with Vice President Mike Pence on the South Lawn of the White House in July 2017. PHOTO: CHIP SOMODEVILLA/GETTY IMAGES

Beijing is counting on such firms to become global leaders in semiconductors, electric vehicles, robotics and other high-technology sectors and is funding them through subsidies and financing from state banks. These initiatives have raised protests from U.S. companies that now find themselves competing with the Chinese state. In solar and wind power, for example, state investment created a glut that drove many foreign companies out of business.

China never fully followed through on its WTO pledge to allow foreign banks to operate in its local currency. It also pledged not to force foreign firms to transfer their technology, but today about one in five companies—many in aerospace and chemical industries—say that they’ve been pressured to do just that in order to do business in China, according to a July survey by the American Chamber of Commerce in Shanghai.

At a WTO session this month, China’s vice minister of commerce, Wang Shouwen, denied that China twists arms to gain technology. Arrangements on technology are “absolutely contractual behavior based on voluntary business deals,” Mr. Wang said in July, according to a Geneva trade official.

China has also maneuvered to its advantage within the WTO. In one case it blocked exports of scarce raw materials needed by high-tech industries, hurting foreign firms. When the WTO ruled against Beijing on one set of restrictions, it removed the barriers—but then blocked another set of raw materials. “The core issue isn’t whether China lived up to the vast number of obligations, but whether it lived up to the spirit” of the deal, says Prof. Wu.

Other Chinese efforts to win an advantage in trade have happened outside the WTO’s purview. For years after joining the international trade regime, Beijing kept its currency undervalued by 30%, boosting Chinese exports by making them cheaper abroad, says Brad Setser, a currency expert at the Council on Foreign Relations. Former U.S. officials say that China and other WTO members wouldn’t have agreed to a provision punishing countries for such measures.

Charlene Barshefsky, who was Mr. Clinton’s U.S. Trade Representative, says that her successors could have used the WTO to sue China to live up to its agreements. She points in particular to provisions that protected U.S. industries from escalating Chinese imports. President George W. Bush turned down all import-surge cases brought by American companies, and President Barack Obama approved just one. Neither brought any cases on their own.

A former senior Bush administration official said that “the national interest was not served by raising protectionist barriers.” Growth in imports, the former official says, doesn’t mean that China has acted improperly. Obama officials made similar arguments.

Mr. Lighthizer, who is now helping to call the shots on U.S. trade policy, says that if the WTO deal had failed in Congress, “uncertainty would have kept the trade deficit from growing and probably would have saved millions of manufacturing jobs.”

But other WTO opponents believe that congressional rejection wouldn’t have made much of a difference for the U.S. With its vast supply of industrious, low-wage workers, China would have continued to rise as an export powerhouse, they say. Indeed, in the 15 years before its WTO entry, U.S. imports from China grew at a faster rate than in the 15 years after, albeit from a much lower base.

Keeping China out of the WTO might have delayed by a few years the damage to U.S. communities from low-cost imports, though it’s not clear that the extra time would have helped. In the 17 years since China’s entry, the U.S. has poured few resources into worker retraining programs or other social safety net programs for laid-off workers. The programs in which it did invest had mixed results.

“I don’t know that [a defeat for the Clinton WTO deal] would have made a difference,” says David Bonior, a former Democratic House Minority Whip, who led the congressional fight against it.

Ms. Barshefsky still believes in a multilateral approach to China. She would revive the Trans-Pacific Partnership, a free-trade pact between the U.S. and 11 Pacific Rim nations, which Mr. Trump discarded on his first working day in office, and extend it to other Asian nations and Europe. The members could negotiate new rules of trade, cutting tariffs and covering state-owned enterprises, import surges, subsidies and other issues relevant to China. “Then China would need to make a decision,” she says. “It can come on board, or it can decide it doesn’t want full access to 60% of the global economy.”

Mr. Lighthizer has a different view. The U.S. should go it alone and threaten China with heavy tariffs, he says, largely leaving the WTO out of the mix as an adjudicator of U.S. grievances.

“The notion that our problems with China can be solved by bringing more cases at the WTO alone is naive at best and at worst distracts policy makers from facing the gravity of the challenge,” his agency said in a January 2018 report. Instead, the USTR said, the U.S. must rely on its own economic muscle.

“Ultimately, that’s all you have anyway,” Mr. Lighthizer says.

Appeared in the July 28, 2018, print edition as ‘When the World Opened The Gates of China.’

World Economy Feels the Bite From Trade War

July 25, 2018

Protectionism is slowly starting to weigh on the global economy.

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From demand at factories to company profits and prices consumers are paying, the tit-for-tat trade battle U.S. President Donald Trump started with China and the European Union is starting to show up in numbers. And it’s still early days, with Trump saying Tuesday that “tariffs are the greatest,” a warning that he may not let up until he gets what he wants.

The latest signs of the fallout came in activity reports from Japan, Europe and the U.S., as well as anxious words from companies facing an additional uncertainty and having to decide between taking a hit to their profit margins or jacking up prices. Many manufacturers are also facing higher raw-material costs, another squeeze on earnings.

Harley-Davidson Inc. on Tuesday cut its profit margin forecast, citing tariffs. The iconic motorcycle maker was caught in the crossfire of the trade war last month when it announced plans to shift some U.S. production overseas, prompting attacks from Trump.

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Dutch electronics firm Royal Philips NV Chief Executive Frans van Houten says an escalation of tariffs may mean it has to pass on costs to customers, and Whirlpool Corp. said rising raw material costs hurt results in some of its markets in the second quarter.

For the global economy, which was enjoying its best spell in years, there’s a sense that the period of synchronized global growth is at an end. The U.S. has got a temporary shot in the arm from tax cuts, but growth is cooling in China, a number of emerging markets are dealing with a currency sell-off, and Europe has been slow to recover from a winter-battered start to the year.

According to Abby Joseph Cohen, advisory director at Goldman Sachs, global growth will continue into 2019, but it’s moving into a slower phase. A trade war on top of that would be a further weight.

‘Very Uncomfortable’

“What is so hard to quantify is the impact not just on demand but on costs and on supply-chain disruption,” she said on Bloomberg Television. “What we have now are anecdotes more than anything but this is what we need to be watching. Clearly if there were an all-out trade war, it would be very difficult for investors to focus very directly just on the fundamentals, the geopolitical environment would be very uncomfortable.”

In the 19-nation euro area, IHS Markit’s monthly survey showed growth softened in July on weaker new orders and deteriorating confidence. Factory activity in Japan grew at the weakest pace since 2016 and, in the U.K., where Brexit is another complication, manufacturing output expectations weakened, as have investment intentions.

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Cars ready for export but going nowhere….

The Markit reports come just days after central bankers and finance ministers from the Group of 20 economies said that trade tensions are threatening global growth, echoing multiple warnings from around the world.

In China, concern has reached such a level that authorities on Monday unveiled a package of policies to boost domestic demand to cushion the economy from the fallout from the trade dispute.

Read More:

  • Is EU Friend, Foe or Both? We’ll See When Juncker Meets Trump
  • China Unveils New Measures to Aid Growth Amid Trade Uncertainty
  • It’s Getting Harder for Companies to Escape Trump’s China Duties

The euro-area composite Purchasing Managers Index for manufacturing and services fell to 54.3 from 54.9 in June, a sharper drop than economists had forecast. A measure of expectations fell to a 20-month low.

“Given the waning growth of new business and further slide in business optimism, the outlook has also deteriorated,” said Chris Williamson, chief business economist at Markit. For manufacturers, the survey saw trade worries “intensify markedly,” he said.

The pressure on the economy may only be beginning, and EU Commission President Jean-Claude Juncker is traveling to Washington this week in an effort to ease tensions. He won’t come unarmed. The EU has vowed to retaliate against any import duties, and China has also said it will match American sanctions on its exports.

Related Story: Inflation Expectations Rise at Factories Along U.S. East Coast

In the U.S., the PMI report showed continued growth in private-sector activity, but a second straight drop in goods export orders. There was also a record surge in prices charged and more supply-chain delays.

“Trade frictions have clearly become a major cause of concern, especially among manufacturers,” Williamson said. “Firms have become increasingly worried about the impact of tariff and trade wars on demand, prices and supply chains.

— With assistance by Mark Evans, Harumi Ichikura, Tom Keene, and Francine Lacqua



Whirlpool loved Trump’s tariffs. Now it’s struggling

“The global steel costs have risen substantially, and in particular, in the US, they have reached unexplainable levels,” Bitzer told analysts. “Uncertainty” around additional tariffs and global trade has disrupted Whirlpool’s supply chain and heightened pricing pressure.

Whirlpool and rivals, such as LG and Samsung, have increased prices on washing machines since the tariffs went into effect. That led some people to pass up a new purchase. Washing machine prices in June were up close to 20% from a year prior, according to the Labor Department.

Draghi Warns Risks From Trade War May Be Understated

June 29, 2018

European Central Bank President Mario Draghi warned European Union leaders that an escalating trade war between the U.S. and the world’s biggest economies may have a larger impact than policy makers and investors currently expect.

Mario Draghi Photographer: Jasper Juinen/Bloomberg

Rising tensions could erode confidence to an extent that is difficult to gauge, Draghi told the 27 heads of government from the bloc at a summit in Brussels on Friday. The complexity of intertwined global supply chains could magnify the impact on the world economy, he said, according to a person familiar with the discussion, who asked not to be named as the debate wasn’t public.

Draghi’s latest comments come days after U.S. president Donald Trump threatened to deal what could be a damaging blow to the German economy by imposing a 20 percent tariff on car imports from Europe. The risk prompted the EU to react with a joint statement on Friday, vowing an unwavering response “to all actions of a clear protectionist nature.”

The ECB has repeatedly warned about the threat protectionism poses to growth, but Draghi’s assessment contrasts with a relatively sanguine approach by some financial-market participants. Citigroup special economic adviser Willem Buiter said in an interview with Bloomberg Television on Friday that fears of a trade war are overblown and the economy could be in for a boost within months as those concerns fade.

Read More

Europe already faces challenges including populism and divisions between member states in areas such as migration and the deepening of euro-area integration. Draghi told leaders that uncertainty and lower confidence are having a negative, visible impact on private investment already, and urged them to complete institutional overhauls of the currency bloc, including a joint financial backstop for the resolution of ailing banks.

“Make sure that it works and that it works soon,” Draghi said.

Peter Navarro’s radical transformation — From Free Trade to Trade War — Alarmist or Realist on China?

June 25, 2018

People think of Peter Navarro, the top White House trade adviser, as President Trump’s mind-meld on tariffs — the most hardline protectionist in the White House. But Navarro used to preach very different ideas in his early career as an economist.

The bottom line: In his 1984 book, “The Policy Game: How Special Interests and Ideologues are Stealing America,” that’s no longer in print — Axios got a copy from a university library — Navarro sounds a lot like the very administration officials he’s sparred with on trade policy. And he argues that tariffs will inevitably send the global economy into crisis.

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We asked Navarro what prompted the radical change in his views, and he explained how he went from a free trader to an economic nationalist. In response to “The Policy Game,” specifically, Navarro told Axios:

It borders on the comical that Axios would spend so much time on a book written 34 years ago and completely ignore the insights of my later works like the 2006 Coming China Wars, the 2011 Death By China, and the 2015 Crouching Tiger.  Together, these books explain at length why the globalist Ricardian free trade model is broken and urgently needs fixing in the name of both the economic and national security of the United States.
— Peter Navarro
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From the book…

“The clear danger of this trend [protectionism] is an all-out global trade war; for when one country excludes others from its markets, the other countries inevitably retaliate with their own trade barriers. And as history has painfully taught, once protectionist wars begin, the likely result is a deadly and well-nigh unstoppable downward spiral by the entire world economy.
If the world is, in fact, sucked into this spiral, enormous gains from trade will be sacrificed. While such a sacrifice might save some jobs in sheltered domestic industries, it will destroy as many or more in other home industries, particularly those that rely heavily on export trade. At the same time, consumers will pay tens of billions of dollars more in higher prices for a much more limited selection of goods. Sacrificed, too, on the altar of protectionism will be the very heart of an international world order that since World War II has successfully changed the aggressive struggle among nations for world resources and markets into a peaceful economic competition rather than a confrontational political or military one.”
— “The Policy Game,” pg. 55

There are multiple passages in “Policy Game” that directly argue against Navarro’s current positions. Navarro’s go-to argument defending the White House’s trade moves has been national security. In a June New York Times op-ed, he wrote:

“President Trump reserves the right to defend those industries critical to our own national security. To do this, the United States has imposed tariffs on aluminum and steel imports. While critics may question how these metal tariffs can be imposed in the name of national security on allies and neighbors like Canada, they miss the fundamental point: These tariffs are not aimed at any one country. They are a defensive measure to ensure the domestic viability of two of the most important industries necessary for United States military and civilian production at times of crisis so that the United States can defend itself as well as its allies.”

But Navarro’s own book topples that argument as well:

“On the benefit side, protectionism within certain basic industries like autos, steel, and electronics helps to create and sustain an industrial base that, in times of war or national peril, can be shifted to defense purposes, However, this national security argument — and the existence of any benefits resulting from protecting these industries — can be legitimately called into question for several reasons.
First, the existence of any sizable benefits rests on the assumption that import competition in our defense-related industries would not only reduce the size of these industries but also shrink them to the point where they would be too small to support our defense needs. The threshold of danger is a matter of some dispute. How big, after all, do our auto, steel, or electronics industries have to be to keep our borders safe? In spite of this uncertainty, few analysts would argue that import competition is likely to push a nation with as large and mature an industrial base as ours anywhere close to that threshold.
Second, it is highly possible that our defense capability might actually be enhanced — not damaged — by import competition. Without the umbrella of protectionism, our defense-related industries would be forced to operate at lowest cost, engage in more research and development, aggressively innovate to stay one step ahead of the competition, and modernize their plants at a faster pace. Thus, while import competition might shrink these industries, they would be leaner, tougher, more efficient, and more modern and in all likelihood outperform a bigger and inefficient (protected) version of those same industries.
On the national security cost side, the major effect of protectionism is to threaten the stability of the international economic order through a global trade war…”
— “The Policy Game,” pg. 82

Navarro lauded the impact of tariffs on saving American jobs in a May op-ed in USA Today, writing:

“There can be no better way to make America — and American manufacturing — great again than to start to rebuild those communities of America most harmed by the forces of globalization. These new facilities will stand as shining testimony to the success of tough trade actions, smart tax policies and targeted worker-training programs.”

But he warned against the harmful longer-run effects of tariffs on jobs in his 1984 book:

“American protectionism threatens employment and profits in the export-dependent nexus because it invites retaliation from our trading partners …
From these direct and indirect effects, it is clear that over time, the major benefits of protectionism — more jobs and higher profits — are largely and perhaps completely offset by a reduction in jobs and profits in export and linkage industries and in those industries vulnerable to the ‘end run.’ Therefore, the argument that protectionism serves as a jobs and income assistance program must be discounted.”
— “The Policy Game,” pg. 79-80

And Navarro has emphasized that tariffs won’t hurt American consumers, saying on CBS’ “Face the Nation” in March that the Trump administration’s moves’ effect on the prices of consumer goods will be “negligible to nothing.”

In 1984, Navarro held a very different view:

“The biggest losers in the protectionist policy game are consumers. Even here. however, ‘consumers’ do not constitute a monolith, for there are several different consumer categories.
Bearing the greatest burden of protectionism are American retail shoppers who pay over $70 billion annually in higher prices (and reduced consumption) for products ranging from autos, bicycles, and color TVs to shoes, shirts, and cutlery.”
— “The Policy Game,” pg. 65

Go deeper: Navarro explains his journey from globalist to protectionist — in his own words.