Final exam question for your Negotiations course:
In the last full year reported, 2018, the United States imported $539,675.6M (almost $540B) in goods from China, while exporting $120,148.1M in goods, for a total trade imbalance of $-419,527.4M. You are the President of the United States. Please describe how the imposition of tariffs could be used to rectify this imbalance. You have access to the internet and may search anything you wish. Support your answer.
Instructor's rubric:
F - This trade war is easy to win. The United States imports more from China than China imports from the United States. Therefore, China cannot win a tit-for-tat tariff fight. It will run out of goods targeted for retaliatory tariffs and will have to give in.
D - The question, as presented, is a purely distributive problem, because it only addresses goods imported and exported. In a distributive negotiation the parties are only negotiating over a limited resource and determining how it will be distributed, or divided. In this case, the question is how to distribute the flow of goods through the imposition of tariffs. In that case, because the United States imports more goods than China, imposing tariffs on goods beyond a value of $120,148.1M will force concessions by China.
C - Trade among nations is incredibly complicated. Any negotiation between nations is integrative, for it also involves national defense, relationships among allies and foes, flow of commerce, and more. In this case, while the trade imbalance is large, the questions is not as simple as goods vs. goods. China can respond to tariffs by taking actions other than counter-tariffs. It can also magnify the effect of its own tariffs. If, for example, China imposes tariffs aimed, not at the entire US, but at the new President's political allies, it can injure the President's political power, and therefore his ability to continue the fight. In this case, China might direct tariffs at soy beans (midwest and great plains farmers and their states support the new President), Kentucky Bourbon (the Senate Majority Leader is from Kentucky), and orange juice concentrate (Florida is an important swing state). Because China has a more centralized economy, it can also cancel contracts for purchase of those goods, creating similar injuries. Another option is for China to devalue its currency, reducing the effect of tariffs. This would weaken the President's hand while also hurting national and international markets. Tariffs can be used to address the trade imbalance, but only in a targeted way. In this case, tariffs could be imposed against specific Chinese goods that are in the most egregiously abused sectors, without starting an all-out trade war that would give China the incentive to use its other weapons in response.
B - This is a purely integrative question. International trade in goods is only a small part of the relationship between China and the US. It is important to understand the big picture, and where trade fits into that big picture, before determining the effect of tariffs. In this situation, China is the second-largest economy in the world. It has a history of trade abuse, including theft of intellectual property and currency manipulation. But because it is so large, the relationship with China is important. It is also important to keep in mind that, while the American dollar is the most important currency in the world, and while America has, for decades, been the economic engine that drives the world, there is no guarantee that will continue tomorrow. Additionally, the new President must not only consider the US relationship with China, but its relationship with the rest of the world. For example, if China responds to tariffs by cancelling soy contracts with US farmers and buys, instead, from Russia, not only do US farmers lose money, but also Russia gets hard currency it would not otherwise have, reducing the ability of the US to address Russian actions through sanctions. The result is a weaker US. All of this must be taken into consideration before imposing sanctions. That does not mean they could not be effective, but they must be part of a larger negotiation strategy that considers the big picture, the best deal possible (Target), the minimum acceptable (Reservation Point), the alternative to a tariff fight (BATNA, or Best Alternative to a Negotiated Agreement), and the ZOPA (Zone of Possible Agreement) that comes from determining the overlap of the US Target/Reservation point spread and the anticipated spread between China's Target and Reservation Point. With that in mind, the best way to approach the use of tariffs would be a careful, well thought out plan that addressed the issues of the most concern, intellectual property theft and currency manipulation. The new US President should start by threatening tariffs aimed specifically at intellectual property, with the goal of negotiating new agreements to protect that property.
A - Trump is a moron.