The impending trade war with China has already generated the drumbeat of preparations for a real war: “cheating”, “usurping”, “impoverishing”, “existential threat”, … Of course with Trump you never know what’s just posturing, given how quickly the North Korean “rocket man” became “very honorable”. So there’s hope that the Chinese trade war will somehow wind down.
But even if it does, we have to recognize there is now a real, ongoing threat to international prosperity. Trump is attacking the system of fair trade that underlies the world’s rise in prosperity since the second world war. His notion of sovereignty means he refuses to acknowledge any limits (international or constitutional) on his ability to use trade as a weapon. That is new, and if it wins we all lose.
We start by quoting a position from the Business Roundtable of corporate CEO’s on the trade negotiations with China.
“During negotiations with China, the Administration’s objective should be to secure lasting economic reforms that will curtail China’s unfair trade practices and allow U.S. businesses to compete on a level playing field. Negotiations that focus on temporarily reducing the trade deficit would make this a wasted effort. Working in coordination with our allies, the U.S. should set deadlines on those economic reforms and outline the consequences China would face if reforms aren’t made. This approach will provide an opportunity for the Chinese to produce results and for the Administration to protect the interests of U.S. businesses and workers effectively.”
The important thing about the quote is that it sees the problems with China within the context of internationally-defined fair trade. And it emphasizes the importance of working with our allies to make the system successful. That’s as opposed to “reducing the trade deficit”—which seems to be at the top of the administration’s list both for China and for Mexico, Canada, and others. (This is despite the fact that our balance of payments deficit with China has decreased greatly from peak, is not a financial problem, and is not the reason for the stresses on the American middle class.)
It is important to recognize that regulating deficits is worse than “wasted effort”; it actually subverts the real objectives of fair trade. Not only does it make China responsible for something it doesn’t completely control (we’re the ones pumping up the federal deficit), it is a rule we would never accept for ourselves. The whole idea of fair trade is that it should be a system of known rules by which everyone can play; here we’re just imposing whatever we think we can get away with.
The quote is of course coming from businessmen, but the issue is one for everyone. The downsides of international trade exist, but most cases the problems are of our own doing. Further the most effective way to impose standards for labor and environmental issues is to work through the definition of fair trade.
We have already sinned against WTO fair trade once, by invoking “national security” as a blanket excuse for unilateral tariffs. We are going beyond that here by setting rules for others we have no intention ever to obey.
The second example is the administration’s other major issue in the Chinese negotiations: “Made in China 2025”.
For high-tech, China today is primarily building products for western companies. Generally most of the intellectual content and profit goes to the parent company (e.g. Apple) as the top of the heap. Unsurprisingly, China would like to move up the value chain to get more of the benefit. Also, China today sources most of the IC chips in the products it builds from other countries—a fact that China views as a risk to its success. Made in China is the plan to move up.
Made in China 2025 covers just about any technical field you can think of (except AI, with its own plan), and the government expects to spend money to make progress happen. As an idea, this isn’t terribly different from what is going on in many other countries (see here for a summary of national spending on AI). But the Trump administration has decided that the whole idea of Chinese government involvement in technological advancement is suspect.
While Mnuchin and others use the language of fair trade to attack the Chinese plan, those attacks have lacked much specificity. And in fact if the administration is worried about abuse, they could take the whole affair to the WTO. What makes the case even weirder is that, as we know, the Trump administration has proposed severe cuts in US government funding for research in essentially all fields, claiming the private sector does it better.
So one has to conclude that what is going on is trade warfare pure and simple. The Trump people (with their zero-sum view of the world) are afraid the Chinese might catch up, and their goals is to throw as many nails on the road as possible to slow them down. That’s what passes for economic policy.
This is arrogant foolhardiness of the sort the world hasn’t seen since the geniuses of the Iraq war. As many have pointed out, the companies most hurt will be American. And the message for the rest of the world is clear. The US, with quite a lot to gain, has decided it doesn’t need free trade.
The end here, as in our last piece on trade, is constitutional. It becomes more urgent each time.
Normally, without the seldom-used national security ploy, tariffs are a matter for Congress. When Trump got away with it on the aluminum and steel tariffs it was a scary first step. We’re now fighting a whole trade war with China, and no one is questioning that it can be done purely by fiat.
So we no longer need to argue about whether Trump will or won’t try to make himself a dictator. Unless something happens, he is already in position to wreck our economy all by himself.