Losses of War


The current trade war with China is so ill-conceived and damaging to the US that one hardly knows where to start.

As one point of departure, it’s worth pointing out that the rhetoric around the trade war sounds like the kind of propaganda campaign used to pump up public support for a real war.  It’s all about “winning” and vilification of the Chinese, as if we’re going to knock them down, so that they’ll never threaten our dominance again.

Given that rhetoric it’s worth pointing out a few basic facts:

– China has been overall good for the American economy.   Much of Chinese manufacture is done for American supply chains.  Low prices and high quality of Chinese exports have helped American companies to sell value-add products worldwide, and has also benefited American consumers.  American businesses, with few exceptions, are not pushing for the tariffs.

– There is of course no question about the decline in good, well-paying jobs for people without specific skills.  The Chinese have contributed to that by making good, cheap stuff, in part through undervaluing their currency.   They perfected outsourcing from spec to such a degree that they have made themselves suppliers of choice, leading to declines in manufacturing jobs in the US. While all of that is true, it is also true that they are scapegoats as much as perpetrators for the consequences.   The Chinese are not the source of inequality in the US—we did it to ourselves.  And that, as least as much as the Chinese, is the source of the pain frequently blamed on globalization.

– The rhetoric around the trade war is remarkably vague over exactly who or what is being defended.  When the subject is the deficit, that makes it sound like the Chinese are stealing from our economy.  But businesses are not tariff supporters, and the deficit is just plain not measuring the right things.  The iPhone is a good example.  It is a fantastically profitable product for Apple—sold at 300% markup over the imported hardware–but it counts as a big loss for the deficit, because the profits are declared in Ireland and Luxemburg for tax purposes.

So maybe we’re doing it for employment.  But the same people who are pushing this are fighting unions, so it pays to look closer.  There’s no guarantee that the tariff-protection will be positive for jobs, particularly good jobs.  Tariffs are a tax, and a very expensive and unsure way to protect a few jobs while putting many more at risk.  To emphasize this point, it should be noted that the new tariffs on China are much like the previous steel tariffs in that they are assessed on basic commodities rather than finished goods—which means that they put all businesses that make the finished goods at risk.   This is obvious in the case of steel, but many of the new tariffs affect hardware which American companies use as platforms for their software—as in the iPhone example.  So the result is the same as for steel.

– Finally the specific evils attributed to the Chinese—theft of intellectual property, currency manipulation, unfair competition in China and elsewhere—are resolvable issues, as we will discuss shortly.  The trade wars guarantee that those resolvable issues will now be sacrificed to the raw emotions of war.

To understand where we stand with China, it helps to think a little bit about history.  Over the past twenty years the Chinese economy has come from nowhere to now surpass the US in total volume.  (However, the Chinese population is so large that per capita income is still well-below Mexico.)

The result is that China has transitioned from a country with no capacity to absorb imports and an economy 100% based on export-driven growth—to a country with a middle-class market comparable to the US.  One indication of the transition is the sudden appearance of Chinese tourists everywhere in the West.

That change has many consequences.  For growth, it means that the Chinese are acutely dependent on prosperity in the West for continuing growth of such a huge economy.  For intellectual property, it means that the Chinese have as much to defend as we do.  For imports, it means that the Chinese middle-class has as much interest in western goods as it does in western travel.  And the Chinese are now supporting their currency rather than undervaluing it.

All of that means that—though negotiation with China will certainly not be easy—there is a common interest recognized by all parties.  This is already happening in particular domains, such as financial services.  The world is ready for a historic step—international trade agreements opening China as a major economy and preparing for an era of worldwide growth to the benefit of all parties.  That’s what we are torpedoing with the trade wars, undermining the necessary trust between participants.

Regardless of what we think we’re negotiating, the trade wars mean we’re giving up on access to the biggest economy in the world, growing at 6%, in favor of protected industries at home.  Trade wars are not like real wars in one important respect—we have limited control of the results from the agreement we reach.  People will still have to buy the stuff, and industries have many ways of avoiding a result that no one wants.   An agreement reached (as the Chinese have said) with a knife at the throat is unlikely to bear fruit.  “Winning” in Trump’s sense has little to do with this situation.  And the “it’s no fun winning unless everyone else loses” attitude is a proven recipe for disaster—for us.

If we look toward the future, we are not going to make China go away as a world power—and it’s not to our advantage to do so.  And it’s certainly delusional to think they are just a bunch of cheats whose only talent is in stealing from us.  If we want to be successful, we need to build upon our strengths.  China is a legitimate challenger technologically, and we will fall behind if we don’t recognize what those strengths actually are.  There was one such list of strengths in the NYTimes today;  here we’ve also given a more technology-oriented list.  Many of those items are at-risk in the current anti-science and xenophobic environment.

We should recognize that if we play our cards right, the value of our openness and democratic structures cannot be overestimated, compared with China’s authoritarian regime.   (One can even argue that China’s enormous growth was largely in spite of, rather than because of, its central authority, and that Xi is tightening the screws.)  I’m old enough to remember when we worried about Japan overtaking us, through their disciplined, top-down economy.  There was even a moment where they too had a central technology plan that was going to leave us far behind.   That never happened, and the dynamism of what we represent continued to reinvent itself in the many decades that followed.

And the whole world got richer.  That should be our future also.

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