The real bully in the America-China trade war

My interest in this story – always high – was heightened by the series of tweets issued by Prof. Richard Baldwin against Michael Pettis for saying that trade surplus countries have more to lose from trade wars than trade deficit countries. Frankly, as a matter of principle, it is no different from the statement that expanded trade is win-win for all trading partners. But, as always, the devil is in the details. I thought Richard Baldwin protested too much, making it sound almost personal.

For Prof. Baldwin, these were the offensive remarks:

“For political reasons, China has to respond,” said Michael Pettis, professor of finance at Peking University. “But China risks an escalation. There’s an asymmetry here: trade war is extremely dangerous for surplus countries.” [Link]

Of course, a cursory glance at his tweets suggests that he is like many commentators – viewing things through the prism of Donald Trump rather than through the prism of efficacy or desirability or, preferably, both.  In his tweets, Richard Baldwin drew attention to a NBER paper of his from 2013 on global supply chains and I have dutifully downloaded it. Not read it yet.

But, just as I had not read Baldwin’s paper and hence, reacting to his tweets, it is equally possible that Baldwin had not read Pettis’ previous works and been reacting to a one-line quote in a newspaper article.

In a long paper he wrote for Carnegie Endowment in 2017, Michael Pettis wrote thus:

Some economists argue that even if there are short-term benefits to American producers and workers, over the longer-term trade intervention is harmful for U.S. productivity growth. This argument, which seems more ideological than empirical, is based on standard trade theory in which there is an implicit assumption that any intervention will drive trade performance away from its optimum, so that the United States always gains from the further opening up of its own market, even if trade partners don’t reciprocate. There are at least two problems with this argument.

First, it doesn’t seem to conform to historical precedents, most especially American historical precedents, that suggest trade intervention has indeed been a successful part of many countries’ growth strategies. In fact, with the exception of a few, small trading entrepôts whose needs are radically different from those of larger economies, it is hard to think of a single advanced economy whose period of most rapid growth has not benefitted from, or at least coincided with, trade and industrial policies.

Second, the idea that any U.S. intervention necessarily pushes the U.S. economy from an optimum in which productivity is maximized simply does not make sense. It is easy to design models that show how mercantilist policies in one country, whether intended to be mercantilist or not, can push another country away from its previous equilibrium, so that if the second equilibrium is closer than the first to the optimum, trade policies can clearly improve productivity. And if the second equilibrium is not closer, trade policies just as clearly can improve productivity if they force a return to the first equilibrium. This is just logic.

The claim that trade intervention is always value-destroying or always value-enhancing cannot be other than ideological. We must develop a framework in trade theory that recognizes the conditions under which specific interventionist policies can enhance or undermine long-term growth prospects, after which we must apply that framework to current circumstances. – Link; emphasis mine

The senence above bold-faced, is a reasonable one. Ultimately, answers to predictions derived from eonomic theories have to be empirical/evidence-based.

Before we turn to that, there are two additional observations:

(1) It is true that the United States has undertaken unilateral trade liberalisation because other interests superceded impact on employment in industries affected by imports. Pettis cites this paper and the highlighted sentence is right there in the first page:

Freer trade has its costs. The record suggests that for diplomatic and national security reasons the U.S. government sacrificed thousands of domestic jobs to create employment and prosperity elsewhere in the noncommunist world. [Link]

(2) I seem to have forgotten what I wanted to write as the second point!

In reality, whether the policies help or hurt the nations practising trade restrictions is a tough one to answer. Take this delightful article on the ‘chicken tax’. America imposed tariffs on European trucks. That benefited Detroit. But, did it really benefit America? It is impossible to make out who won and who lost and over what time frame, whether we are evaluating trade liberalisation or trade protection. Further, what is the criteria? No one is sure. Each one sets up a criteria that would help them arrive at a conclusion validating their priors.

More importantly, even if one reached the conclusion, for example, that there was net employment gain to an economy arising out of trade liberalisation, there are doubtless winners and losers. Unless winners can compensate the losers, losers will become implacably opposed to trade liberalisation. That is what is happening to America.

In fact, Pettis makes that insightful point. America has probably grown tired of exporting dollars. Its debt to foreigners is rising. Two, American households have probably reached the end of their limits on borrowing to consume. Third, the losers from free trade in America are now probably more numerically than the winners and winners have not either been able to or willing to compensate the losers. The ‘inequality’ fact is too powerful now to be ignored by politicians.

So, who will win the trade war? Many have said that China is now co-opting the messy American democratic politics in its favour by targeting the products that are made in States that voted Trump. Two calculations here: one is that the American President will be forced to pay heed to electoral calculations since the November mid-term Congressional elections are at play and the second is that his constituencies would pile up pressure on him to withdraw.

But, there are dangers to this strategy. It makes an economic issue overtly political and the other side (American) can become ‘irrational’.

Also, notice two important facts mentioned in the Bloomberg Gadfly article linked just above:

Seven of the trade categories affected relate to beef, which China resumed importing from the U.S. only last year — in minute quantities — after a 14-year ban due to fears of mad cow disease. New 25 percent duties on wheat and corn won’t do much additional damage to a trade that’s minimal given the 65 percent import tariffs that China already charges on those crops. [Link] – Emphasis mine

So, did Trump start the trade war? The answer is a clear NO. John Pomfret thinks that China has lost America:

They noted that, in negotiations with then-President Barack Obama, China’s president Xi had agreed not to turn a series of manmade islands that China had created in the South China Sea into military installations. But then China did just that.

When it came to trade, they pointed out that for decades, China had been forcing American companies to hand over technology to China in exchange for access to the Chinese market. Massive Chinese espionage directly benefited the development of China’s automotive, aircraft, information technology and defense industries. For decades, Shirk noted in an interview, the American business community served as the ballast in the U.S. relationship with China. But after years of such treatment in China, she said, many American firms are “frustrated and disaffected.” [Link]

Note the comment by James Lewis that John Pomfret  cites:

China will not change its behavior absent external pressure, and pushing back against the constant drain from Chinese IP theft is long overdue. [Link]

But, of course, China betrays no nervousness on account of external pressure. A Reuter story is explicitly headlined, “China says it never backs down in the face of threats after trade salvos with U.S.” Clearly, the bully here is China and not America.

A NYT article from 5th April that is headlined, ‘Why China is confident that it can beat Trump in a trade war?’ concedes the following:

Missing in the bluster and the propaganda are the questionable methods that China has adopted to squeeze foreign companies out of key technology markets — and the fact that in the cold-eyed calculus of economics, China is more vulnerable to a trade war than officials admit.

Exports account for a big share of Chinese economic growth. Because the United States buys so much from China, Washington has many more ways to hit Chinese manufacturers. By contrast, the retaliatory tariffs Beijing has proposed already cover more than one-third of what China buys from the United States, leaving it fewer options to strike back. [Link]

Many in America, it seems, would rather see their country lose than see Trump triumph in his confrontation with China on an issue, in which the latter has been the overwhelming culprit for a long time. Just sample some of the headlines in ‘New York Times’, or ‘Financial Times’, for example: ‘America sends mixed signals’; ‘Threat to American jobs’, etc. It is a pity.

Such headlnes dominate notwithstanding this mildly worded FT Edit that calls up on China to do the right thing first.

Ironically, this attitude of the Western elite is one sign that China has understood well and exploited. That they are now more inclined to disregard larger interests for their narrow, ego-driven goals and interests. Surely, a sign of decaying society and civilisation.

They consistently fault Trump for not building an alliance against China. Well, the United States and Europe joined hands to deny China ‘market economy’ status. With respect to trade, Germany is a worse culprit these days than China with its massive trade surplus. In any case, we must remember that the issue is not so much about trade as it is about IP theft and non-compliance with WTO membership conditions on technology transfer, etc.

James Lewis anticipates the argument that Western nations routinely stole technology from each other and so why single out China?

Sometimes you hear the arguments that the United States stole technology in the nineteenth century when it was growing and that China is only doing the same. But these arguments are feeble, and those who make them are feebleminded. In the nineteenth century, it was possible to steal a book, but with digital technologies, you can steal the entire library.

The United States was a net contributor to the world stock of knowledge in the nineteenth century, and its innovations spread to other countries, given the absence of international IP protections.

In the nineteenth century, countries recognized that inadequate protection for IP hurt global economic growth and disincentivized innovation (people invest less in innovation when their work can simply be stolen). In response, they created a series of agreements to protect IP and trade in the international market. China routinely ignores these agreements, subsidizing its own growth at the cost of global innovation. China has become a country that can innovate, but it is unwilling to give up the crutch of economic espionage and will never do so unless it is pressed. [Link]

John Pomfret, in his column in WaPo, had cited the report of the Asia Society on US policy towards China, published last March (March 2017).  From the portions devoted to trade matters:

Since 2008, the business environment in China has become increasingly challenging for foreign enterprises, deeply frustrating executives with the slow pace of economic reform and official favoritism for Chinese stateowned companies and homegrown private-sector companies. As a result, China is consistently ranked far below its peers in terms of regulatory impediments and the ease of doing business.

While there have been some successes in US-China trade talks and enforcement, too many key US objectives remain unmet….

… What is more, WTO cases take years to adjudicate, resulting in critical and unfair competitive lead times for fast-growing (and often government-supported) firms. The end result is lost market opportunities for US companies. [Link]

Now, we know why China wants to go back to WTO. It would eat up precious time. In any case, if China respected WTO, it would have honoured the commitments made to the world trade body when it joined WTO.

In the final analysis, people like Richard Baldwin and the media in America and elsewhere that is happy to take potshots at President Trump and revel in his troubles – political or otherwise do not have any alternatives to offer.

Just sample what Ash Carter has to say in the interview that ‘Politico’ had with him. He was the U.S. Defence Secretary in the Obama administration:

I believe that we have no adequate economic playbook for competition with China. Last time we competed with or had a long difficult strategic relationship with a large communist country was during the Cold War, and our approach to that was simply not to trade with them. Now, one of our largest trading partners is in fact a communist country, and I don’t think that the economists have given us much of a playbook to protect our companies and our people. [Link]

Indeed, the interview itself is proof, if it were needed, that America and President Trump have to battle their own internal adversaries in their battle versus China. More than half the interview was dedicated to Russia, another 20% to 25% was dedicated to somehow getting Ash Carter to saying something negative about his successor, about the new administration and another 20% to 25% about North Korea. The comment on China was, kind of a suo moto comment by Ash Carter himself! So much for the priorities of the elites in America.

It is really Trump vs. China with Western elites on its side.

[postscript: We should remember that American tariffs do not take effect until June and China’s countermeasures will kick in only after that.]

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3 thoughts on “The real bully in the America-China trade war

  1. One factor is China has no option.

    It’s installed capacity is more than global demand in many goods. To run this excess capacity it has employed enormous manpower. These workers are being transformed from poor to middle income labor. At this point if this fails China will have to push middle-income labor into poverty – a social landmine. They have to find some way to keep this population employed – getting up and turning out for work. It is like a poker players’ bluff. US will be hurting China. It will feel the heat but it will survive. US is more resilient than world understands.

    Like

  2. The left liberal response in India to Pakistan’s behaviour and that of American elite seems to be the same – decaying civilisation is the right diagnosis

    Like

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