Trump’s Trade War With China

I was distressed to hear Senator Chuck Schumer, Minority Leader in the Senate, encourage President Trump to continue his trade war with China. I had thought Schumer was smart and sincere. It makes me wonder if the Democrats are any more fit to govern than the Republicans. I share his and Trump’s desire to hold China accountable for unfair trade practices. But in his heart-of-hearts Schumer must know that Trump’s is an insane strategy for achieving that objective.

China will never meet Trump’s demands. The Chinese Communist Party can’t be seen by its domestic audience as caving to Trump for the same kinds of political reasons that are driving this administration to attack in the first place. And that government is not about to restructure its entire economic model to accommodate the whims of a buffoon like the current US President. They can just wait him out. They’re playing the long game. They know that no one wins in a trade war. But they also know that while the world’s economy, and their own, may suffer in the near term, their political structure allows them to outlast Trump and the American political climate. They can and will eventually cause the Americans to cave.

The really sad part of Trump’s international brinkmanship in the meantime though is that the people who bear the brunt of the financial loss are working class American families. While the President is touting the income rolling into the US treasury from the tariffs, they are actually being paid by American consumers. Probably unplanned, but it’s another way Trump is shifting more federal tax burden from the wealthy to the middle class.

Internationally respected economists currently estimate that the already announced tariffs will cost the average American family more than $450 per year, not including loss of a few thousand jobs as the economy slows down in response. If Trump follows through with more tariffs as he has promised, the cost may be $800 per family and many thousands more jobs. Of course those numbers don’t consider the real potential impact of Trump’s strategy causing a broader international recession. When the two largest economies in the world fight, every other country gets bruised as well.

I suppose it’s remotely possible that Schumer is using reverse psychology, expecting Trump to do the opposite of what he, Schumer, seems to be supporting, but I doubt that. More likely, Democratic leaders have given little thought to the folly of Trump’s zero sum view of trade. Besides, historically Democrats have been trade protectionists themselves. Regardless, everyday Americans are paying the price for American political weakness and stupidity.

International trade is not a zero sum game to start with. One country benefiting from international trade does not mean some other country must lose. The world’s economic pie is not a fixed size nor does it grow at a fixed rate. Increasing tariffs makes the pie smaller and/or makes it grow more slowly. That is the current result of the Trump strategy which is being endorsed by Schumer. Reducing tariffs makes the pie larger and grow faster. That is the rational approach to all international trading relationships. 

Nations do indeed need to address associated sector unemployment, work force disruption issues, and the social trauma of its citizens readapting to the migration of trading patterns. Similarly they certainly have strategic interests in protecting some domestic industries for national security reasons, but that should be used sparingly and never for tactical market advantage as the Trump administration seems to be doing.

Relative to changing China’s behavior, I doubt Democrats have considered what alternative to Trump’s approach could effectively hold China accountable for bad behavior. That requires planned strategic thought and action.

When contemplating trade action against China, it is critical to face the challenge realistically. With a major diplomatic initiative (that isn’t Trump’s strong suit) we could begin to fix the problem yet this year. But don’t hold you breath!  And don’t expect to level the economic playing field anytime soon if/or when we do get around to addressing it rationally. It may take a decade, or a generation, to find equilibrium. And that is barring a catastrophe like a world war or other worldwide cataclysmic event. It has taken 4 decades of lack of Western attention for the Chinese to develop the economic trading structure they have now and it won’t change without lots of long term pressure from most of its trading partners.

So what to do??

The US is not the only nation being mistreated by China’s trading behavior. We need to align ourselves diplomatically with our allies and identify a common set of abuses all allies are experiencing with China’s trading posture. That group should include at least the majority of the three North American trading partners, the major EU countries, as well as Japan, South Korea, and Australia. These allies should collectively define the requirements of a fair trading relationship with China, identify a reasonable timeframe for implementation of such fair trading practices, identify milestones to measure progress, and specify collective sanctions for non-compliance.

The vehicle for implementing such a collective strategy should be the WTO.  That is what it was set up for. China joined the WTO and ostensibly accepted the rules but has never abided by them. And it has never been held fully accountable. It’s time for that accountability, but it only works if the US leads a coalition of countries with similar grievances. The Trump bilateral approach will never work because the US economy, big as it is, does not have the independent capacity, and the US government doesn’t have the political will, to force a total restructure of China’s economic model. That is what it will take to gain a fair trading arrangement. China will only change if all its major trading partners band together. China would not be able to ignore that kind of collective pressure. It would be forced to negotiate new trading relationships if given reasonable time to adapt (think several years for conversion). Any other approach will fail to meet the objective or lead to potentially severe international instability or even violent confrontations.

I do not discount that in the current US/China tit-for-tat there will be some kind of announced “meeting of the minds” by the two sides. There may be joint public proclamations of resolved differences, press conferences, pictures, handshaking, maybe even a document signing ceremony. But if such events do occur, they will all be political theater so both sides can save face. When the TV cameras are turned off and the media moves on, nothing material will occur.

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