“Trade wars are good, and easy to win.” So declared Donald Trump a few weeks ago, after announcing tariffs on steel and aluminum. Actually, trade wars are rarely good, and not at all easy to win – especially if you have no idea what you’re doing. And boy, do these people not know what they’re doing.
It’s odd, in a way. After all, trade is clearly an issue about which Trump is truly passionate. He tried to kill Obamacare, but to all appearances his main concern was tarnishing his predecessor’s legacy. He wanted a tax cut, but more to score a “win” than because he cared about what was in it. But reducing the trade deficit has been a long-term Trump obsession, so you might expect him to learn something about how world trade works, or at least surround himself with people who do understand the subject.
But he hasn’t. And what he doesn’t know can and will hurt you.
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In the case of steel, here’s what happened: First came the splashy announcement of big tariffs, ostensibly in the name of national security – infuriating U.S. allies, which are the main source of our steel imports. Then came what looks like a climb-down: The administration has exempted Canada, Mexico, the European Union and others from those tariffs.
Was this climb-down a reaction to threats of retaliation, or did the administration not at first realize that the tariffs would mainly hit our allies? Either way, Trump may have gotten the worst of both worlds: angering countries that should be our friends and establishing a reputation as an untrustworthy ally and trading partner, without even doing much for the industry he was supposedly trying to help.
Now comes Trumptrade II, the China Syndrome. On Thursday the administration announced that it would levy tariffs on a number of Chinese goods, with the specifics to be detailed later. How will this one work out?
Let’s be clear: When it comes to the global economic order, China is in fact a bad citizen. In particular, it plays fast and loose on intellectual property, in effect ripping off technologies and ideas developed elsewhere. It also subsidizes some industries, including steel, contributing to world excess capacity.
But while his coterie mentions these issues, Trump seems fixated on the U.S. trade deficit with China, which he keeps saying is $500 billion. (It’s actually $375 billion, but who’s counting?)
What’s wrong with this fixation?
First of all, much of that big deficit is a statistical illusion. China is, as some put it, the Great Assembler: Many Chinese exports are actually put together from parts produced elsewhere, especially South Korea and Japan. The classic example is the iPhone, which is “made in China” but in which Chinese labor and capital account for only a few percent of the final price.
That’s an extreme example, but part of a broader pattern: Much of the apparent U.S. trade deficit with China – probably almost half – is really a deficit with the countries that sell components to Chinese industry (and with which China runs deficits). This in turn has two implications: The United States has much less trade leverage over China than Trump imagines, and a trade war with “China” will anger a wider group of countries, some of them close allies.
More important, China’s overall trade surplus is not currently a major problem either for the United States or the world as a whole.
I use the word “currently” advisedly. There was a time, not that long ago, when the U.S. had high unemployment and China, by keeping its currency undervalued and running big trade surpluses, made that unemployment problem worse. And at the time I was calling for the U.S. to play hardball on the issue.
But that was then. Chinese trade surpluses have come way down; meanwhile, the U.S. no longer has high unemployment. Trump may think that our trade deficit with China means that it’s winning and we’re losing, but it just ain’t so. Chinese trade – as opposed to other forms of Chinese malpractice – is the wrong issue to get worked up over in the world of 2018.
And here’s the thing: By bumbling into a trade war, Trump undermines our ability to do anything about the real issues. If you want to pressure China into respecting intellectual property, you need to assemble a coalition of nations hurt by Chinese ripoffs – that is, other advanced countries, like Japan, South Korea and European nations. Yet Trump is systematically alienating those countries, with things like his on-again-off-again steel tariff and his threat to put tariffs on goods that, while assembled in China, are mainly produced elsewhere.
All in all, Trump’s trade policy is quickly turning into an object lesson in the wages of ignorance. By refusing to do its homework, the Trump team is managing to lose friends while failing to influence people.
The truth is that trade wars are bad, and almost everyone ends up losing economically. If anyone “wins,” it will be nations that gain geopolitical influence because the U.S. is squandering its own reputation. And that means that to the extent that anyone emerges as a victor from the Trump trade war, it will be … China.