Why America is losing the trade war with China
Gordon Chang has a new piece in the WSJ that can only be described as slightly hysterical:
Yet for more than a decade, President Xi has been dropping audacious hints that China is the world’s only sovereign state.
Tyler Cowen provides another example, from the same article:
From the WSJ Op-Ed:
“Mr. Trump is the only thing that stands between us and a world dominated by China.”
From the author’s bio:
“Mr. Chang is author of “The Coming Collapse of China.””
The Amazon reviews of Chang’s book don’t sound promising:
Be aware that this book was written 20 years ago, is over priced, and everything it predicts would happen has not happened.
I have not read the book, but I do know that China did not collapse after the book was published in 2001. So at least the title is wrong.
If we are counting on Trump to stop China, then we are in big trouble:
President Donald Trump said China may wait until after the 2020 U.S. presidential election to sign a trade agreement because Beijing would prefer to reach a deal with a Democrat.
“I think that China will probably say, ‘let’s wait,’” Trump told reporters in the Oval Office on Friday.
The Chinese have basically been told that Trump’s willing to wait until after the 2020 election. China now has no incentive to negotiate with a US President that the betting markets indicate has only a 50% chance of being re-elected.
I’ve been arguing that China’s in a much stronger negotiating position than has been widely assumed, and now that claim seems to be confirmed by events. Trump is worried about being re-elected in 2020, while Xi’s position is secure. Trump’s advisors are telling him that an all out trade war with China risks pushing the US into a recession (and stock market crash) right before the election. Xi has no more incentive to negotiate with Trump than does North Korea’s Kim Jong Un:
Trump is letting Kim Jong Un do almost anything he wants
Trump’s defenders will insist that the trade war is a sideshow, and the actual goal is to force China to become more like a western country. In fact, the trade war is doing the exact opposite:
Within China, President Xi Jinping has successfully portrayed the trade war as a US attempt to inflict national humiliation. His faction within the Communist party gains legitimacy by not going soft on the US.
The faction of economic liberals has been largely silenced. This group is represented by the princelings and elites, many of them educated in the US, who fostered China’s integration into the global system over the past three decades under former Chinese premier Zhu Rongji, and his protégé vice-president Wang Qishan.
This is what happens when we elect someone with no knowledge of foreign affairs. Trump’s trade war with China may end up being an even worse disaster than Bush’s ill-fated adventure in Iraq. Let’s hope the Dems win in 2020. They are also skeptical of China, but they aren’t likely to choose advisors who are fanatically obsessed with humiliating the world’s largest economy.
PS. I hope I’m wrong and that a trade deal is signed very soon. But the signs are not good.
PPS. We currently live in a world dominated by the US. That has produced some very good things since 1945, but it is an increasingly ugly sight.
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28. July 2019 at 09:05
You’re attacking straw men here. China has never had any attention of altering how they do business. A meaningful “deal” – under Trump or anyone else – was always a unicorn.
The question is, what do you do, given that reality? Continue to accommodate a murderous, authoritarian regime and its centrally-planned economy that is badly distorting capital allocation globally? Or decouple in the hopes that the regime may collapse, or at the very least you’re not acting in furtherance of its aims?
The only sensible answer is you decouple. Now, obviously that’s not easy or economically painless. But be honest – 18 months ago would you have thought Trump could have tariffed $250bn at 25% w/ no discernible economic effect and markets roaring?
Here’s the decoupling scorecard:
Trump: tariffs on $250bn, and now he’s trading back Huawei’s handset business (NOT 5G) for Chinese Ag purchases. So he’s basically gotten the tariffs and the important part of Huawei for “free” – ie absent Chinese retaliation.
Xi: inexorable economic slowdown and intensifying political problems in Hong Kong. Badly losing the global PR battle and facing increasing scrutiny over Xinjiang.
28. July 2019 at 09:37
I guess Obama and H. Clinton had a lot of “knowledge of foreign affairs”, so they were able to successfully deal with China and particularly Russia. Oh, wait…
Scott, your anti-Trump texts are embarrassing. It’s OK, I will just have to wait for wait for TDS to take its course.
28. July 2019 at 09:50
“Trump’s trade war with China may end up being an even worse disaster than Bush’s ill-fated adventure in Iraq.”
Quit being dumb.
“but they aren’t likely to choose advisors who are fanatically obsessed with humiliating the world’s largest economy.”
Really, Sumner? Really? Really? You really think the Dems are less protectionist than the GOP? All advisors (especially Dem ones) are fanatically obsessed with humiliating the world’s sixth largest economy. Why not the largest?
Glad we are agreed.
28. July 2019 at 09:52
Not really meaningful so far.
28. July 2019 at 10:48
“So he’s basically gotten the tariffs and the important part of Huawei for “free” ”
What could this possibly mean? The tariffs are paid ultimately by US consumers.
28. July 2019 at 11:41
Brian, It’s amusing how people will spin Trump’s failure to win his trade war. First we are told that we must force China to change. Then we are told that China will never change, even though China has changed more in the past 40 years than any other country in the world. Since China will never change, we must make the Chinese suffer. What could go wrong!
It’s also apparent that you know little about China. It’s not a centrally planned economy, indeed it wasn’t even a centrally planned economy under Mao (it was far worse). It is a very authoritarian country, as you say, but US allies like Saudi Arabia are much more “murderous”. Should we boycott Saudi oil?
You said:
“So he’s basically gotten the tariffs and the important part of Huawei for “free” – ie absent Chinese retaliation.”
Free? So you agree with Trump that the Chinese are paying the tariffs? Not US consumers?
Joseph, Yes, Obama’s policy toward China was far more successful than Trump’s. We didn’t have to bail out farmers for the failed tariff policy under Obama.
28. July 2019 at 15:57
Many of the issues raised in this post are too large to have a definitive answer.
I think China is a Sovereign Nation and its internal developments or retardation are largely the product of policies made by the Communist Party of China in Beijing and not Washington DC.
Wisely or unwisely, President Trump has placed tariffs on a portion of China’s export of products to the United States.
The Trump tariffs may open up some mainland China markets to American exports, but probably not.
However, a good reason for tariffs is not in any way to treat China as an adversary. The IMF has repeatedly advised the US to reduce its current account trade deficits. The IMF posits that such chronic and large trade deficits lead to bloated asset values inside the US, due to the artificial inflows of capital. This leads to a Hyman Minsky type moment, as was seen in 2008.
Well, that is what the IMF says.
The IMF advises that the US open up foreign markets for export, and lower labor costs.
It is interesting to ponder the viewpoint of Michael Pettis, who posits that Germany became an export powerhouse after increasing the share of income that went to capital in relation to labor.
It makes sense that with globalization, multinationals will seek to produce in those regions in which flavor share of income is lowest.
28. July 2019 at 18:10
It is not clear the Democrats would do better in relations with the People’s Republic, since they tend to be a bit keener on what might be called moral imperialism.
The Beijing regime fears the US pushing democracy internationally. Ironically, the more isolationist the US becomes, the lower that point of fundamental tension.
Tanner Greer is an excellent source on contemporary China, see this for example:
http://scholars-stage.blogspot.com/2019/07/two-case-studies-in-communist-insecurity.html
“The concerns Xi Jinping and his clique have about the ideological integrity of the Chinese socialist system and the threat Western values and institutions pose to them are not comic curiosities. They are the foundation for China’s relationship with the United States. We cannot get China policy right if we do not take the fears of these men seriously.”
28. July 2019 at 19:58
Scott,
This is a bit off-topic, but wondered if you wanted to comment:
https://blogs.cfainstitute.org/investor/2018/03/13/red-states-blue-states-two-economies-one-nation/
It’s about red states having significantly lower AHDI’s than blue states, on average, and a possible connection between desperation in these states and a willingness to vote for people like Trump.
28. July 2019 at 20:00
Obama’s TPP approach was, while imperfect, a vastly superioir approach to policy with China. We have the WTO and allies in the world. We should be using those to address China’s protectionism. Trump is too stupid to use mechanisms established by the US to favor the US approach to trade.
28. July 2019 at 23:34
“Trump’s trade war with China may end up being an even worse disaster than Bush’s ill-fated adventure in Iraq.”
It’s only July, but this is the dumbest thing by far Scott has said this year…or in 2018….or in 2017….or in…
29. July 2019 at 05:52
Heed the cow path. Stick to your knitting. Otherwise this blog is despoiled with political fights and the like. It’s amply reduced since you started in quality.
29. July 2019 at 07:07
Of course, the position of the WSJ editorial page is that China’s version of state capitalism will cause the collapse of China’s economy any day now and that China’s version of state capitalism gives China an unfair advantage and must be changed. A foolish consistency is the hobgoblin of little minds. Does this mean a stupid inconsistency reflects large minds? Sumner? A consistency of a large mind.
29. July 2019 at 07:58
Lorenzo, You said:
“The Beijing regime fears the US pushing democracy internationally. Ironically, the more isolationist the US becomes, the lower that point of fundamental tension.”
I agree. And I’d like to reduce tension.
Michael, Don’t forget that lots of booming states like Texas and Florida voted for Trump, and the Trump voters tended to be the more affluent residents of those states. So it’s more complicated than that.
I agree about TPP.
Todd, I suppose 1940 claims about our oil embargo of Japan would have seemed similarly unhinged. And I did say “may”.
Agrippa, Yes, the quality has clearly suffered. But a better solution is for readers to be selective as to what posts they read.
And at least I don’t print statements like:
“Yet for more than a decade, President Xi has been dropping audacious hints that China is the world’s only sovereign state.”
Or that only Trump can save us.
So at least I haven’t fallen to the level of the WSJ.
Why don’t you send your comments to the WSJ, telling them to shape up? You’ve already made your point here.
29. July 2019 at 08:05
I thought it was funny when TC posted the bit about “a world dominated by” and “the coming collapse of,” but now I see it makes a little more sense, as one is Chang’s new view and the other is (apparently) his old view.
Chang’s mistake in the first place was to not understand the basis of his own project. What he should have done was write a book called “The Coming Devastation of the World Economy by China” where he made both arguments, that China would harm the world economy by collapsing or becoming enfeebled, and also by becoming too powerful.
After all, the market (readers) for his book would probably agree with both arguments, and probably wouldn’t even notice a contradiction. They’d see him as hitting his bird on both wings.
It’s like if you write a book called “How Monetary Policy Ruins the Economy,” you want to make both the argument that monetary policy is impotent, “pushing on a string,” and at the same time monetary policy is going to cause hyperinflation. You should never make one of these arguments without the other.
(This lesson courtesy of this blog, of course).
I guess another possibility in cases like this would be to write two books – if you wrote the first one cleverly, then you’d only have to make a few changes to it and you’d have the second one. It might be tricky to get both versions published under the same name, but then if you can get one published, why not both?
29. July 2019 at 08:13
@Brian McCarthy,
China wants to get rid of the low-tech manufacturing and climb the value chain. If decoupling means moving low-tech manufacturing out of China, maybe that’s exactly what the Chinese wish for.
Time is on China’s side, because of the pending trade deals such as the RCEP and The EU-China Investment Treaty
29. July 2019 at 09:12
Scott, are you sure it is all about money won or lost by the US today? And not about say Taiwan or Xi becoming a dictator?
And I am not surprised you chose to completely ignore Russian success of super-professional Obama administration. 🙂
29. July 2019 at 13:40
I think everyone is overstating this trade war and its implications. First of all, both countries don’t have a large share of GDP allocated to trade with the other, so the impact isn’t very big on the economic growth metrics.
Second of all, the geopolitical implications are even less. Remember, the US lost a war in Vietnam in the 60s, despite being above 50% of the global economy. If we couldn’t hurt the Vietnamese, then what is China going to do in an even more globalized world, where the US will be significantly closer to China than Vietnam was to the US at the time. Nothing will happen, I think the world will become very boring, in terms of geopolitics.
Although, Scott I think you are underestimating the US’s stake vs China’s. The US is already a old, rich nation, facing demographic decline due to its ability to have its citizens lead long productive lifes(less birthrates, older workforce). On the other hand, China is still far from its potential, having 5 times the US workforce, and a significantly younger workforce. Yet it is already in the process of a dramatic slowdown. I think Xi Jinping will seek a quick resolution, or focus on beefing up reforms in China to withstand Trump’s attacks.
31. July 2019 at 07:02
The author of this blog is a typical fact free America hating liberal.
America is WINNING re: China not by a trade war, but by making trade more fair between the two nations.
For years China put high tariffs, import bans, and bans on foreign investment.
Now America is making the playing field more even, and NOW it is a ‘trade war’?
America was being attacked by unfair trade, that’s how China was built from mud in the first place.
China has lost 8 million jobs, and America has gained 5-6 million jobs, since Trump was elected.
If you call making the playing field more even (still unfair today, China just balked on their agreement to buy agricultural product from us) a ‘trade war’, then America is winning it.
China wants gropy pedo Joe Biden to become President so they can continue to loot us with bad trade deals. Maybe they can give his son another billion dollar slush fund bribe for political favors again.
31. July 2019 at 12:45
“Let’s hope the Dems win in 2020”
So that there can be cities like Baltimore everywhere!
https://i.imgur.com/cK1jxD4.png
31. July 2019 at 16:57
It’s hard to see a democratic state like US ever win a trade war in the context everyone is talking about. (However, I never thought US would wage a trade war, let alone a sustained one but I was wrong.) In the common context, “winning” requires an entity (government) to place sustained taxes on one’s own population such that their lives become worse and they become poorer and more miserable. An authoritarian state like China could pull it off because its history is a unique bland of rabid nationalism and poverty and its government can command its citizens for political purposes with fewer political repercussions. (Scott had a post earlier that pointed out the same issues.) For the average Chinese citizen, it would be better if their government “lost” the trade war, i.e. removed tariffs, continued to reform the economy via privitaziation, continued to strengthen independent institutions such as an independent central bank, reformed judiciary and an independent NDRC to drive economic policy and continued to expand trade all around the world. However, the more likely outcome is a more nationalistic Chinese government continues the tariffs and might even reverse some of the previous reforms for political purposes. This is the worst outcome for the planet and could affect lives of billions of people both within China and around the world.
20. August 2019 at 06:16
Obama’s TPP approach was the absolutely correct way to handle China. It hurt him with some on the left, but TPP was brilliant.
It basically pitted every Chinese neighbor (as well as major China raw material supplier, Australia) against China. While ensuring that they agreed on an IP regime that would have prevented any of those neighbors from becoming China 2.0.
The goal would have been to get a coalition of the neighbors to play the role China currently does in a decade or so, while them ensuring they would both protect American IP, and not close off their markets from the US the way China does.
In the worst case, the threat of this happening would have encouraged reforms in China far quicker because it would have allowed China to drive the reforms, and therefore have allowed Xi to promote the changes as “economic reform for a developed nation”, instead of as kowtowing to Trump.
And there’s a guy complaining about Obama’s approach to Russia, which is hilarious, considering Trump’s approach to Russia can be summed up in 2 words “Yes Sir”.