Saturday, December 3, 2016

Does the U.S. Really Win a Trade War with China?

Listening to recent political rhetoric about how China has raped American jobs and taken advantage of our lax trade policies, combined with promises to restore order, balance and American jobs to the contrary, I had to ask, “What would such a battle really look like?” There should be no question that a number of middle-aged and older semi-skilled workers, that mostly-white, undereducated and angry rust belt segment that defined Donald Trump’s presidential victory, have been displaced with no real vector to restore their once solid earning power. Is Mr. Trump’s anti-global-trade platform likely to restore those jobs and grow American economy?
If the United States were to erect trade barriers against Chinese imports, there is little doubt that our consumer prices would like go up significantly in direct proportion to those tariffs. But would our export-driven businesses still grow, creating more jobs for the displaced? And how would China itself be impacted? China is today the poster-country for increased globalization even as the United States goes in the opposite direction. PRC representatives at the recent Asia Pacific Economic Cooperation summit meeting in Peru clearly stepped into the global economic power void as the United States, under Donald Trump, promises to turn inward in what is called an “America First” strategy. The world, now planning to operate in a world of Trump-initiated trade barriers, is searching for a new global economic leader.
Eduardo Porter writing for the November 22nd New York Times explains: [Before] such U.S. policies are implemented, China seems to be gaining the upper hand. “No such war has begun, yet it seems clear that the United States has already lost. China has been steadily gaining in the global economic system.
Waging war against globalization, America is making China’s case. Eswar Prasad, a former head of the Chinese division at the International Monetary Fund, argues that ‘over the long term China comes out a winner no matter what.’
China’s economy would surely suffer if the United States were to impose a 45 percent tariff on nearly $500 billion worth of Chinese imports. The United States absorbs only 16 percent of Chinese exports, but it is China’s healthiest export market. Fears of American protectionism are already stoking capital flight from China.
But China might be better placed than the United States to take the blow. And it would certainly counterpunch. An editorial in China’s Global Times, a Communist Party mouthpiece, is probably not far off in its warning that American action would mean: ‘A batch of Boeing orders will be replaced by Airbus. U.S. auto and iPhone sales in China will suffer a setback, and U.S. soybean and maize imports will be halted.’
China has several ways to retaliate. It could bar state-owned companies from doing business with American businesses. It could limit access to essential commodities, as it did in response to a fishing dispute with Japan by stopping exports of so-called rare earth minerals essential to the electronics industry. It could soft-pedal efforts to combat the piracy of American patents and copyrights.
Some of the United States’ most successful companies would be in for a rough ride. Most of Apple’s iPhones, for example, are assembled in China. The assembly costs, though, account for less than 4 percent of the value added of the device. That means China could force a halt in iPhone production at little cost to itself, while Apple would face a deeply disruptive, expensive effort to shift production elsewhere. Building it from scratch in the United States is nearly impossible.
How long could American resolve hold? An analysis by the pro-trade Peterson Institute for International Economics concluded that a full-blown trade war with China and Mexico would push unemployment in the United States to nearly 9 percent in 2020, from 4.9 percent today. That would not improve the economic outlook for millions of working-class Americans in whose name Mr. Trump proposed this fight.
And that may not even be the worst part. Circling the wagons around the American border plays directly into China’s hands in other ways.
Washington would be cast as the villain in the fight. No matter how many tricks the Chinese government might deploy against American interests, it would remain the victim in the eyes of many nations, a champion for the cause of open rules-based trade.
Even if Mr. Trump is just bluffing, as many of his allies say, to gain leverage in some future negotiation, much of the damage has been done. His bluster has changed the perception of the role the United States will play in the world… In the face of a turn toward populist nationalism in other rich countries — like Britain and France — China has emerged in the unlikely role of defender of globalized capitalism…
And if Washington’s actions against China start to disrupt Asia’s supply chains, the United States could quickly become the region’s economic pariah… The question is, to what purpose? It can’t simply be about stopping currency manipulation. That’s an outdated fear. Instead of working to lower the value of its currency to improve its exports, China has spent about $1 trillion lately to prop up the value of the renminbi in the face of capital flight. If it stopped, the currency would drop like a stone, enhancing China’s trade competitiveness.
Moreover, slapping trade barriers against China would do little to narrow the American trade deficit. American companies building things in China wouldn’t bring much manufacturing home; in most cases they would go to some other country with cheap labor. And to the extent they did ‘reshore’ production, most of it would be highly automated, employing few additional Americans.
‘It does not make economic sense for Trump to want to balance trade with China,’ said Derek Scissors, a China specialist at the conservative American Enterprise Institute. ‘Balanced trade doesn’t bring back jobs.’
Initially, Mr. Trump might look like a winner, resolute in his defense of the working class. But any increase in popularity would be unlikely to last as the consequences started to become apparent.
Washington has already been playing a relatively weak hand trying to contain China’s influence. China has skillfully deployed investments to win over countries from Africa to Latin America, broadening its network of influence. Its proposed Asian infrastructure bank proceeded, despite opposition from the Obama administration, after Britain and other American allies jumped on board.
‘China is becoming a leading member of the international community,’ Mr. Prasad wrote in his new book ‘Gaining Currency,’ but not, ‘as the West prefers, by being co-opted into existing institutions under the current rules of the game.’ Instead, China is ‘co-opting other countries into the system of rules it wants to dictate.’  
Indeed as China circles Asian trade partners with potential replacement economic treaties and alliances, excluding the United States that will withdraw from the Trans-Pacific Partnership trade accord the instant Donald Trump takes office, China is grinning like a Cheshire cat: “Last April, Defense Secretary Ash Carter said, ‘In terms of our rebalance in the broadest sense, passing TPP is as important to me as another aircraft carrier ... It would deepen our alliances and partnerships abroad and underscore our lasting commitment to the Asia-Pacific ... And it would help us promote a global order that reflects both our interests and our values.’”, November 24th.  
That lots of American businesses – from the IP and the entertainment sectors,  e-commerce and businesses that deal in genetically modified organisms – are hurt by leaving the TPP behind, what’s worse is that, “‘Economically, it excludes the U.S. from the Pacific supply chain,’ [said Scott Lincicome, an international trade attorney and an adjunct scholar at the Cato Institute, a libertarian think tank in Washington], meaning that U.S. competitors in Asia will enjoy the benefits of a system in which the component parts of different products can move freely and efficiently between parties [but not the United States, of course].
Further, American manufacturers often rely heavily on imported components… “access to a broad array of goods drawn from a global supply chain — fabrics, chemicals, electronics and other parts. Many of them come from China…
“In short, Mr. Trump’s signature trade promise, one ostensibly aimed at protecting American jobs, may well deliver the reverse: It risks making successful American manufacturers more vulnerable by raising their costs. It would unleash havoc on the global supply chain, prompting some multinationals to leave the United States and shift manufacturing to countries where they can be assured of buying components at the lowest prices… [Such domestic manufacturers] would be vulnerable to competitors in Mexico, Colombia and Australia. They would be free to draw on China’s supply chain and sell their wares into the American market unhindered.” New York Times, December 2nd.
And you have to wonder if Mr. Trump’s recent personal telephone call to Taiwan’s President, Tsai Ing-wen (who campaigned against unifying with the People’s Republic), was a blunder or an intentional throwing down a gauntlet to Beijing’s leaders. U.S. policy has walked a careful line since the Nixon-era opening of formal relations with the People’s Republic, which of necessity downgraded Taiwan’s status as a separate nation. “Breaking decades of American diplomatic practice, [Trump] caught the Chinese government off guard by lunging into the most sensitive of its so-called core interests, the ‘One China’ policy agreed to by [Republican] President Richard M. Nixon more than four decades ago.
“‘This is a wake-up call for Beijing — we should buckle up for a pretty rocky six months or year in the China-U.S. relationship,’ Wang Dong, an associate professor at the School of International Studies at Peking University, said Saturday [12/3]. ‘There was a sort of delusion based on overly optimistic ideas about Trump. That should stop.’” New York Times, December 3rd. I’m actually wondering what benefit the United States derived from Mr. Trump’s phone call. The PRC has already lodged a formal diplomatic protest (“stern representations”) with the U.S. State Department against that call.
Mr. Trump may just learn the difference between the microeconomics of running a business and the macroeconomics of running a country… or not. When “tough guy” works and when it provokes a powerful and perhaps irretrievable retaliation. Learning on the job in the most powerful position on earth is truly scary when the person in question doesn’t have five minutes of government experience, hates reading books and is loath to follow expert advice. China has real economic bargaining power, and she can seriously strike back. These lessons learned the “hard way” may, unfortunately, take decades to erase, if they can be erased at all.
We may just be ceding global economic power to China… years and years before that might have happened naturally. You might disagree with this perspective, but history seems rather consistently to suggest that Eduardo Porter’s essay is quite correct. The historical fact remains that almost every time a nation has erected serious trade barriers, it results in a serious recession or depression for that country, a lesson seemingly lost on the incoming administration. Those who do not study history are… well, you know…
I’m Peter Dekom, and some “hard way” lessons are deeply more painful than others.

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