In Hollywood films, the term “protection money” refers to money that organized crime extorts from a business, ostensibly for providing protection.  In fact, the Mafia is not protecting business at all; they are threatening them and then extracting money in exchange for not carrying out their threats.

In the 21st century, the US government has become one of the world’s largest criminal gangs, extorting money from weaker countries.  Our government claims the moral high ground, insisting that our rules are based on ethical principles when we put sanctions on rogue nations like North Korea and Iran.  But that’s not what’s actually going on; the foreign policy excuses merely provide a fig leaf for the US to use its muscle to steal money from other countries.

President Donald Trump thinks America is being ripped off. “We have spent $7trn—trillion with a T—$7trn in the Middle East,” he told a crowd last year, exaggerating slightly. “You know what we have for it? Nothing. Nothing.” To right this perceived wrong, Mr Trump has long favoured seizing Iraq’s oil. But after he hinted at the idea with the Iraqi prime minister (who demurred), his aides admonished him. “We can’t do this and you shouldn’t talk about it,” said H.R. McMaster, the national security adviser at the time, according to reports. Still, Mr Trump may be getting what he wants from Iraq in other ways.

I’ve often been critical of Trump, but I must grudgingly give him credit here for being honest, unlike his advisors.  While we are no better than the old-fashioned imperialist powers that tried to loot resources from weaker nations, Trump’s advisors have found more subtle ways to achieve his mercenary objectives:

When America reimposed sanctions on Iran last year it gave some countries extra time to stop buying Iranian oil before they would lose access to the American market. Most were given 90-day exemptions. In November Iraq, which shares a long border with Iran, was given half that time to cut off electricity and gas imports. As it negotiated for extensions, American companies made a push for Iraqi contracts. In December, Rick Perry, the energy secretary, led America’s largest trade delegation to Iraq in over a decade. “It was a quid pro quo,” says an oilman. “You give us priority and we’ll give you an exemption.”

The strategy seems to be working. General Electric, an American company, has muscled in on a big contract to upgrade Iraq’s decrepit electricity grid, which had been earmarked for Siemens, a German firm. American companies have also signed deals to supply Iraq with grains and poultry, important Iranian exports. Chevron and Exxon, American oil giants, have avoided the inconvenience of a bidding process by negotiating directly with Iraq’s oil ministry for large concessions. A previous Iraqi government put off a decision on Exxon’s bid to help boost Iraq’s oil export capacity and build a desalination plant. Now it is said to be a priority.

We claim that these sanctions are necessary to prevent Iran from developing nuclear weapons.  But while its (supposedly) essential that Iran not get nukes, it’s even more crucial that the lucrative deals available in Iraq go to US companies, not German companies.

The NYT reports that the same process is going on with 5G networks, where the US is trying to pressure foreign countries to avoid using Huawei equipment:

The White House’s focus on Huawei coincides with the Trump administration’s broader crackdown on China, which has involved sweeping tariffs on Chinese goods, investment restrictions and the indictments of several Chinese nationals accused of hacking and cyberespionage. President Trump has accused China of “ripping off our country” and plotting to grow stronger at America’s expense.

Mr. Trump’s views, combined with a lack of hard evidence implicating Huawei in any espionage, have prompted some countries to question whether America’s campaign is really about national security or if it is aimed at preventing China from gaining a competitive edge.

Administration officials see little distinction in those goals.

“President Trump has identified overcoming this economic problem as critical, not simply to right the balance economically, to make China play by the rules everybody else plays by, but to prevent an imbalance in political/military power in the future as well,” John R. Bolton, Mr. Trump’s national security adviser, told The Washington Times on Friday. “The two aspects are very closely tied together in his mind.”

Tied closely together?  I’m no fan of Bolton, but give him credit for honesty.  And Trump also chimed in on the issue.  After Meng Wanzhou was arrested by the Canadians (at our behest), we stabbed Canada in the back by hinting that she might be released if China gave us a better trade deal:

President Donald Trump has linked Ms Meng’s legal fate to the prospects of America getting a good deal in trade talks with China.

Unfortunately, no one told Trump he was supposed to keep his mouth shut; that the US wasn’t supposed to admit to our actual motives:

US officials argue that their criminal case against Huawei, which erupted when Ms Meng was detained by Canadian officials late last year, and the trade talks are on two separate tracks and have nothing to do with each other.

Western media outlets were then shocked and horrified that the evil Chinese had the temerity to arrest Canadian citizens in retaliation.  How dare they politicize this important national security issue!  Of course the Chinese government was wrong in this case, but where is the outrage against the US government?  “That’s right Canada, go out on a limb and arrest this important Chinese executive for us, but we’ll let her go if the Chinese do a trade deal where they promise to buy our goods instead or yours.”

The French firm Alstom was involved in bribing countries such as Indonesia to get lucrative deals selling power equipment.  That’s unfortunate, but it’s certainly none of our business.  Of course that didn’t stop the US from arresting a French executive and throwing him in jail.  What happened next is interesting:

According to executives there at the time, Alstom first explored a deal with GE just after Mr Pierucci’s guilty plea in July 2013. Legal pressure on Alstom, and on Mr Pierucci, seemed to ease once it became possible that much of his employer would come under GE’s ownership. For one thing, the arrest of executives stopped. The fourth to be detained in the case, while in the American Virgin Islands, was seized one day before news of the deal became public on April 24th 2014. Two months later, in the same week that Alstom’s top brass signed off on the sale to GE, Mr Pierucci’s long-standing bid to be released on bail was approved, after 14 months inside.

There is no suggestion of wrongdoing by GE itself, merely that American supremacy in imposing anti-corruption norms globally may have given American firms an advantage. GE had an edge over non-American firms vying to buy Alstom’s assets, such as Siemens of Germany and Mitsubishi of Japan, insofar as their legal departments may have been less well-versed in negotiating American legal settlements.

That mattered. In the purchase agreement, GE agreed to pay whatever fine was meted out to Alstom Power for past wrongdoing, even though the fine the French firm faced also related to past activities of other parts of the group. Foreign rivals interested in joining the bidding would also have to gauge the size of that potential legal liability, but may have been at a disadvantage: GE, like other American firms, employs multiple former DOJ staffers, according to their LinkedIn profiles. . . .

An American group such as GE could also help Alstom navigate judicial waters. Lawyers for GE conferred with the French firm’s lawyers ahead of its agreement with the DOJ, long before the deal formally closed. The DOJ settlement mentions how GE promised to “implement its compliance programme and internal controls” at Alstom. In American courts, such assurances may carry more weight coming from well-known local firms, not foreign ones.

The US is becoming increasingly effective at using its financial and military clout to extract resources from other countries.  Look for the Europeans to retaliate with huge fines imposed on our tech firms.  More than one country can play the nationalism game.

PS.  When did it become OK to endorse nationalism?  During the first 60 years of my life, nationalism was pretty universally viewed as evil, by both the left and the right.  It was seen as a cause of both WWI and WWII, not to mention destructive trade wars and lots of other bad things.  Now we suddenly have a president who is a self-avowed nationalist:

In Berlin, meanwhile, diplomats have been poring glumly over The Virtue of Nationalism, a book by the Israeli writer Yoram Hazony, which Mr Mitchell had told them was the key to the Trump administration’s Europe policy.

Mr Hazony’s book — published in 2018 to fervent applause from conservative commentators in the US — purports to provide the theoretical gloss on Mr Trump’s tweets: nationalism as the cure to “liberal imperialism”. The two main “empires” he has in mind are post-cold war, liberal-interventionist America and the EU.

Teutonic brows are furrowing presumably at passages from the book such as this: “The European Union is a German imperial state in all but name . . . Should the United States ever withdraw its protection . . . a strong European executive will be appointed by Germany.” Mr Hazony goes on to write that a “German-dominated EU” is an “imperial order”, that “will work to delegitimise and undermine the independence of all remaining national states”.

Never mind that this is spectacularly misinformed about the status of nation states in Europe or Germany’s power over them and the EU. Repress, if you can, the realisation that Mr Hazony thinks the EU could succeed where the Nazis failed. And try to ignore the question implied by both Messrs Pompeo and Hazony: to what imaginary golden age of nationalism exactly should Europe’s clock be turned back? 1989? 1945? 1918?

But the nationalism “bench” in DC still seems pretty thin, and hence Trump ends up stocking his administration with lots of traditional Republicans like CIA National Intelligence director Dan Coats, who just informed Congress that Trump’s views on Iran, Syria and North Korea are deluded:

North Korea is unlikely to abandon its nuclear weapons because the regime views the bombs and their missile delivery systems as critical to its survival, according to the worldwide threat assessment from the US intelligence committee. . . .

In justifying his decision in December to remove military forces from Syria — which prompted the resignation of defence secretary Jim Mattis — Mr Trump said the US had “defeated Isis in Syria”. But the intelligence community made clear in its assessment on Tuesday that the threat from the terrorist group remained.

“While Isis is nearing territorial defeat in Iraq and Syria, the group has returned to its guerrilla warfare roots while continuing to plot attacks and direct its supporters worldwide,” Mr Coats told the committee. “Isis is intent on resurging and still commands thousands of fighters in Iraq and Syria.”

Mr Coats also said the intelligence community “do not believe Iran is currently undertaking activities we judge necessary to produce a nuclear device” even after Mr Trump withdrew the US from the 2015 nuclear agreement.

Trump keeps appointing what he himself calls the “best people”, like Dan Coats and Jerome Powell, and then keeps telling us what idiots they are:

Donald Trump has accused his own intelligence services of being “naive” about Iran after top US security officials contradicted his statements about the dangers of the nuclear threat posed by both Iran and North Korea.

Naive?  Say what you will about Trump, we’ve never had a funnier president.

Tyler Cowen has a new Bloomberg post on the recent truce in the US/China trade war.  Here is a rare example of where I strongly disagree with him:

Nonetheless, it’s not quite fair to describe the trade war with China as a problem that Trump started and then pretended to solve. The reality is that hostility toward Chinese trade practices has been building for some time. Anti-China measures have long commanded bipartisan support not only in Washington but also among corporate leaders, who see themselves as victims of unfair Chinese trade practices and espionage. This is an issue that predates Trump, and he deserves some credit for doing something to help solve it.

Everything in that paragraph is completely correct–except the last portion of the final sentence, which is wrong. Tyler’s right that Democrats and Republicans and corporate executives have been complaining about China for years.  For instance, Chuck Schumer used to constantly complain about China’s huge current account surpluses.  He demanded a sharp revaluation in the Chinese yuan.  China did exactly what he requested, sharply revaluing the yuan upward and reducing China’s current account surplus to near zero.  But as with any schoolyard bully, capitulation of the victim just whets the appetite for more bullying.  Schumer is not at all satisfied.

China needs to know that if they give in to US demands once again, we’ll just find new topics to complain about. The US is a bully—that’s what we do.  We bully small countries any time they don’t agree with our foreign policy, on anything from Iran sanctions to breast milk.  (Yes, China also occasionally bullies small countries on issues such as the disputed islands in the South China Sea.)

I read the situation very differently from Tyler.  Previous presidents like Clinton, Bush and Obama occasionally complained about Chinese trade practices, but their economic advisors were not foolish demagogues like Peter Navarro, they were serious people who correctly advised them that China’s policies were not a big problem for the US and that we’d be better off with a policy of engagement.  As a result, these presidents wisely ignored the calls for a trade war with China.

Tyler mentions practices that we object to such as government supported Chinese state-owned enterprises, and these are indeed bad policies.  But it’s up to China to decide how to organize its economy, not the US.  After all, Europe was also full of state-owned enterprises during the 1970s, as well as all sorts of hidden barriers to US imports.  That was too bad for Europe, but would the US have been wise to launch a trade war against Europe during the 1970s?  Obviously not.

Consider the following two cases:

1. China has foolish economic policies that hurt China a lot and also hurt the US a little bit.

2. India has even more foolish economic policies that hurt India enormously and also hurt the US somewhat.

If the reasons cited by Tyler were the actual basis for the trade war, then India should be the target, not China.  India’s policies are even more anti-market, and deprive the US of even more potential gains than what we’d get from a liberalized China.

Now suppose I’m right, and this is all window dressing that is disguising the real motive—crude protectionism based on economic doctrines that were discredited 200 years ago.  In that case the trade war would be launched against the country with the largest amount of exports to the US, which is China, not India.  Protectionists believe that imports hurt an economy.  Pundits may complain about Chinese policies like state-owned enterprises, but if China’s exports to the US were at the level of Cambodia then no one would care.  Does Cambodia even have state-owned enterprises?  Most Americans don’t know and most don’t care.

So while Tyler’s right that many people in America have been complaining about China for years, he’s wrong in claiming that Trump deserves credit for listening to those complaints and trying to “solve” the problem. It’s up to China to determine how to run its economy.  It’s up to American consumers and firms to decide if they want to buy Chinese goods, or invest in China under the conditions offered by the Chinese government.  Although the US is less protectionist than China, we are far from being a free trading nation.  How would we feel if other countries put sanctions on the US, in retaliation against our numerous protectionist policies?  We should lead by example and unilaterally adopt 100% free trade, unless there’s a clear national security issue (not a phony one like cars and steel.)

I encourage the Chinese to continue liberalizing their economy, as they’ve been doing for the past 40 years—but only because it’s good for them.  Regarding US demands, the best strategy for China is to stand its ground.  Fortunately, Trump has shown he’s desperate to get deals, even if the concessions on the other side are trivial.  Fortunately, Trump also worries about the stock market, and thus he will eventually give in, as he has done so many other times. On the other hand, it makes sense for the Chinese to look like they are willing to compromise, as that will make things easier for Trump.  Like the Chinese, he doesn’t like losing face.

PS.  There may be a few national security issues with China where sanctions are appropriate. I’m no certainly expert on high-tech espionage.  But that’s only a tiny faction of the trade dispute, and if it is a problem is better addressed through sanctions targeted at specific high-tech companies like Huawei.

When you read the history of interwar Europe, particularly the “alt-right”, one theme shows up over and over again. On one side is the authentic, patriotic working class, with a strong attachment to the home country. But they are continually being “stabbed in the back” by a class of “smelly, rootless cosmopolitans”, who have no national loyalty. Oddly this latter group is linked to both socialism and global capitalism.  (How is that even possible?)

Of course today we are far past that sort of crude rhetoric, as shown in a recent Financial Times story:

The White House’s top trade adviser has accused “globalist billionaires” of trying to pressure President Donald Trump into ending his tariff brinkmanship with China, saying their “shuttle diplomacy” to Beijing meant that any truce would have a “stench around it”.

Peter Navarro, the most prominent China hawk in Mr Trump’s inner circle of economic advisers, called on Wall Street to “get out of the negotiations” and warned that if a deal is reached when the president meets with Xi Jinping at a G20 summit in Argentina this month, it would have “imprimatur of Goldman Sachs”. . . .

Mr Navarro’s comments came as he mounted a robust defence of Mr Trump’s protectionist trade policies, saying the president had the “courage and wisdom to stand up to the globalist elite” that was using the US as the “bank of the world”. . . .

“He didn’t need the help of Wall Street, he didn’t need the help of Goldman Sachs, and he doesn’t need it now,” Mr Navarro said. “When these unpaid foreign agents engage in this kind of diplomacy, so-called diplomacy, all they do is weaken this president and his negotiating position. No good can come of this.”

The good news is that Trump is himself a billionaire, who cares a great deal about how the stock market is doing.  Navarro sounds like a desperate man, who attached himself to the wrong sort of demagogue.  He doesn’t understand that the 1930s are over.  Look for “globalist billionaires” to eventually win this battle.

PS.  When is that trade deficit going to begin shrinking?  And if Trump is right that the economy is doing spectacularly well, does that mean that our previous problems had nothing to do with the trade deficit?  Just asking.

Little did we know that during the golden 1990s we were complaining about things that would look utterly trivial in retrospect. The sheer stupidity of the 21st century is so mind-boggling it leaves me almost speechless.

But not quite.

Consider the “problem” of currency manipulation. Let’s start with the fact that currency manipulation is a strange term to apply to a hodgepodge of government policies that may or may not impact the current account balance. For instance, you might say that “currency manipulation” is almost the sole purpose of having a central bank.

There are some smarter economists who do worry about currency manipulation. But when you read their work, it’s pretty clear that what actually concerns them is “saving manipulation”—when countries enact policies that boost the national saving rate. These policies can “improve” the current account balance. And not all such policies, rather they worry most about a subset of relatively ineffective policies, such as swapping domestic assets for foreign assets. (I’m not saying these policies have no effect; I just don’t see how it could be very large.)  They tend not to worry as much about far more effective pro-saving policies, in the fiscal/tax area.

The Netherlands and Switzerland have CA surpluses of 10% of GDP, while Singapore’s is 20% of GDP.  Does anyone seriously believe those are due to “currency manipulation”?

Even the economists who do worry about currency manipulation find the criteria set by the US government to be absurd:

Congress’s criteria to assess if a country is interfering in its currency are: A minimum $20 billion trade surplus with the U.S., a current account surplus in excess of 3 percent of gross domestic product, and repeated intervention in currency markets.

I’ve got an idea!  Instead of labeling countries “currency manipulators” when they accumulate $20 billion surpluses with the US, how about labeling then “currency manipulators” when they, umm, manipulate their currencies?

I’ll tell you why not.  Because that would force us to actually define currency manipulation in a way that could be measured.  And that would expose the fact that what really concerns us is saving manipulation.  No, not even saving manipulation, it’s current account surpluses in other countries that actually concern us.  No, not even that, it’s bilateral deficits with other countries that concern us.  And of course bilateral deficits have nothing to do with currency manipulation in any meaningful sense of the term. Indeed they have nothing to do with anything meaningful at all.   What’s the bilateral trade deficit between New York and New Jersey?

Trump took office saying he would label China a currency manipulator from day one.  He’s failed to deliver on that promise, just as he’s failed to repeal Obamacare, secure the border, reduce the trade deficit, or stop the rest of the world from laughing at us.  He failed because the Trump’s own Treasury department wasn’t able to find evidence that China is a currency manipulator, despite using a silly set of criteria that are strongly biased toward finding China guilty, such as the provision that it’s not OK to run a $20 bilateral surplus with the US.

But it’s even worse.  Not satisfied with the fact that the Treasury’s own criteria show that China is not a currency manipulator, they are thinking of changing the criteria so that the evidence will match the predetermined verdict—guilty as charged:

Treasury Secretary Steven Mnuchin is open to changing how the U.S. determines which nations are gaming their currencies, a move that could give President Donald Trump the chance to officially brand China a foreign exchange-rate manipulator as he seeks leverage to redefine trade terms between the world’s largest economies.

One method Mnuchin would consider: Using a 1988 trade act with a broad definition of currency manipulation to designate a country a manipulator, even if the label isn’t warranted by specific tests under a 2015 law, he said. The other would be to change the criteria that help establish whether a country is engaging in competitive devaluation of its currency, according to Mnuchin.

Treasury applies three tests to measure whether a country should be labeled a currency manipulator. The framework of the criteria is provided by Congress, but the specific thresholds in the tests are at Treasury’s discretion.

Again, foreign current account surpluses are not a problem for the US.  But if you disagree with me and agree with those pundits who do worry about current account imbalances, you should be focusing on the Eurozone and Japan and Switzerland, which really do have big CA surpluses, not China, whose CA is nearly balanced.

Trump seems determined to launch a cold war against China, a country with an economy that will be twice as large as the US economy by 2035.  In the old days, militaristic countries would engage in warfare by inventing some silly pretext—say demanding that a smaller neighboring country apologize for some imagined slight.  Trump wants a cold war with China, and demands the federal bureaucracy find some sort of fig leaf to justify it.  Why not point to China’s bad human rights record in Xinjiang?  Unfortunately, mentioning human rights would simply highlight Trump’s embarrassingly friendly relationship with the Russians and the Saudis, despite their war crimes in the Ukraine and Yemen.  So Trump needs to seek out an economic rationale for war with China.  In this post-truth world, currency manipulation is as good as any.

Here’s Noah Smith at Bloomberg:

Instead, the U.S.’s best bet is to concentrate on a key Chinese government intervention that can be measured easily — currency manipulation. Though China no longer pegs its currency to the U.S. dollar, it still closely manages the yuan’s value and maintains an extensive system of capital controls. In recent years, China usually hasn’t had to intervene in order to keep its currency cheap, since the yuan has fallen:

But the threat of intervention is still there, which undoubtedly keeps a lid on the currency’s value. Meanwhile, measures like the Economist’s Big Mac Index show that the yuan is undervalued against the dollar by about 44 percent. This effectively provides a subsidy to all Chinese exporters, and a tax on U.S. goods sold in China, thus distorting the global economy and the patterns of world trade.

As his main goal in the trade war, Trump should push for a large upward valuation in the yuan, followed by a much freer float of that currency against the dollar.

Actually, that would be a disastrous policy for China, which (fortunately) they are unlikely to adopt.  The Chinese economy is already struggling with a slowdown due to a crackdown on debt and a looming trade war with the US.  A sharp revaluation in the yuan could easily push them into a depression.  Think about it.  A rising power in the East, with a history of being humiliated by Western powers, and with a prickly nationalistic public that is intensively resentful of these past actions, is pushed into depression by a combination of a rabidly anti-Chinese American administration and some really bad exchange rate advice by Western experts.  What could go wrong?

[BTW, even if the yuan were undervalued, which it isn’t, it would not constitute a “subsidy” to Chinese firms or a “tax” on US exporters.  Words matter.  Taxes and subsidies are inefficient because they drive wedges between the prices faced by buyers and sellers.  Undervalued currencies do not do this.  If you want to argue an undervalued currency is inefficient, you need a completely different argument centered on saving rates.]

So what’s my solution?  Simple.  Have the Chinese government order McDonalds to raise Beijing Big Mac prices by 44%.  Problem solved, no more undervalued currency.  Seriously, the Big Mac index tells us absolutely nothing about whether a currency is undervalued or overvalued.  If it did, then the Swiss and Norwegians should demand that the US massively revalue the dollar, so that Big Macs over here are as expensive as in Oslo and Zurich.  In fact, all the Big Mac index illustrates is the Balassa-Samuelson theorem, which says that lower wage countries tend to have lower price levels because their comparative advantage lies in non-traded goods.  (I.e. rich countries are much more productive at building complex products, but not much more productive at cutting someone’s hair or cooking Big Macs.)

Outside the Trump administration, I doubt you’d find many international economists who think PPP should determine the proper exchange rate between any two countries.  And even within the Trump administration they’d be more likely to use “trade imbalances” as an excuse for demanding that China revalue.  The problem, of course, is that China now has the most balanced trade of any major economy in the world, with a current account surplus estimated to be 0.5% of GDP this year and 0.3% next year.  So it’s not clear what sort of “distortions” Smith is referring to.  Many of the same people who a decade ago insisted that China needed to revalue because of its current account surplus (which really was large at that time) now seek out some other reason for demanding Chinese revaluation.  I guess cheap hamburgers are as good as any, as the importance of maintaining PPP and “balanced trade” are roughly equally invalid arguments.

There is one economy that does have a massive CA surplus, the Eurozone.  And to his credit, Smith does not advocate that we demand a sharp euro appreciation (which would also be a disaster—ciao Italia):

Trump has also turned his attention away from Europe, avoiding the mistake of getting into a harmful spat with allies he should persuade to form a trading bloc and a unified front.

This also caught my eye:

There’s no way to measure the amount of state interference that China is using to shut out foreign companies. And IP theft, by definition, happens in secret and is thus difficult to detect or to prove. China’s entire economy is centered around pervasive state intervention and skullduggery — even if it made some moves to change that model, the U.S. couldn’t verify that changes had really been made.

If it can’t be measured, how can we be confident that China’s entire economy is centered around this intervention and “skullduggery”?  You might say, “it’s obvious”.  No, it’s obvious that these things happen pretty often in China, but it’s not obvious how big a problem it is.  If it were, then Smith would be wrong in claiming we can’t measure it.  How do we know that the “center” of their economy is not growing rice, or building subways, or selling life insurance?  For instance, China’s goods imports are about 15% of their GDP.  The same is true of the US, but because the US figure is for both goods and services, I presume China’s total imports are actually a larger share of GDP than in the US.  So how important are their barriers to imports? Who knows?

I am not claiming that China has fewer trade barriers than the US, indeed I believe the opposite is true; my point is that the data doesn’t provide any way of knowing how much of this is anecdotal, and the extent to which China really is much more closed than other countries like the US.  Let’s not forget that the US also does lots of “skullduggery”, like “Buy America”.

Note that if Smith is right that it’s hard to measure this stuff, then Trump may be wasting his time.  How would we even know if they adhered to any trade agreement?  That’s why Smith suggests that we instead press for yuan revaluation.  But that won’t work either.  China could simply stop having a crawling peg with the dollar, and instead have a crawling peg with the euro, yen or pound.  When you have a crawling peg, it really doesn’t matter which currency you choose.  And there is near-zero chance that China will agree to set their exchange rate according to PPP.

Smith also seems confused about the implications of what’s often called the “China shock”:

And Chinese import competition has been much more harmful to American workers than competition from Mexico, Europe or any other country. Even some Democrats support pushing back against China.

He’s referring to a study that showed the import surge from China had depressed a number of industrial towns in the US.  But then he advocates a Chinese policy that would cause an even bigger China shock:

What would constitute a win in a trade war against China? A simple goal would be to get that country to cut tariffs on U.S. imports. Indeed, China’s leaders have already offered some tariff cuts, suggesting that they’re in a mood to deal. But although tariff cuts are good, they don’t form the bulk of China’s unfair trade practices. The government underwrites its industries in a variety of ways, from cheap loans from state-owned banks to energy subsidies to export subsidies. Costs are held down because of lax environmental regulations and low labor standards — China crushes independent labor unions, for example. The U.S. government could demand that the Chinese reduce subsidies, do more to protect the environment, or improve worker rights.

Chinese tariff cuts would cause the US to export more movies and food and high tech stuff to China, and also cause China to export more “mid-tech” industrial goods to America.  If you thought the China shock hurt America (I don’t), you should not advocate an even more open China, an even bigger China shock.  You should advocate they go back to Mao’s policies, when China was closed to the world and American workers were not “threatened” at all.  Of course I don’t worry about China shocks, and thus agree with Smith that fewer Chinese tariffs would be a good thing.

Some might argue that lower Chinese tariffs would reduce America’s trade deficit.  They won’t.  But what is true is that Trump’s policies are likely to raise our deficit.

At a deeper level, all of this focus on the domestic policies of other nations is deeply misguided.  I agree that better economic policies in China would benefit the US.  However that same argument is even more true of India, Africa and lots of other places, which buy far fewer US goods than they would with more sensible policies.  But that’s because with better policies they’d be richer, not because they would no longer be “cheating” at trade.  Since the time of Ricardo, we’ve known that factors such as subsidies, weak environmental laws and low wages do not give countries any competitive advantage of international trade.  Paul Krugman demolished all those arguments a second time back in the 1990s.  Read Pop Internationalism.

I hope this post doesn’t come across as too negative, but I get frustrated reading the same misconceptions about trade, over and over again.  In fairness, there are also things I agree with in Smith’s article:

That doesn’t mean a trade war with China is without downsides and risks. Chinese retaliation against U.S. agriculture has already forced many farmers to accept handouts from the government in order to stay afloat. Disrupting the cozy economic symbiosis that has developed between the U.S. and China will cause painful adjustment, and will also increase the risk of military conflict. If Trump decided to call off his trade war against China right now, it would certainly be a safe course of action.

He’s rightfully skeptical of the Trump approach, and opposes some of the current protectionist policies:

President Donald Trump’s trade war is less bad than it was just a short time ago. After some tense negotiations, the North American Free Trade Agreement has been replaced with a new, very similar arrangement, meaning the disruption to trade — and to U.S. relations with Canada and Mexico — will be contained. The agreement might even ease the damage from the president’s misguided steel and aluminum tariffs.

Unfortunately, China pushes people to advocate policies that are highly counterproductive.  Perhaps it’s partly due to the fact that China is an increasingly powerful and successful country that really does have lots of bad public policies, especially in terms of repressing free speech, minority rights, etc.  That’s frustrating—I really wish they had better policies (Ditto for Myanmar, Vietnam, Venezuela, Saudi Arabia, Russia, Cuba, Iran, Nigeria, and 100 other countries.)  But when I read the arguments for focusing our trade war on China, none of them make any sense.  Whether it be “undervalued currencies”, trade imbalances, or domestic policies that discourage US exports, you can always find much worse offenders than China.

So what’s my solution for bad Chinese policies?  Push China to high income status as quickly as possible and hope for the best.  It worked pretty well in the rest of East Asian, where it was tried. It may not work with the mainland, but going back to the 1930s is even less likely to work.