Did China win the trade war?
Tyler Cowen has a new post entitled :
No, China did not win the trade war
He cites a recent study on the economic impact of the trade war:
This paper estimates that the trade war costs China $35.2 billion, or 0.29% GDP, costs US $15.6 billion, or 0.08% GDP, and benefits Vietnam by $402.8 million, or 0.18% GDP.
Does that indicate that China did not win the war? Look at the following data, and tell me who won the Civil War?
For 110 years, the numbers stood as gospel: 618,222 men died in the Civil War, 360,222 from the North and 258,000 from the South — by far the greatest toll of any war in American history.
This data has recently been challenged, but I think you get the point.
The primary objective for Trump and Navarro was a reduction in the US trade deficit. The deficit actually got larger, and the trade war also seemed to slow the growth of manufacturing jobs in the US. So it certainly looks like the US lost the war. Whether China won is another issue.
I’d say it’s too soon to draw any firm conclusions on who (if anyone) won the trade war. If Biden wins, I expect him to continue the recent cold war with China, mostly fought on issues ranging from technology to human rights. On the other hand, I’d expect Biden to wind down the trade war with China, for several reasons.
First, there’s a widespread view in the Democratic Party (and among economists) that the trade war was a failure. Second, polls suggest that Trump’s trade polices were not very popular among the general public—where support for free trade agreements has recently surged much higher. (You and I may not trust polls, but politicians do.) Third, the policy is associated with Trump, which makes it toxic in the Democratic Party. Fourth, if I’m right that Biden will continue the cold war with China, dumping the trade war is a convenient way to distinguish his policy from Trump’s.
If Trump wins, it’s anyone’s guess as to what the second term will look like.
My wife is currently in China, and says that things there are back to normal. She and her mother saw a movie where the theatre was so crowded that they couldn’t even sit together. The roads, the restaurants, the stores are all packed. In contrast, the US economy is horrible. If Biden abandons the trade war, a war that failed to reduce our trade deficit, it’s certainly going to look to most people like China won, even though the disparate economic performance is primarily due to Covid-19. If people want to say both sides lost, I’m fine with that claim.
Tyler commented on the trade war study as follows:
Those numbers should not come as a surprise, they do indicate that both countries are worse off, but they also show that a lot of the bargaining power does in fact reside on the side of the United States.
Sure, “a lot” of the power resides in the US. But it’s also likely true that “a lot” of power lies in the country ruled with an iron fist by a dictator for life who is negotiating with a democratic country containing a soft and spoiled electorate that is not used to the extreme sacrifices made by the Chinese at various times in their recent history.
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11. October 2020 at 10:24
Scott
Any Nobel prediction ? Thanks
11. October 2020 at 10:30
Cove, I care even less about the Nobel than does Tyler. I predict that I will never have even heard of the winner. How’s that?
11. October 2020 at 10:32
I found this quote by the CEO of the American company that developed the technology that bankrupted all of the big American steel mills to be a funny quote:
“We’re very pleased with the results that are happening as a result of the tariffs,” John Ferriola, chairman and CEO of Nucor, told CNBC’s Jim Cramer on “Mad Money” on Thursday evening.”
https://www.google.com/amp/s/www.cnbc.com/amp/2019/07/19/nucor-ceo-john-ferriola-says-very-pleased-with-trump-steel-tariffs.html
Here is an excerpt from an article from 1988:
“Nucor is an especially big threat to the Bethlehem plant,” says Andrew Futchko, manager of Bethlehem plant operations. “When this plant comes on stream, we are going to have a real crisis on our hands.”
Analysts at the WEFA Group in Bala Cynwyd, Montgomery County, list the Bethlehem plant as one of the industry’s candidates for partial closure because of mini-mill competition. Plant officials acknowledge that a shutdown of primary steelmaking, with its corresponding major drop in employment at the 4,810-employee Bethlehem plant, is one option being considered.
https://www.google.com/amp/s/www.mcall.com/news/mc-xpm-1988-05-23-2629167-story,amp.html
11. October 2020 at 11:38
The US certainly did not win the trade war. In fact, it’s a failure in almost every aspect.
The US deficit with China has increased compared with that before the trade war started. To be sure, China’s export to the US falls about 10%, but its overall export increases – increasing exports to ASEAN and Europe offset that to fall to the US. Over 3,500 US companies are suing the Trump administration for the increased tariffs on Chinese imports; they’re hurting. There are some shifting out of production capacity out of China, notably to Vietnam, which has accompanied by increased Chinese export to Vietnam. The overall impact on China has been minimal.
The trade war has since expanded to tech war, given clearly that China is not capitulating to Trump’s bully. Hostage has been taken, 70+ companies are newly added to the Entity List. Huawei is hurting and US tech companies are affected and concerned. China has dug in to become self-sufficient in tech. It’s going to be a long term struggle. But there has no precedent that the US has successfully stopped China’s tech development despite numerous sanctions have been applied to companies and industries in the last several decades; these include satellite, defense, supercomputer, nuclear power plant. In all of these, China emerged to be winner and become stronger.
The Trump administration has pretty much run out of options and leverages. Any escalation will significantly damage the US interest. These would include finance – think Hong Kong and dollar usage – which would impact dollar hegemony, and military – think about the on-going Taiwan provocations – which could trigger serious military conflict.
11. October 2020 at 12:20
Minor quibble: China didn’t win the trade war because in a trade war every side loses. There is no winner by default, only sides that lose slightly less. I pedantically include this just to make the point that in every trade war there is a substantial deadweight loss that hurts real individuals with families, businesses, etc.
The US definitely lost more than China; we went into a completely pointless trade war with about as much strategic foresight as we did in our recent forever wars in SW Asia and the ME.
The silver lining of this presidency is that hopefully economic nationalism, industrial policy, and immigration restrictions will be associated with one of the most reviled politicians in American history.
11. October 2020 at 13:44
Scott’s right. Market reactions also suggest that the trade war was more costly economically to China, but the economic costs are still rather small.
And evidence suggests that Trump lost the trade war politically, as anyone who recalls this revelation from Bolton understands:
https://www.politico.com/news/2020/06/17/john-bolton-book-trump-china-326563
Trump was begging China for help for his re-election campaign, fearing China would target tariffs on important political constituencies. This is likely why Trump was initially praising China’s pandemic response, when it was already clear they deserved criticism. Then, as the pandemic threat began to shut down the US economy, Trump began blaming China for the entire problem.
Of course, no one wins a trade war anyway, except for a minority of interests in protected industries.
11. October 2020 at 13:45
Gene and Greg, Good points.
Skeptical, I agree.
11. October 2020 at 21:48
The “trade war” amounts to 20% to 25% tariffs on some China goods, and some one-off actions taken against specific companies, such as Huawei. This is more like a trade skirmish.
Are the US China trade policies good or bad?
Very long answer, and depend on one views on how R&D and technological leadership evolves.
Another set of views on whether certain types of trade enable CCP repression.
Banning Huawei has shifted a lot of business to Free Korea and Free Taiwan. That is a bad result?
My own view is what is fervently genuflected to as “comparative advantage” in “free trade” today rests nearly entirely in government subsidy, rules, infrastructure build-outs, tax codes.
No, you can’t grow bananas in Minnesota.
But you can build airplanes, cars or smartphones anywhere, including India, Thailand or Carolina.
Trump is the Banana President. But even the banana-man sometimes counts the bananas correctly.
Will “Beijing Joe” Biden be a better president that Trump?
Vote for Pat Paulsen. Do not debase yourself.
12. October 2020 at 02:20
The trade war hit imported intermediate goods hard, which means the trade war hit US manufacturing hard (because US manufacturers rely on imported intermediate goods). As for Cowen, his coded (Straussian) blog posts are simultaneously fun to decipher and annoying. In any case, let’s not forget that the most important demand by the US trade negotiators is for the US to have veto power over China’s fiscal policy – all other demands pale by comparison. Of course, China is a sovereign country and isn’t about to give the US veto power over its fiscal policy. Does this reflect a bargaining power advantage of the US? Of course, the demand for a veto power over China’s fiscal policy by an administration that produces trillion dollar annual budget deficits during an economic expansion takes self-delusion to new heights.
As for the study cited/linked by Cowen, the author states: “Table 6 summarizes the estimated welfare effect of the trade war. The model estimates that, from January 2018 to December 2019, the trade war costs China $35.2 billion, or 0.29% GDP in 2017, costs US $15.6 billion, or 0.08% GDP in 2017, and benefits Vietnam by $402.8 million,or 0.18% GDP in 2017.” I searched the study in vain for the meaning of “welfare effect” and “costs” (which the author seems to use interchangeably).
12. October 2020 at 10:53
Rayward, Good point about the US demands, which were totally insane.
12. October 2020 at 11:06
The demand for veto power on fiscal policy for another sovereign country is a demonstration of arrogance/audacity/delusion, not advantage. The puncturation of that facade of being able to dictate to a country of even China’s status really exposed the weakness of the US, and promoted China’s status, as we have seen since the Trump trade started. Each ridiculous demand and push-back and subsequent escalation further reinforce the growing power of China, to the point now that most of the world think the US and China are the two peer superpowers of the world and the world could split into two camps led by each. Regardless whether it is going to happen, the perception has been created. Previously, there have been a lot of chatters about China’s growing power, but now it is being tested by the US. You grow your status by contesting with the strongest player.
So that is the side-effect of Trump’s failed trade war against China. The Chinese were initially tentative and untested, and they have since grown more confident from their resilience. The lesson for the US: leverage your power, but don’t overreach. This is the Art of Negotiation .
12. October 2020 at 19:46
Consensus in the Democratic party is that the trade war was a failure? I guess in the sense that whatever Trump did was a failure, because they’re campaigning against him, but consensus against protectionism? I don’t see that. Schumer believes Trump hasn’t been protectionist enough. I wouldn’t expect a meaningful policy reversal under Biden on trade. There’s a long list of de facto bipartisan policy positions that each party consistently criticizes the other party for while doing the exact same thing once in office.
Unrelated: Scott, what do you think about Sonnenschein-Debreu-Mantel theorem and its implications for market economies? How dependent is the case for markets on the existence of unique, stable, general equilibrium? I’ve found difficult to find a good free market economist’s take on the possible failure of general equilibrium. Some argue that the case for markets hinges on unique, stable equilibria.
It’s kind of a relevant question in light of the Nobel Laureates being auction theorists, which made me think about Walrasian auctions.
12. October 2020 at 21:52
Mark, You said:
“Consensus in the Democratic party is that the trade war was a failure? I guess in the sense that whatever Trump did was a failure,”
No, not in that sense. In the sense that it was obviously a failure, anyone can see that. I’d expect Biden to go back to the Clinton and Obama/Biden trade policies. I can’t be certain, but that’s my expectation. I expect a lot of really bad economic policies in a Biden administration, but mostly in the domestic area.
I do not believe that general equilibrium models are useful for evaluating the case for free markets. Free markets tend to work best in the real world. That’s the best argument for free markets.
13. October 2020 at 05:58
Trade War
One thing that Scott does not mention is that China has had benefits of an emerging market economy in WTO, even if such benefits are illusory. They are either largest or second largest economy. Trump points this out all the time. Also, Trump has said on many occasions he favors zero global tariffs. Is he lying? I have no idea. But Scott, I assume favors zero global tariffs. This is unlikely to happen of course. But why not comment on that too?
13. October 2020 at 08:34
Michael, India is the third largest economy. Germany is fifth. Is India or Germany the emerging market?
Why mention facts that have no bearing on your argument?