Why no US/India trade war?
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.
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3. December 2018 at 17:15
I wonder if “free trade” theory works in a world of large, dirigiste, mercantilist economies.
Also, Western economists are loath to critically examine free trade theory—as Paul Krugman says, “free trade” has been sacralized. To express reservations about “free trade” is to link arms with protectionists, Luddites and economic neanderthals. Yet when a theory is made sacrosanct, it becomes a theology. Honest re-assessments become impossible.
China subsidizes not only state-owned enterprises, but whole industries.
“The expansion of the FPD (flat-panle display) equipment market that started in 2016 has been driven by the high equipment intensity of new flexible active-matrix organic light-emitting diode (AMOLED) display factories and the scale of Gen 10.5/11 LCD factories,” said Chase Li, senior analyst at IHS Markit. “This expansion has been further fueled by Chinese local governments, which have supported panel makers with various mechanisms such as financing, land grants, reduced taxes, infrastructure and direct subsidies.”
China not only has state-owned enterprises, but subsidizes whole industries.
Okay, the free-trade “solution” to large, dirigiste mercantilist economies is for the US to sell assets to pay for the imports. This is extolled as a virtue, as it benefits the exalted consumer.
Looked at in another way, due to artificial, government-created US current-account trade deficits, there is huge flow of capital looking for a home in US assets, including property. Foreign capital looking to buy US property can be leveraged from five to one to 20 to one.
Leading up to 2008, the US was running large current-account trade deficits. The US ran an $805.1 billion current account trade deficit in 2008, for example, or about 6% of GDP. Imagine, say, $300 billion of foreign capital looking to buy US property, leveraged 10 to one.
Property values in the US (especially commercial property) zoomed in the years up to 2008. Back then, conventional economists such as Robert Murphy blamed the Fed for being too easy, for “blowing asset bubbles.”
A trade deficits were sacralized, then “easy money” had to be the villain.
Okay, so the Fed tightened—and US property values collapsed, taking down the US financial system, and much of the global economy. The Great Recession,
The IMF says this can happen again.
http://www.imf.org/en/Publications/ESR/Issues/2018/07/19/2018-external-sector-report
There is much to ponder about “free trade” and the undeniable strengths of dirigiste, mercantilist economies. Singapore and China have been successful, other Far East nations have been successful with various versions of dirigiste economies.
This does not mean I advocate such policies for the US. I prefer free markets.
But it does mean a critical re-assessment of “free trade” theory (in the real world) and trade policies is warranted.
3. December 2018 at 20:05
Good post, but how far is the U.S. from being a free trade nation? Tariffs are down to 1%. The real issue is patent and copyright law. For some reason the U.S. believes its standards are defacto the correct ones.
3. December 2018 at 20:38
Todd, We have many non-tariff barriers.
3. December 2018 at 22:42
Benjamin Cole,
and once again you repeat the same thing,
“There is much to ponder about “free trade” and the undeniable strengths of dirigiste, mercantilist economies. Singapore and China have been successful, other Far East nations have been successful with various versions of dirigiste economies.”
Remarks:
Do you realize? …
– That China’s economic strength comes from the non-“dirigiste” part of the economy?
– That presumably not so dirigiste Hong Kong before 1997 grew faster than presumably dirigiste Singapore?
– That Singapore liberalized its economy considerably in the 1990s (towards more neoliberalism overall, for lack of a better word) and then grew … faster?
– That the above quote of yours was said verbatim about Japan in the 80’s? About how lucky they were to have MITI planning for their economy’s success, how it ought to be emulated by the West, how the West was dead in the water, how a small part of Tokyo was soon to be worth more than all of California, etc. Yet somehow, Japan, Inc. (as it was called back then) failed to buy up the US.
4. December 2018 at 03:09
mbka:
Well, thanks for reading my comments.
Is China a dirigiste economy? Egads, who knows? I think it is. Even private-sector companies evidently qualify for huge public subsidies. See the flat-panel display makers. Did you know they were receiving free land, free capital and direct subsidies? I did not. Given the opacity that is China, how are you sure of anything? The PBoC is very active in capital markets, btw. I mean, very active.
A dirigiste economy has private-sector elements in it.
But the real deal I want to discuss is this: Given that China and many other nations subsidize exports heavily, the US will run large current-account trade deficits.
Like $800 billion in 2008. That means $800 billion looking for a home in US capital markets. Including property. And lenders are happy to magnify foreign capital inflows into property by 5-to-1 up to 20-to-1.
BTW commercial property sales in the US in 2007 were $570 billion and then $175 billion in 2008.
Given the scale of foreign capital inflows…jeez, you think what I think?
Hey, it is not just me–it is Fed studies and the IMF who say large current-account deficits lead to property price “bubbles” or “high values” or whatever terms you want to use.
And so when the Fed pulls out the rug—look out below. Financial system collapse.
Is the Fed pulling out the rug now?
4. December 2018 at 05:25
What about theft of intellectual property (and state sponsored theft no less)?
4. December 2018 at 05:37
Scott, you wrote: “Todd, We have many non-tariff barriers.”
Could you name three of the more egregious ones that come to mind? With respect to services, foreign doctors aren’t allowed to practice in the U.S., nor is an American without an MD.
4. December 2018 at 08:40
[…] The first bit is mine, the second is his commentary, link here: […]
4. December 2018 at 08:56
“The US is a bully—that’s what we do. We bully small countries any time they don’t agree with our foreign policy…”
Wait a minute…What do you mean by bullying? The list of countries we embargo,for example, is not exactly topping the Freedom House list. The US has a pretty good record when it comes to free trade: GATT, NAFTA, the WTO…The problem with Trump is that he’s reversing our position–backing out of the TPP, escalating trade tensions with China–not that he’s just doing what America does.
4. December 2018 at 10:22
“Why no US/India trade war?”
Because India does not produce a lot of steel, aluminum, and consumer goods (compared to China).
4. December 2018 at 10:40
>I’m no certainly expert on high-tech espionage.
No you are not. And your appeals to narrow economic theories are not convincing either. China aims to destroy the West. Unfortunately you are not young enough to live under a China dominated world, so you will never offer an apology for your narrow “free market” views.
Free markets are institutions built on values. Not rules, not speeches to the G20, not empty promises of liberalization printed in state owned papers. You seem to be under some delusion that China must continue to liberalize to improve itself. No, once it buries the West and the values of truth and freedom, it will not need to better itself, since it would have all the power, which is the only status it ever wanted.
Just like all the dynasties before the CPC, we will get unipolar and stagnant China firmly in command. That is the Chinese Dream. China won’t care about progress when they rule the world. Even today, their scholars and sinophiles in the West offer excuses for China not autonomously industrializing, for keeping East Asia in relative backwardness. The Japanese had to study Dutch books to confirm what the human body looked on the inside because the Chinese books couldn’t even get this basic verifiable fact correct. The Chinese mandarins relied on Jesuits for astronomy because their own scientists couldn’t deduce the Earth was spherical and the planets had regular motions. Good luck with the Chinese century rest of the world once we are gone!
4. December 2018 at 10:58
“See the flat-panel display makers. Did you know they were receiving free land, free capital and direct subsidies?”
Did you know Scott Walker promised Foxconn $3 billion (which later grew to $4.5 billion) to build a flat-panel display plant in Wisconsin?
https://newrepublic.com/article/152123/scott-walker-thought-get-away-corporate-welfare
Do you think it was a good example of “…the undeniable strengths of dirigiste, mercantilist economies…”?
P.S. I laugh and laugh and laugh at Scott Walker. He got exactly what he deserved. Hopefully, his actions on the Foxconn subsidies will keep him from ever getting elected to a high political position again.
4. December 2018 at 11:27
Scott,
China is the security issue. If the US wants to stay the hegemon, they must confront China, preferably in a new Cold War.
We have had this topic before. In relative terms, the US Hegemon is the most benign bully in world history.
We do not know for sure what kind of hegemon China would be. But we know how they operate against their own population, how they operate in Tibet, how they operate against Taiwan, how they operate against any dissident (no matter how tiny), how they operate against Uyghurs, Christians, and Falun Gong; how they operate in the South China Sea, how they interact with all the rogue states in the world, how they operate in the UN, how they act against nearly any human right imaginable. Taking these clues, the Hegemon China will be an absolute nightmare without moral compass. One must be really blind not to see this.
4. December 2018 at 13:10
Carl, So Canada has a poor human rights record? How about Switzerland?
How about Germany?
4. December 2018 at 14:04
Scott:
We aren’t embargoing any of those countries. And they’re actually good examples of smaller countries who have benefited greatly from the fact that the us hasn’t acted like a bully. My assertion again is that the US default behavior has not been bullying as you claim, but has been generally quite fair. And the second part of my assertion is that Trump is going against the norms of US international behavior not continuing them.
Also, would you say that China’s rise from poverty in the last 40 years has been hindered more or helped more by the policies and behavior of the US?
4. December 2018 at 17:27
Ben, You said:
“Given that China and many other nations subsidize exports heavily, the US will run large current-account trade deficits.”
You do realize that Germany, which doesn’t subsidize exports, has a massive CA surplus, and China does not, don’t you?
No, I guess you don’t realize that.
4. December 2018 at 17:28
Carl, Wait, so you are claiming that we are not bullying Canada, Germany and Switzerland? Seriously?
4. December 2018 at 17:30
DF, You said:
“China aims to destroy the West.”
Of course they do. Then they could export to Africa, instead of the West. I’m sure the Africans would buy all their exports.
When I post on foreign policy they really come out of the woodwork.
4. December 2018 at 17:37
Todd, I’m not expert, but this link discusses examples from the food industry:
http://trade.ec.europa.eu/doclib/docs/2012/july/tradoc_149679.pdf
Sugar quotas are obviously a major issue.
Here’s another link:
https://www.cbp.gov/trade/quota/guide-import-goods/commodities
Beyond quotas, there are other “buy America” polices, etc. Foreign airlines are restricted from competing within the US, ditto for shipping between US ports. I’m sure there’s lots of examples that don’t immediately come to mind.
4. December 2018 at 20:11
Because India isn’t regarded as a serious potential challenger.
Economics isn’t the primary issue here. Economics is secondary, and relevant in so far as it relates to the main issue: national power and status. It’s not fashionable for intellectuals like Cowen to be motivated by nationalism. So all sorts of side issues have to be raised. But it wouldn’t matter if China had elections and free speech and whatever else; as long as it was on a trajectory to dwarf the US economically and be more powerful, nationalistic reasons will motivate opposition and hostility towards China. Cowen gets invited to talks around the world because he’s a popular econ blogger in the US, and the US is the most powerful country in the world. If the US were a third rate country dwarfed by other countries, nobody would care about US econ bloggers.
4. December 2018 at 20:26
Scott Sumner:
Re Germany:
Back in the gaslamp era, when I was in college, the consensus academic view on Germany was that it was an “administrative state” for its heavy regulation and involvement with commerce.
Maybe that has changed. In addition to that, Europe rebates VAT taxes to exporters.
I must be stupid but to me this looks like a subsidy. A German exporter receives all the benefits of a first-world state— great infrastructure, great educational systems, civil courts, fire and police, a healthy population, national security— but freeloads. The exporter does not pay for all of those wonderful benefits.
I am told this is not a subsidy but it strikes me as a subsidy.
4. December 2018 at 21:40
Scott, we come out when you exhibit your naivety regarding foreign policy. Since you are incapable of conceiving international relationship as anything other than trivial trade relationships, it’s pointless to continue this discussion. Our relationship with China isn’t as simple as your toy model, and thankfully you do not represent the United States because we would be in an even worse state than with the current President.
4. December 2018 at 22:54
DF,
When you say “China aims to destroy the West”, do you mean that, given the zero-sum nature of political power, China’s continued economic growth and increase in political power will eventually lead to the destruction of the West? Or do you mean that China aims to destroy the West as a deliberate policy aim?
5. December 2018 at 07:39
Hi Scott,
It looks like my comments on this post are still “in moderation”. I’m not sure why…
Mark
5. December 2018 at 10:07
As for the US being the “most benign bully in the world” should we not consider as bullying the history of US policy toward Latin America and our Mexican, Spanish-American, Korean, Vietnamese, and Iraq wars?
5. December 2018 at 12:58
Mark, Good example, and sorry you got stuck in moderation so long. My oversight.
Ben, You said:
“Back in the gaslamp era, when I was in college”
It might be more useful for you to discuss topics you actually know something about
6. December 2018 at 07:55
Scott:
I’m afraid we’re dropping into the Monty Python “this isn’t an argument” skit. I’m saying that our current nationalistic trade behavior is out of character. You seem to be responding as though I’m defending our current behavior. My point again was that our default behavior has not been to bully little countries; it has instead been to support free trade as evidenced by our sponsorship of GATT, the WTO, NAFTA etc. I contend that our current actions are out of character.
If your contention is that we have always been a bully, then I would ask you to explain our sponsorship of those frameworks and agreements and to explain who in history has had our amount of power and bullied less. If your contention is that we have only recently become a bully under Trump, then we have nothing to argue about.
One point of clarification: I am speaking about the time since the Second World War. We rationalized a lot of bullying in our hemisphere before that.
6. December 2018 at 16:03
Carl, Yes, I agree that we have become much more of a bully under Trump. There were problems pre-Trump, such as FATCA, but much less severe.