Understanding Donald Trump May Help to Avoid US-China Trade War
Photo Credit: Reuters
By John F. Copper

Understanding Donald Trump May Help to Avoid US-China Trade War

Jul. 10, 2018  |     |  0 comments

President Donald Trump announced the US would be applying tariffs amounting to USD 34 billion on certain Chinese goods imported by the US, commencing from midnight of July 6, 2018. The list included water boilers, x-ray machine components, airplane tires, and various other industrial parts. China responded tit-for-tat with tariffs of an equal value on US products such as soybeans, pork, and electric vehicles.

Although the lists did not seem very consequential, the liberal Western media responded as if the sky was going to fall. A New York Times headline read, “Trump’s trade war with China is officially underway.” CNN reported that the US (meaning, of course, President Trump) had started the “biggest trade war in history.” The Financial Times wrote of a coming “three trillion trade war.” The Associated Press predicted weaker investments, depressed spending, unsettled financial markets, and slow global growth, and even suggested Chick-fil-A would lose business because the made-in-China cookers they use would now cost more. Some other media outlets predicted the Christmas season that usually boosts the economy would be affected adversely.

For the mainstream liberal media that hate President Trump, the expectation (and hope) was that the public fear generated would hurt the president.

What happened? Little or nothing! The US stock market rose; all three of the major indexes (NASDAQ, NYSE, DOW) went up. The Dow rose by more than one hundred points. The big stock markets in Asia also rose. Gold and silver (a haven during times of uncertainty) went down. Forecasts for the US economy remained positive.

In other words, the cooler minds and those that mattered disregarded the Chicken Little hype about a trade war.

The anti-Trump media then shifted gears. The new narrative was: if what Trump just did failed to start a trade war, one will certainly happen owing to his future acts. Bloomberg cited the former deputy US trade representative under President Obama, Robert Halleyman, who forecast that the present situation would “accelerate like a snow ball going down a hill.” The Atlantic magazine wrote of Trump already starting four trade wars, with more to follow.

To understand the predicted crisis that did not happen and what might come, one should try to grasp President Trump’s thinking on the matter and China’s response and then decide whether or not the bad things wrongly forecasted have been delayed and are yet to occur and Armageddon is just over the horizon.

Here are Trump’s essential points:

Number one: President Trump believes that free trade is merely an ideal, perhaps just a dream; it is not something that most nations actually practice. The reason is simple. Trade imbalances according to free trade theory (penned by British economist David Ricardo centuries ago) are to be managed by an adjustment of national currencies; countries that have deficits see an automatic downward movement of their currency and this corrects the imbalance by making their exports cheaper. Unfortunately, most nations want to keep their currencies valued low to prevent unemployment and their governments peg them accordingly. Governments also have a host of other means to keep their exports up and their imports down, such as subsidies, safety and health rules, interest rates and more. Thus, the system is plagued by manipulation and does not work to make trade free, or fair.

In the past, Trump notes, American leaders assumed that free trade is something to be adhered to sincerely (while others did not) and as a result the United States was a big loser in its foreign commerce. Other countries took advantage of America by blocking US imports with more obstacles against US imports than the US used (and still are). A US trade deficit followed — big time. US companies suffered; many collapsed.

President Trump perceives that he must “rock the boat” to change this practice and get a better deal for America. He speaks of a level playing field, fair trade, and reciprocal trade, but assumes there will be strong resistance to any of these.

One might conclude that President Xi is not hyperventilating as the Western media think he is over President Trump’s provocations, though he perceives some strong talk in response is normal and proper and is part of the game.

Number two: President Trump said the United States might withdraw from the World Trade Organization. To his opponents what could be more heretical?

But maybe Trump is onto something. After China joined the World Trade Organization in 2001, the US trade deficit with China grew exponentially. It is now four and one-half fold what it was. Some say the WTO caused this. Indeed, the WTO helped China’s leaders promote trade, which they did with great verve. China soon became the largest exporting nation in the world. But the organization that is responsible for managing world trade and promoting stability therein has plainly not served to balance trade relations and that is what is awry.

When China joined the WTO, President Clinton predicted that it created a win-win situation for the United States and that thousands of new jobs would be created in America. He was very mistaken. Then the situation got worse. Obviously, the WTO needs to be revamped or replaced.

Specifically, the WTO cannot fix (at least in Donald Trump’s mind) the US deficit. Indeed, it is not equipped to deal with the main causes for it. A nation’s (China’s in this case) internal commercial practices are very much at issue. Certainly, the WTO cannot command Chinese citizens not to save so much (which allows China better interest rates, economic growth, and easier exports) or tell them they should lower their work ethic. It cannot implore the United States to do something about its bloated government, with its high taxes and regulations and an expensive welfare and penal systems, which contributes to the trade deficit.

President Trump’s comment then may be the spark that starts discussions on needed reform of the WTO.

Number three: President Trump perceives that the US trade deficit leads to an increase in the US national debt, that is already perilously high (at USD 21-plus trillion) and threatens the US and the world financial systems.

Clearly, although some economists disagree, the trade deficit can be connected to America losing many of its prized industries (where jobs declined by 3.4 million between 2001 and 2015), higher unemployment, increased demand for government welfare, and thus larger budget deficits. Few can deny that.

The interest on the US national debt will soon crowd out other items in the budget. It will be larger than defense spending in a few years. More money will have to be raised through taxes and that will make US exports even less competitive.

Patently the situation is unsustainable. Large debt has ruined countries in the past. At some point it will undermine America’s global financial leadership — probably sooner rather than later. While China may supplant America’s role in managing global trade, it is definitely too soon for that to happen now. The Chinese Yuan still makes up but a quite small portion of global transactions. Anyway, President Trump perceives the deficit and the resultant debt are not good for the United States or Americans.

Arguably, President Xi Jinping and other Chinese officials can identify with President Trump’s thinking … and his strategy.

How so? Chinese leaders despise the Western media’s fake news that is as anti-China as it is anti-Trump. They have to contend daily with negative press and exaggerated blame of China ranging from it getting rid of term limits to air pollution and other environmental problems. But more important, China’s leaders — according to the US media’s refrain — want to put an end to the Western liberal world order that they see as based on zero-sum military power theory. That is true; but it is the same antiquated system President Trump attacks and thinks should be reformed or scrapped.

They also understand President Trump’s modus operandi: threaten the status quo (and even create chaos and panic) in order to negotiate more successfully. After all this is an essential idea-cum-strategy in China’s diplomatic playbook going back to Sun Tzu, who once said: “In the midst of chaos, there is opportunity.”

Thus, one might conclude that President Xi is not hyperventilating as the Western media think he is over President Trump’s provocations, though he perceives some strong talk in response is normal and proper and is part of the game. President Trump no doubt is able to handle this. In fact, he may welcome it; it adds to the poignancy (and impact) of his declarations.

Thus, we need to look at the trade dispute from a different angle. Doing so, we should learn not to expect a trade war.

Leave a Reply

Your email address will not be published. Required fields are marked *