The New Trade Wars

by Joseph Joyce

The New Trade Wars

The U.S. and China are headed down a road of retaliatory trade restrictionsStock prices are falling in response to the impact of such measures on corporate profits, while U.S. firms reconsider their global supply chains. But one curious aspect of the situation is why it has taken this long to flare up.

The “global imbalances” of the early 2000s were the Chinese trade surpluses and the U.S. deficits. These received a great deal of attention, but the effects of the U.S. deficit on the domestic economy was not always acknowledged. Those who complained about the loss of manufacturing jobs in the U.S. were met with responses that technology was the true culprit, or that Americans benefitted from the influx of cheap imports. Only in recent years has the evidence that there was an impact on U.S. employment been widely accepted.

Arvind Subramanian, currently an economic advisor to the Indian government, and Martin Kessler of the World Bank, in 2013 wrote about China’s emergence as a large-scale trading nation—in their words, a “mega-trader”—in the 1990s. They compared the impact of this development on the U.S. with the effect of Japanese exports to the U.S. in the 1980s and that of Mexican exports in the 1990s. They use different measures, including the average amount of imports and the change in imports, scaled either by the number of working age adults or domestic absorption.  On all these measures, the Chinese shock exceeded the earlier ones by several orders of magnitude. Yet it did not draw the same level of indignation that occurred during the Reagan administration or the Clinton administration in response to the earlier surges in imports. There were calls for the IMF and/or the U.S. Treasury Department to sanction China in some fashion for the undervaluation of its currency, but both the Fund and the U.S. government were reluctant to criticize the Chinese government.

Subramaninan and Kessler examine several reasons for the relative silence. The one which seems most relevant is the stance of U.S. businesses towards China. For many years, these firms viewed Chinese markets as a sort of “El Dorado” of immense consumer markets that would yield large profits as the Chinese economy grew. Moreover, U.S.-sourced foreign direct investment contributed to the Chinese export expansion. U.S. firms were willing to sacrifice some U.S. jobs, particularly if this put pressure on domestic wages.

However, there has been a growing realization that business conditions in China have not evolved as U.S. firms wished. There are profits for firms, particularly those with global brand names, but the Chinese government has carefully controlled access to its markets. Moreover, there are long-standing allegations of intellectual property theft. As a result, U.S. firms have become much less optimistic about their future in China and increasingly concerned about competition from Chinese businesses.

Subramanian and Kessler viewed the situation in the following way: “At the risk of overgeneralizing, the challenge in the trade arena can be summarized as follows: China is happy with the status quo and the United States is not.” But the response of the U.S. to impose tariffs will not be effective, and will have adverse domestic effects. Subramanian and Kessler argued that a common position with other nations would be the most effective negotiating tool: “Multilateralism ensures that China’s trading partners will have enough heft to negotiate with China in a more balanced manner. For example, China might be willing to open its markets in return for the United States, European Union, India and Brazil opening theirs…The opprobrium of being a deviant from multilateral norms is China’s great fear, rendering multilateralism the best weapon the word can deploy against a dominant China.”

But the Trump administration has alienated potential allies that have similar concerns and could join it in formulating an effective response. When even Canada is treated as a threat, then there can be no joint position. The Chinese government can justifiably claim that it faces a government with a deep and profound ignorance of how international trade functions.

Trump may settle for a face-saving public statement that seems to satisfy his demands, much as he has done with North Korea. Many of his advisors, however, are advocating a hard stance, as the Chinese government considers its options. If the situation continues to deteriorate, the U.S. will have squandered an opportunity to make a case for fair and effective rules on intellectual property rights, and instead will precipitate a period of chaos and disruption.

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