Donald Trump’s trade war with China is by far the main threat to the U.S. economy at the moment. While fears of a recession are overblown, if not for the trade war, no one would even be talking about a recession right now.
There is no doubt that Trump’s trade war is slowing growth and costing the U.S. economy jobs. The problem is more than just his tariffs and China’s retaliation.
Tariffs are taxes, and they slow the economy in the same way as other taxes do. They are effectively a consumption tax that disproportionately hit low- and moderate-income families, pulling money out of their pockets which they otherwise would have spent.
But tariffs by themselves are not that bad. After all, if we face average tariffs of 15 percent on everything we buy from China, that would put us in roughly the same situation as if China’s currency rose in value by 15 percent against the U.S. dollar. In both cases, we would be paying somewhat more for items imported from China, which would encourage some domestic production and increased imports from other countries.
The bigger problem with Trump’s tariffs is the uncertainty they create. By running his trade policy like a reality TV show, he is making it impossible for companies to engage in long-term planning on their investment decisions.
A company looking to produce cars, planes, or anything else with Chinese inputs has no idea what U.S. trade relations will look like with China five or 10 years down the road. Will they be able to import items with minimal tariffs, as was the case pre-Trump? Will they be paying 25 percent in tariffs as Trump digs in for the long haul? Or will they be banned from dealing with China altogether, as Trump threatened in one of his tweets?
On the other side, China is the most rapidly growing market in the world. Should U.S. companies be looking to sell their output to China, or should they assume that Trump’s trade war has effectively put the country’s market off-limits to U.S. companies for the foreseeable future?
This uncertainty is the reason that investment fell in the second quarter of the year. It is also the reason that manufacturing has been so weak in recent months, with production in August at 0.5 percent below its year-ago level.
While the trade war is clearly causing some pain in the U.S., this is less true in China. Unlike Trump, China’s leaders actually have a strategy.
In contrast to Trump, who has been picking fights with almost everyone, China has been lowering tariffs with the European Union and other trading partners. It also has adopted stimulatory fiscal and monetary policies to offset the drag that the trade war is placing on its growth. Contrary to Trump’s claims, there is no reason to think that China will be forced to raise the white flag of surrender any time soon.
But there is some likely good news in this story. Trump may not be very good at economics or negotiating, but he does realize that he has an election coming up.
For purposes of getting re-elected, it will be very much to Trump’s advantage to have a victory in the trade war with China. There is a simple way for him to do this: He takes whatever deal Chinese leaders put on the table and declares a huge victory. He will say how the deal is a win for the U.S.’s great workers and farmers.
It does not matter at all if the deal truly does nothing to help workers and farmers. Trump will insist that it does, and we all know what Trump will say about anyone that questions his claim: Fake news!
But the good news part of this story is that most of us really would be better off with Trump losing his trade war with China. While he ostensibly started the war over currency values, the turf has quickly shifted to protecting the intellectual property claims of major U.S. corporations. U.S. workers have no stake in increasing the strength of Boeing and GE’s patents in China.
In reality, China’s economy is already 25 percent larger than the U.S. economy and will likely be more than twice as large by the end of the next decade. Since China spends the same share of its GDP on research, the country will undoubtedly have many great technological breakthroughs over this period. We should be far more interested in ensuring our access to China’s innovations than worrying about protecting Boeing and GE’s patents.
With any luck, the person occupying the White House in 2021 will understand this fact. The next round of trade negotiations can focus on sharing technology that will allow us to address climate change, deadly and debilitating diseases, and other major problems affecting the world. If that proves to be the case, we will all be happy that Donald Trump lost his trade war.