In Samuel Beckett’s postwar play “Waiting for Godot,” a defining work in the theater of the absurd, Didi and Gogo are waiting for Godot, nobody knows who Godot is, and he never comes. In many ways, the current trade negotiations between the American government and the Chinese government verge on the absurd: for most subjects of the two governments, such negotiations are meaningless and tragic. Look at the economics and politics of international trade with the economist’s non-romantic eyes.
(The picture below represents the two actors who play Didi and Gogo in a Berliner Ensemble interpretation of “Waiting for Godot”: respectively, from left to right, Axel Werner and Michael Rothmann.)
Axel Werner, Michael Rothmann – Theaterproduktion “Warten auf Godot” (von Samuel Beckett, Regie: George Tabori), Berliner Ensemble, Probebuehne, Premiere am 4. Februar 2006, Berlin-Mitte.
Forget about the small absurdities that often pop up in the trade war that the US government has launched against China. Just one example in today’s Wall Street Journal (“Can This Marriage Be Saved? Chinese-U.S. Integration Frays,” May 9, 2019):
Senators have proposed barring local governments from using federal funds to buy railcars from China’s state-owned rail company, ostensibly because the cars could be used to spy on American commuters.
Let’s focus instead on the big absurdity picture, and look for some rational-choice explanations. Rational choice means using the generally rational behavior of individual actors to explain social, economic, and political phenomena. Rational choice does not mean that economic actors are omniscient, but that they try to maximize their utility on the basis of the information that they have or find profitable to acquire.
Trade negotiations are run on the illusion that each side is bargaining on behalf of its citizens, as Paul Krugman reminded us in a well-known article (“What Should Trade Negotiators Negotiate About?” Journal of Economic Literature, March 1997). As Krugman noted, if economists had their way, there would be no need for trade negotiations, because there is no reason one would negotiate with the goal of imposing handicaps to oneself. Trade negotiations do look absurd: the government of each country grants “concessions,” or import liberalizations, which will benefit most of its subjects, in order to obtain for some of its subjects the privilege of using “national resources” to export goods and services to the subjects of the other ruler.
For more than two centuries, economists have shown that protectionism hurts most of the residents of the country that is supposedly “protected,” irrespective of whether the governments of other countries do the same to their subjects or not. Joan Robinson, the famous Cambridge economist, suggested that retaliation is as sensible as it would be “to dump rocks into our harbors because other nations have rocky coasts.” (Krugman attributes the famous aphorism to Frédéric Bastiat, but I have been unable to find it in the latter’s work. Robinson’s quote is from her 1947 book, Essays in the Theory of Employment.)
As Krugman prudently recognized, though, one can find a good reason for trade negotiations. Perhaps they are not absurd after all. Assume that your own government is actually intent on defending the common interest of the vast majority of its subjects (perhaps you can then call them “citizens” instead of “subjects”). Given that assumption, you and your government recognize the danger that a successor government may yield to special interests and limit your freedom to import. Some exporters may share your fears as domestic protection might lead to trade wars that would be harmful to them too. Therefore, you may want trade negotiations and treaties to tie the hands of your own government. Why trade negotiations and agreements? We could answer with a tired (and not very polite) formula: “It’s your own government, stupid!”
This approach explains one phenomenon that is incomprehensible to those who don’t understand that most residents of a country benefit from the freedom to import. If you understand the economic argument for free trade and are a resident of China, you would welcome the efforts of the US government to prevent your own government from limiting your imports from America. In exactly the same way, if you are a resident of the United States, you would applaud the efforts of the Chinese government to prevent your own government from interfering with your imports from China.
We may make room for ignorance. Perhaps Donald Trump and Xi Jinping never read Adam Smith, David Ricardo, or Jean-Baptiste Say, and none of their trusted advisors did either. Perhaps they are deeply persuaded that they are helping “their people”—as if “their people” had the same preferences and interests besides the liberty of each to do anything peaceful he wants to do and can do. But note that ignorance, which is as widespread among the rulers as among the ruled, is actually one reason to limit the state and not grant rulers the power to control trade and manage society.
It is generally more fruitful to try and explain behavior on the basis of individual interests rather than from ignorance. The public choice school of economics has successfully modeled politicians and bureaucrats as ordinary, self-interested individuals. So perhaps it is an illusion to think that your angelic government is negotiating for you? Perhaps your out-of-control government is negotiating tor itself. Both Trump and Xi have an interest in pleasing their supporters, that is, the part of the population that can keep them in power. One might think that the rulers would want as much free trade and thus as much prosperity as possible. But Trump obviously believes that his supporters (about one-third of registered voters voted for him) don’t want free trade. And Xi probably thinks that his own supporters (one-third of Chinese adults, perhaps?) don’t want their government’s power limited by the policies of, or agreement with, the government in DC.
Trade negotiations may not be between angelic governments each trying to protect its citizens’ interests, but between Leviathans intent to maintain or increase their power. “Running” the economy and controlling their subjects’ imports can only increase or confirm Xi’s and Trump’s personal power. How else to explain that Trump has betrayed his farming supporters by launching a trade war with China? Drop some supporters if you can get new ones. Ignorance probably plays a role, but so do the personal interests of rulers. In this perspective, the current trade war is not absurd from the point of view of the rulers, although it is from the perspective of the subjects.
The current act of the real-world play in the theatre of the absurd is that Trump and Xi are playing a chicken game with the possible outcome that none of the two will yield and that most of their subjects will be harmed. They play chicken with their subjects’ cars. Another intriguing absurdity of this chicken game is that one of the players is the chief ruler of a state called tyrannical (which it is in many respects), and that the other player is the chief state official of a country called free (which it is in many respects). And both apparently have enough power to wage a trade war, if not a worse war.
READER COMMENTS
David S
May 10 2019 at 11:04am
At least the US government is being consistent for once – if trade sanctions against Iran and North Korea are a good idea, why not try trade sanctions against the US as well?
That said, it is possible for a trade war to have a positive NPV. If the trade war results in both sides lowering tariffs soon enough. It would be interesting to see how fast it would need to be.
My initial guess would be that you have 5 years to balance out the tariffs. So if you lower tariffs by 5% after five years, you could pay for one year of 25% tariffs. That would be based on the time value of money used by new startups, which seems to be vaguely similar levels of risk.
Michael Rulle
May 10 2019 at 11:20am
Yes, stating the obvious. Hard to disagree. I think you left out one angle of the argument. It is not just the citizens of the countries who have tariffs who are hurt, but also the citizens of the countries who might otherwise sell to those countries with tariffs who are also hurt. I am sure there is an opportunity cost in there somewhere.
China, by international agreement, formal or otherwise, has been the biggest abuser of its citizens in this regard. But it also has been the abuser of foreign entities through its trade barriers, and various information and ownership requirements to do business there (this comes from the investment side more than the trade side). They have certainly benefited from the latter—and not all of this “information sharing” has been voluntary.
So there is a plausible argument that creating short term trade costs might compel them to change some of there ways. I have no idea what Trump thinks and he is not my point. A peaceful rational world is the ideal—-and maybe sometimes pressure can change behavior—theoretically it certainly can.
Pierre Lemieux
May 10 2019 at 5:05pm
From an economic viewpoint, it is not impossible but unlikely, as Adam Smith already argued. The “chicken tariff” on light trucks, enacted by the US government in 1962 to incite the EEC to reduce its tariff on poultry, is still on the books after more than half a century. Indeed, the US government recently bullied the South Korean government into renouncing a previous agreement to eliminate it to between the two countries.
Don’t forget that a tariff creates a new constituency. The increased return gained in the protected industries will soon be competed away, so that the owners of protected firms will end up earning only a normal return. Drop the tariff, and you impose a loss of normal profits, not of extraordinary profits.
From the point of view of any liberal ethics, a retaliatory tariff is impossible to defend. What would you think if the US government were to forbid Americans to marry North Koreans in order to incite the North Korean government to drop its own practical ban on marrying Americans? See my previous post on this. A tariff to incite a foreign state to drop its tariff is, in effect, one ruler saying to another: “I am harming my subjects until you stop harming yours. Be warned!”
Craig
May 11 2019 at 11:43am
“Don’t forget that a tariff creates a new constituency.”
I would readily acknowledge that people can use it for protectionist purposes. Tariffs aren’t unique in this respect. Every other tax I have been subjected to in the US, from sales tax to property tax to income tax is levied in ways that do essentially the same thing.
“From the point of view of any liberal ethics, a retaliatory tariff is impossible to defend.”
I disagree, in fact, I would suggest that under current circumstance not levying a tariff is itself immoral. Free trade is spoken of almost exclusively in terms of international trade, but the international border is itself irrelevant, all trade is subject to rational basis taxation. Now, for sure,tariffs will hurt the person taxed. Non-tariff taxes, don’t? We shouldn’t be burdening non-international trade with taxes so that international trade can be relatively exempt from taxation, particularly given the state of ‘free trade’ which is anything but. I mean, sure, it’s a great idea, but they’re doing it wrong. Taxes must shift as a result because you cannot tax people to protect and defend those who discriminate against them. The lack of mutuality changes the equitable nature of taxation imposed.
At the end of the day, Trump is challenging the very fundamentals of the post-WW2 international order. And he is 100% correct to do so. The majority of our trade is with countries that actually are taking advantage of us. From NATO to the Persian Gulf to the Pacific Rim, there’s a series of trade deals, commercial relationships, capital markets and an American security guarantee. And that costs us hundreds of billions and really if you fully load it its probably close to a trillion, if not more than a trillion. That cost is being imposed on a country $20tn in debt with $100tn in contingent obligations and the deficit is being financed in no small part by our geopolitical adversaries.
Pierre Lemieux
May 12 2019 at 10:32pm
Craig: Let me focus on one point, which I think invalidates most of your argument. You write, “countries that actually are taking advantage of us.” It is generally more methodologically useful–and more consistent with a free society–to avoid these collective and collectivist wholes. (Name me one Chinese who is taking advantage of me.)
Henry D.
May 11 2019 at 6:21pm
To put the so-called “FREE” trade between the U.S. and communist China into perspective, let’s use this analogy. A baseball game is played between the Red Sox and the Yankees. For Red Sox hitters: 3 balls – a walk, 4 strikes – a strikeout, a single becomes a double, a double becomes a triple, a triple becomes a homerun, and a homerun counts as 2 runs. For Red Sox pitchers: 2 strikes – a strikeout and 5 balls – a walk. For Yankee hitters and pitchers, they follow MLB rules. Who wants to play this baseball game? The Yankees does not, for sure, want to play the rigged baseball game. Communist China has practiced unfair trade policies and broken most of the trade rules in the book. Nobody is against free trade. Trump said he’s a free trade guy. Tariffs are a mean to get communist China to stop practicing unfair trade policies. The U.S. is better off in the long run reducing trade with communist China. Let’s be real, communist China wants to dominate the world. Communist China competes against the U.S. economically and geopolitically. The U.S. should do a lot more bilateral free trade with India, Vietnam, Mongolia, Nepal, Myanmar, Laos, Thailand, Philippines, Taiwan, South Korea, Japan, Malaysia, Pakistan, and Indonesia.
Jon Murphy
May 13 2019 at 9:47am
In your baseball analogy above, however, the Red Sox are American citizens, the Yankees are the Chinese, and the Yankees are the Chinese government that established that rule change. To the extent that the Chinese government’s behavior is unfair, it is unfair to Chinese citizens, not Americans.
These are contradictions. Either you’re for free trade, which involves increasing trade, or you’re not for it, which involves reducing trade. Plus, it contradicts your immediately prior statement that the goal of tariffs is to get the Chinese government to “play by the rules.”
He’s also said, more frequently and more recently, that he is “the tariff man.” Plus, his actions indicate he is staunchly opposed to free trade. Even when the EU government offered to repeal all tariffs on US goods, he rejected that deal demanding the government buy more from US manufacturers, a blatant call for not-free trade.
Pierre Lemieux
May 13 2019 at 8:40pm
Henry: I think Jon has it right. Let me just stress one of his points. It’s a crucial point. One might pity (as you and I do) the poor Chinese individuals who are, in many respects, regimented by their government into a fictitious, collectivist whole called “China.” But this is not a reason to force individuals in a free society to emulate the process. For an American, free trade is essentially the freedom to import what he wants or to export what somebody somewhere in the world wants to buy. Moreover, the way to help the hapless Chinese individuals is not to forbid Americans to trade with them and to transform America into a beacon of holism.
I have addressed some of your points in a recent Regulation article, at https://object.cato.org/sites/cato.org/files/serials/files/regulation/2018/9/regulation-v41n3-1.pdf.
Michael Pettengill
May 11 2019 at 6:17am
Increasing living costs to high levels for twice the population of the US by creating high labor cost jobs is abuse?
The US is thus a far bigger abuser of its population by increasing living costs while cutting labor cost of tens of millions.
China treatment of natives of occupied territories is very much like that of the US, eg the trail of tears, the reeducation camps for native children, removal and isolation in prisons, punishing them for pursuing their religion.
China has gained by embracing Adam Smith and Keynes. Smith defined the wealth of nations as the productivity of its people. Keynes argued government should ensure all workers were employed to make capital cease to be scarce, demanding a price less the the labor cost to produce it, and over time the return to capital covers its labor costs.
This is in contrast to recent trends in the US back to the mercantilism Adam Smith argued against. China is like colonial America rebelling against the British control over all industrial production, the british making it a high crime to “transfer” trade secrets to British enemies.
Trump is acting more like the British which was restructuring its rules of global trade in the charters of, and tariffs paid by, trading companies. These changes reduced tariffs and cut the profits of American smugglers, but in turn, the Britiish needed to tax internal commerce in the Americas which had grown too self sufficient and no longer paying tariffs on enough imported British goods.
China has focused on paying Chinese workers more to produce more. China needs to import a lot, but its trying import more raw material instead of finished goods and export higher value finished goods instead of intermediate goods, but more importantly to consume more Chinese high value finished goods. Ie, the goal is keeping all the spending by the Chinese in China. Ie, money buying cars and trucks all stays in China, not have rents sent to the US and EU.
And China is targeting tariffs very cleverly. For example, Chinese tariffs on lobster hurt US producers while rewarding Canadian producers who can source from the US at depressed prices.
Thaomas
May 10 2019 at 12:30pm
The best (most generous) way to understand traditional trade agreement negotiations is of a way of overcoming the asymmetric political power of those who benefit from restrictions — harm to them is evident and immediate but the general benefit is diffused. Multilateral and multi-sector negotiations being in those who will benefit from reductions in restrictions by trading partners and make a general reduction in restrictions politically feasible.
This theory has not much to say about negotiations in which China simply wants to retain the existing level and structure of restrictions and the US wants either to reduce certain Chinese restriction or the overall trade balance (which is a macroeconomic phenomenon not affected by trade restrictions at all).
Pierre Lemieux
May 10 2019 at 5:10pm
Well said. (However, your second paragraph would be clearer if you said “the Chinese government” instead of China and “the US government” instead of “the US.”)
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