A year ago, Tyler Cowen claimed that President Trump won round one of the trade war with China:
I’m not entirely convinced we won even the first round of the trade war, although the claim might be true. The stated goal of President Trump and his advisers was to reduce the US trade deficit with China. A secondary goal may have been to slow the growth of China’s economy. A third goal might have been to weaken the position of Xi Jinping, who has been moving China in a more repressive and nationalistic direction.
Today, we know that the US failed spectacularly on all three counts. Indeed the last year has been an unmitigated disaster for Trump administration protectionists. Today’s Bloomberg has an article arguing (correctly) that China ended up winning the trade war:
The trade deficit has risen to record levels in 2020:
The goal of slowing the rise of the Chinese economy has also failed. The Chinese economy (in dollar terms) is now expected to overtake the US in 2028, five years earlier than estimated just a year ago. (In PPP terms they overtook us years ago.)
And the prestige of Xi Jinping has risen dramatically relative to the prestige of President Trump, even before the recent fiasco on Capitol Hill. In China there’s a widespread view that our botched handling of Covid-19 shows the superiority of an authoritarian system, at least on questions of public health. (That’s not my view, as Taiwan did better than China.) The prestige of America has never been lower.
Here’s what Tyler said a year ago:
A third set of possible benefits relates to the internal power dynamics in the Chinese Communist Party. For all the talk of his growing power, Chinese President Xi Jinping has not been having a good year. The situation in Hong Kong remains volatile, the election in Taiwan did not go the way the Chinese leadership had hoped, and now the trade war with America has ended, or perhaps more accurately paused, in ways that could limit China’s future expansion and international leverage. This trade deal takes Xi down a notch, not only because it imposes a lot of requirements on China, such as buying American goods, but because it shows China is susceptible to foreign threats. . . .
It is too soon to judge the current trade deal a success from an American point of view. Nevertheless, its potential benefits remain underappreciated, and there is a good chance they will pay off.
It’s no longer too soon to judge. Perhaps without Covid-19 the outcome would have been more favorable to the US, but as of today the trade war looks like an own goal for the US. The correct policy would have been to join the TPP back in 2017. And increase high skilled immigration from China (including Hong Kong.) Let’s hope the Biden Administration learns the right lessons.
READER COMMENTS
Alan Goldhammer
Jan 12 2021 at 2:55pm
China is also supplying COVID-19 vaccines to a number of countries such as Indonesia, Pakistan and several in the Middle East.
Mark Z
Jan 12 2021 at 5:49pm
Which is something they owe to the fact that they were much less risk averse than the US and less stringent in restricting availability to the public, thereby getting a head start on us.
Jon Murphy
Jan 12 2021 at 3:04pm
Perhaps, but COVID did happen and the trade war made it much, much harder for the US to combat the virus (the Trump Administration greatly restricted importing PPE and ventilator equipment)
LEB
Jan 12 2021 at 4:54pm
Clearly the US lost out economically from the trade war, but I thought that recent estimates suggested that China lost even more? (link below) A lose-lose situation is not the same as a victory for China, as they likely would have done better still in the absence of a trade war.
https://marginalrevolution.com/marginalrevolution/2020/10/no-china-did-not-win-the-trade-war.html
Scott Sumner
Jan 12 2021 at 6:08pm
Maybe, but some estimates suggest that the North lost more soldiers than the South during the Civil War. But I’d say the North won the war.
LEB
Jan 12 2021 at 6:40pm
That’s a good line haha. Still I think that declaring a winner in this fight depends a lot on what you perceive the objective to be. If you take it to be primarily designed to weaken China as an economic power, it arguably did that (depending on the metric).
Peter Thiel views the trade war as successfully persuading both the right and the left to take China seriously as a geopolitical foe. The left is now much more hawkish on China than before 2016 and Biden appears to be considering a continuation of some of the same policies.
This may all be a bad development from a neoliberal perspective and still be a success from the perspective of those who advocated it.
Brian
Jan 12 2021 at 8:50pm
I seldom read foreignpolicy.com so I am wondering what is a geopolitical foe?
The U.K. seems to have government health care, and Canada sort of single payer health care, so does that make them geopolitical foes? How high does the probability of a China invasion of the continental U.S. have to be in the next 100 years in order for them to be a geopolitical foe? Is geopolitical foe status dependent upon some measure of industrial subsidies? Does every subsidy dispute imply the litigants are geopolitical foes or is this label reserved only for some relationships? Are there any countries that have no industrial subsidies?
Scott Sumner
Jan 13 2021 at 12:02pm
Surely the goal would have been to reduce the CCP’s power, and it clearly failed to do that—indeed the opposite occurred.
Henri Hein
Jan 13 2021 at 1:49pm
That could be self-fulfilling prophecy in action. The trade war Trump started worsened relations on both sides, across the board. That does not mean relations would have worsened absent the trade war.
J Mann
Jan 13 2021 at 11:30am
I hope we didn’t have the goal of weakening China’s economy for its own sake – that strikes me as monstrous.
It is IMHO possible for China’s trade surplus to increase and the US still to “win,” but I don’t think that’s likely here. For example, you could hypothesize that our trade war caused China to take some steps that helped the US economy to increase more (or decrease less) than it otherwise would have, even if the surplus increases.
I’ve seen people make this case for Reagan’s pressure against Japan – that by encouraging Japan to move some production tot he US, he left the US better off. (My priors are sufficiently free market that I’m skeptical, but I guess you never know, or at least I never do.).
Scott Sumner
Jan 13 2021 at 12:05pm
You said:
“I hope we didn’t have the goal of weakening China’s economy for its own sake – that strikes me as monstrous.”
Me too. I don’t think people stop to think about just how evil some of these ideas actually are. Perhaps because I personally know ordinary Chinese people who live in China, I have a better idea as to what’s at stake here. We are talking about the lives of 1.4 billion people.
By all means try to discourage China’s repressive policies, but don’t try to hurt China itself. We should be trying to help China become richer.
MarkW
Jan 13 2021 at 3:34pm
By all means try to discourage China’s repressive policies, but don’t try to hurt China itself. We should be trying to help China become richer.
At what points in its history would that have been the right strategy for the USSR?
On the one hand, I regard hundreds of millions of ordinary Chinese being able to join the global middle class as one of the greatest miracles of my lifetime. On the other hand, doesn’t it seem that growing economic success under Xi has been a key enabler of increasing international assertiveness and internal repression? If China were to continue its growth and reach U.S. per-capita levels (meaning an total GDP three times that of the U.S.) would that improve or worsen prospects for global peace?
Scott Sumner
Jan 13 2021 at 6:04pm
You said:
“On the other hand, doesn’t it seem that growing economic success under Xi has been a key enabler of increasing international assertiveness and internal repression? ”
China was vastly more repressive under Mao, when it was much poorer. More broadly, the correlation between repression and wealth is strongly negative across countries and over time. Yes, there are exceptions, but I’d rather base policy on the most likely result.
If China starting invading other countries (as Russia does), then the case for sanctions would be far stronger.
As countries get richer, they have more to lose from war.
Jose Pablo
Jan 13 2021 at 7:47pm
We have been pursuing this idea that economic development will lead to a freer Chinese society for quite a long time. Even if you are right and the trend is positive (which I doubt, we are not better now that in 1989), the evolution is painfully slow. To the point that is more than fair to discuss whether or not it is the right approach or a more “muscular” one is required.
And in the meantime, the country is growing in assertiveness, political regional cloud and military power, increasing the risks of a miscalculation regarding the consequences of economic prosperity on both internal repression and external war likelihood.
As countries get richer, they have most to lose from war, yes, but also, they can wage a far more destructive war. And in this case, you don’t base your policy on the most likely outcome but in avoiding the risk of a really bad scenario even if their probability of occurrence is low. And it is difficult to deny that the consequences of the worst-case scenario have grown much worse due to the Chinese development supported and encouraged by the free world.
We have made this mistake before with the Nazi Germany and with Stalin after WWII (and the 1962 crisis could have gone the other way) … apparently, we don’t learn from our mistakes.
And this is from a utilitarian point of view. From a moral perspective (which I think should be adopted in this issue) the CCP should have been banned from the international community long time ago and Mao pursued for crimes against humanity. I think it is a shame to all of us that none of these things have happened.
Scott Sumner
Jan 14 2021 at 1:33pm
Jose, I’m confused. What should we have done with Stalin?
And what should we have done with Germany in 1914? (Germany in 1914 is a much better analogy to modern China than Germany in 1938.)
Here’s what I’d do for a start. I’d suggest that America should stop having its president recommending that the Chinese put a million Muslims into concentration camps. I think we can all agree on that proposal.
E. Harding
Jan 13 2021 at 4:07pm
“By all means try to discourage China’s repressive policies, but don’t try to hurt China itself. We should be trying to help China become richer.”
Do you hold the same stance on Russia, Sumner?
Mark Z
Jan 12 2021 at 6:03pm
How much of the growth statistics is attributable to trade policy? I think that the sign on the effects of the trade war was negative for both China and the US (I assume you agree and that you’re just claiming that the magnitude of the effect on China is lower than on the US?), but with respect to the last year, isn’t it probably the case that nearly all of the forecast change is due to the epidemic being worse in the US than China?
I’m not so ‘long’ on China these days. In the long run, Xinping’s rising star will probably be bad for China’s economy, as the regime seems to be increasingly retreating to old school communist type policies like central planning and nationalization.
Scott Sumner
Jan 12 2021 at 6:10pm
I agree that Xi Jinping is bad for China, but I don’t see evidence they are moving back to central planning. The bad trends are more political than economic.
Jose Pablo
Jan 13 2021 at 4:51pm
Actually, which is totally unacceptable in China is, precisely, its political system.
I still have a hard time understanding how any free country on Earth can find the Chinese regime legitimate or internationally acceptable.
The Chinese government should be barred from any International Organization and strongly condemned by any self-respecting Human Rights Court.
From a libertarian point of view any Chinese economy related issue should be just immaterial compare with the illegitimate, oppressive, and profoundly immoral nature of the Chinese political regime.
Scott Sumner
Jan 14 2021 at 1:35pm
How do you feel about trade with Saudi Arabia?
What should we do about India’s oppression of its Muslim population?
Xiao M
Feb 6 2021 at 12:50am
Your suggestions are simply unrealistic and insanely ridiculous. You suggest banning China, the largest economy in the world and emerging superpower, from the international community. It is as ridiculous as banning America for its history of crimes and interventions in other countries. It would plunge the world into self-destruction. These views make you an extremist.
To put it in perspective, what you described is exactly what China has achieved in regards to Taiwan. Taiwan is banned from most international organizations organizations and no country has diplomatic relations with it, China sees it as an illegitimate country. It would never in the future happen the other way around.
Phil H
Jan 12 2021 at 6:28pm
“ the regime seems to be increasingly retreating to old school communist type policies like central planning and nationalization.”
As Scott says, this isn’t happening. There’s pervasive misreporting of what’s really going on in China’s state sector, which is just this: upscaling. Just as private sector firms are getting bigger and controlling their workers more tightly, state sector organizations are doing the same. This is the natural result of technology advances (internet + improved management, Drucker is very popular). But it’s consistently misreported in America as some kind of statist plot.
Xi’s big fails are legislating to give himself a third term, and the Xinjiang fiasco. On the economy, there’s been no change in trend.
E. Harding
Jan 13 2021 at 4:09pm
More countries consistently supported China’s Xinjiang policies than opposed and terrorism in Xinjiang has gone down to zero; it’s hardly been a “fiasco”.
Scott Sumner
Jan 13 2021 at 6:05pm
Sadly, President Trump supported the crackdown in Xinjiang
E. Harding
Jan 14 2021 at 6:52pm
No, he didn’t. The U.S. banned tomato and cotton imports from Xinjiang just a few days ago. Policy and public statements outweigh rumors. Russia, Nicaragua, and Morocco would never ban tomato and cotton imports from Xinjiang.
Brian
Jan 12 2021 at 8:20pm
You said “retreating to old school communist type policies like central planning and nationalization”.
The business media does not seem to be saying this if you look at the course of the past 25 years. In 25 years, there might have been pauses and rollbacks that I haven’t noticed but the overall trend is clear. Look at the proliferation of US and Hong Kong traded China stocks today compared to 10 years ago. Speaking of liberalization, note that China just agreed with the EU the right to open businesses without forming a joint venture with a China-based partner.
Mark Z
Jan 13 2021 at 1:07am
From what I’ve read the regime is increasingly asserting greater control over the private sector (https://www.wsj.com/articles/china-xi-clampdown-private-sector-communist-party-11607612531) and is rumored to be considering nationalizing the Ant Group. Maybe it’s an overhyped trend, but somewhat concerning.
Scott Sumner
Jan 13 2021 at 12:08pm
I think what’s going on here is that the occasional reverses of liberalization (which are real, as you say) receive far more news coverage than the steady advance of liberalization on other fronts.
Harvey Haddix
Jan 12 2021 at 7:54pm
Seems to me what is going on is collusion between the China Communist Party and multinationals to repress China wages, aka labor share of income, to gain global market share.
The antique idea is that trade flows are determined by free markets and comparative advantage. Rather, it is collusion or coordination between government and enterprise that create 95% of comparative advantages.
This is not so extreme; the same thing happens across much of the Asian Pacific, and parts of Europe, notably Germany. This model should probably be taught in econ 101.
Of course, chronic trade deficits for the US are the result, and a decline of the US manufacturing base, and of related technologies and skills.
The IMF has advocated the US cut its current-account trade deficit in half, but why half and not two-thirds or entirely? (The IMF fears asset-value bloating in the US as foreign capital looks for a home in the US. House values have exploded).
The IMF helpfully offered advice on how the US could cut the trade deficit in half: cut wages.
In other words, what the globalists offer is that different nations should engage in “upping the ante” on reducing labor share of income to get into trade balance. So, the answer to trade deficits is to cut wages in the US (Sumner advocates “more savings or investment” in the US, in a world glutted with capital anyway. This is the obverse of “lower wages”).
Some, such as Warren Buffet, advocate the US tax capital inflows. Maybe so. Trade tariffs probably work, perhaps should just be higher.
An interesting option is for the Fed to print money and buy sovereign bonds from China and Germany, equal to the size of trade deficits run with those countries. Sounds nutty, but reason it through.
The sad thing is, Biden won’t be making policy decisions based on the merits. He will make trade decision based on his political affiliations. Follow the money.
Scott Sumner
Jan 14 2021 at 1:41pm
I think I’ll stick with the “antique” idea, unless you think Switzerland’s huge current account surplus is due to wage suppression.
Warren Platts
Jan 15 2021 at 1:38pm
Yes, that is what I think. In general, any country that is running a “massive” trade surplus, that is usually probably because that country’s population cannot afford to buy the country’s production: S – I = NX
Jon Murphy
Jan 15 2021 at 2:34pm
The accounting identity you discuss does not imply that a country’s population cannot afford the production.
Jon Murphy
Jan 14 2021 at 2:10pm
Well, the problem is comparative advantage is subjective, not objective. Governments can no more create comparative advantage than they can create my taste for chocolate.
Remember that comparative advantage means one person has lower opportunity cost compared to another. If the person being compared to changes, then comparative advantage can change even though nothing else does. In other words, A may have comparative advantage to B, but not to C.
Additionally, opportunity cost is ephemeral and depends on the perceived alternatives the individual faces. Opportunity cost changes as the alternatives change.
In short, to teach comparative as you would want in Econ 101 would require demolishing the very foundations of economics.
Jose Pablo
Jan 14 2021 at 9:41pm
This idea of the US manufacturing decline is misguided and does not represent the reality of what has happened for the last 70 years.
https://www.stlouisfed.org/on-the-economy/2017/april/us-manufacturing-really-declining
Floccina
Jan 13 2021 at 11:37am
In trade wars you aim your weapons at yourself.
su tang
Jan 13 2021 at 7:49pm
Free trade to Nazi Germany.
Free trade to Mao’s China.
Free trade to Stalin’s Russia.
We will always lose every trade war with any regimes which treat their people as a slave.
su tang
Jan 13 2021 at 7:53pm
you shouldn’t say China won the trade war. You should say Chines Communist Party won the trade war.
Scott Sumner
Jan 14 2021 at 1:41pm
Good point.
su tang
Jan 13 2021 at 8:00pm
A libertarian hope American Left will do the right thing. Amazing!!!!!!!!!!?????
su tang
Jan 13 2021 at 9:58pm
A libertarian economist tell us the U.S. dollar is losing it’s value and at the same time tell us Chinese Communist party which keeps accepting this worthless paper won the trade war. Amazing !!!!!!!!!!!!!!
su tang
Jan 13 2021 at 10:09pm
It’s also amused to know a libertarian economist agree with Bloomberg’s propaganda.
su tang
Jan 15 2021 at 9:23am
I Was a member of Chines Communist Party and esp. a Chinese Marxist. But I don’t want to be controlled and hate being dominated by others. I love liberty more than anything and I like Classical Liberalism. If you want talk about Chines Communist Party, you must always remember the most important things for them are Politics and Ideology. They want not only control your body but control your Mind. The economy is always secondary consideration. They always treat trade like war but it is Soft War not Hard War.
Warren Platts
Jan 15 2021 at 1:24pm
The purpose of a tariff is to reduce imports. By that measure, the Trump’s tariffs on the CCP Empire have been wildly successful — imports from the Empire are down by half from a few years ago, last I checked.
Anyway, since we want to end the overall current account deficit, I would appreciate it if the PhD economists told us how to do that, so that us mere geologists and steel workers don’t have to figure it out by ourselves.
So Scott: What exactly is your prescription to end the trade deficit?
Jon Murphy
Jan 15 2021 at 2:32pm
Check again. According to the US Census Bureau, US imports from China are up about 21%.
Whose “we”? The experts all say that worrying about a trade deficit is “absurd.” Why don’t you just listen to the experts?
Warren Platts
Jan 16 2021 at 1:59pm
Jon, you are wrong again: overall imports are down about half.
Not sure where your 21% figure came from. Probably Christmas sales plus PPP. (FYI, to come back to zero from a 50% loss, you must grow by 100%.)
Anyways, if imports from China were not reduced because of tariffs, whither your entire economics theory?
Jon Murphy
Jan 16 2021 at 2:24pm
I told you. US Census bureau.
Not quite. Imports of electronic equipment due to lockdowns.
Ceteris paribus. Go back to Chapter 2 of your econ textbooks.
Jon Murphy
Jan 16 2021 at 2:26pm
By the way, your link is nearly a year out of date. Not wise to use stale data.
Warren Platts
Jan 16 2021 at 2:55pm
Jon, the CB produces about a million reports a year. I have NO IDEA which one of those you think you are reporting on because you refuse to provide a link.
As for stale data, it really is true: Trump did manage to crash Chinese imports: January 15
Jon Murphy
Jan 16 2021 at 4:10pm
You didn’t ask for a link. But I’m surprised you don’t know which data I am referring to since it’s the same data you constantly referred to…until it stopped supporting the message you wanted to tell.
It’s the US Census Bureau data on trade. The standard data source for all things trade.
Jon Murphy
Jan 16 2021 at 4:10pm
NB: your link doesn’t support your story.
Warren Platts
Jan 17 2021 at 5:07pm
Jon, you wrote, “US imports from China are up about 21%.” That is a literally meaningless statement. It looks like standard English, but it conveys zero information. 21% up from when? The day before yesterday? Last month? YOY? Since Trump instituted the tariffs in 2018? Or is it since Trump assumed office in January 2017? Or is it 1987? There is no telling.
In any case, your basic point that China imports are up despite Trump’s tariffs is patently false. Here is another link:
“Looking at all the taxed products for which we have data, China has lost about a quarter of its pre-tax market share. Mexico, Taiwan and Vietnam gained market share at Mainland China’s expense. The US does not appear to have replaced the imports with domestic production.”
https://www.zerohedge.com/economics/two-years-later-what-did-trumps-china-tariffs-achieve
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