Trump’s Misguided Trade War
Trump’s Trade War is Missing the Mark
In terms of trade politics, President Trump has delivered on his promise to impose tariffs on China . Trump blames the $345.2 billion US trade deficit with China for the loss of American jobs , . He is not entirely wrong; studies have found that between 2 and 3.4 million American jobs were lost due to trade with China over the past two decades , . Tariffs on washing machines, phones or steel are not, however, likely to bring those jobs back. Trump’s trade war lays bare his misunderstanding of China’s economic strategy.
The China shock
China liberalized trade relations with the US when it joined the World Trade Organization (WTO) in 2001. This came about as the two countries dealt with differing fortunes: US manufacturing had been in decline since the 1970s, while Chinese manufacturing had been on the rise since the 1980s . Many American companies in consumer goods industries such as textiles, plastics, rubber, glass, machines, electronics, and toys were not able to keep up with the new Chinese competition and had to close or relocate as a result . Job losses were particularly widespread in the Rust Belt, an area that would later form an important part of Trump’s base. One study found that Chinese import competition was directly linked to Trump’s 2016 victories in three decisive swing states: Pennsylvania, Wisconsin, and Michigan .
Trump, like many Republicans and Democrats, believes that the economic shock was worsened by unfair Chinese trade practices. That is likely true. The Chinese Renminbi (RMB), for example, does not float freely, which means that its value is not determined by supply and demand. If the RMB floated freely, the continuous Chinese trade surplus would have led to a rise in the RMB’s value, which would have made China’s export industry less competitive. Instead, the Chinese government kept buying up US$300 billion annually between 2003 and 2014 to keep the RMB’s value artificially low .
The US trade deficit – China’s problem?
Trump promises to bring back American jobs by countering China’s unfair trade practices with equally illiberal measures. Yet China stopped manipulating its currency in 2014 and it is now aiming to keep exchange rates at a stable level . The Chinese market’s shock to US consumer goods manufacturers had worn off by 2006, which means that the impacted companies are now long gone . The US imports more goods than it exports to China because Chinese companies produce them more competitively than American ones. The importance of manufacturing to the US economy has steadily declined over the last couple of decades – both in terms of its share of employment and share of GDP – with no indication that this trend will turn around . A trade war will not turn back time.
In fact, the US may not even be receiving the shorter end of the stick in international trade due to its deficit. The US has the world’s leading exchange currency; 60 percent of the world is part of a “de-facto dollar zone” . To be able to trade with the US, exporting countries like China must keep buying US assets, mainly treasury securities. In this way, China is financing the US government’s debt. The US can run deficits because other countries must accumulate dollars to trade .
Made in China 2025 – More than a workbench
Would the US economy improve if Trump stopped interfering in global trade? Not exactly. Trump, like many other decision makers around the globe, needs to change his perception of China. It is no longer just a factory flooding the world with cheap consumer goods.
In 2015, Premier Li Keqiang announced the Made in China 2025 strategy to dominate global markets in smart manufacturing . China is striving for innovation leadership in 10 critical high-tech industries including information technology, green energy and green vehicles, and aerospace equipment. The goal is to achieve self-sufficiency; foreign companies may be excluded from the Chinese market in the future once Chinese national companies are capable of meeting domestic demand . In addition to injecting billions of dollars of stimulus and pursuing foreign acquisitions, the Chinese government is also suspected of promoting forced technology transfer agreements and commercial cyber espionage to gain access to key technologies .
Made in China 2025 goes hand in hand with the Belt and Road Initiative, China’s push to establish global trade routes through bilateral investments and cooperation agreements with over 70 countries. The conditions of these agreements are largely determined by China. The US withdrew from the Trans-Pacific Partnership (TPP), leaving the Asia-Pacific region with no robust benchmark to refer to in international trade agreements with large partners. China’s economic strategy, which has been labeled “techno-nationalism” or “innovation mercantilism,” is driven by a shift away from an economic model reliant on exporting labor-intensive goods to Western countries and toward a high-tech economy no longer so strongly dependent on consumers in the US or Europe , .
Countering China – Technological leadership and rules-based trade
The US is in a privileged position in the international trade system because the dollar is the world’s leading exchange currency. Despite Trump’s assertions, the real threat to the US economy is not the current trade deficit with China. It’s that at some point, China will become so advanced that it will no longer rely on exports to the US. At that point, the record deficit spending of the US government will become a major problem. To keep up with China’s ambitions, the US should ensure their technological leadership and pursue liberal, rules-based trade alliances.
Rather than trying to re-industrialize the Rust Belt, the US should cement their technological leadership in certain key industries. Singling out and threatening to ban Chinese companies from the US market will not help the US achieve technological leadership. The Big Tech antitrust hearing before Congress in July 2020 was a good example of how the US can ensure functioning markets by better understanding and regulating new important technologies.
The US should also pursue multilateral, rules-based global trade. Rather than quarreling with European partners over trade balances, the US needs to work with its allies to find governance solutions for issues such as digital tech or dual-use-technologies. The US should also build stronger trading relationships with partners in the Asia-Pacific region like Japan and Australia, and provide an alternate option to countries like Myanmar and Malaysia that have become disillusioned with the Belt and Road Initiative. Competing with China will require diplomacy, not division.
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2. United States Census Bureau, 2019: U.S. trade in goods with China (2020), https://www.census.gov/foreign-trade/balance/c5700.html (accessed June 14, 2020).
3. Donald Trump, Hillary Clinton surged the trade deficit with China 40% as Secretary of State, costing Americans millions of jobs
4. Daron Acemoglu, David Autor, David Dorn, Gordon H. Hanson and Brendan Price, Import Competition and the Great US Employment Sag of the 2000s (Journal of Labor Economics 34/1; University of Chicago Press, 2016), https://economics.mit.edu/files/9811 (accessed June 14, 2020).
5. Robert E. Scott, Growth in U.S.–China trade deficit between 2001 and 2015 cost 3.4 million jobs (Economic Policy Institute, 2017), https://www.epi.org/publication/growth-in-u-s-china-trade-deficit-between-2001-and-2015-cost-3-4-million-jobs-heres-how-to-rebalance-trade-and-rebuild-american-manufacturing/ (accessed June 14, 2020).
6. David Autor, David Dorn and Gordon H. Hanson. Why Obama’s key trade deal with Asia would actually be good for American workers (Washington Post, March 12 2015), https://www.washingtonpost.com/posteverything/wp/2015/03/12/why-obamas-key-trade-deal-with-asia-would-actually-be-good-for-american-workers/ (accessed June 17, 2020) and Acemoglu, Autor, Dorn, Hanson and Price, Import Competition and the Great US Employment Sag,
7. Acemoglu, Autor, Dorn, Hanson and Price, Import Competition and the Great US Employment Sag of the 2000s, 213.
8. David Autor, David Dorn, Gordon H. Hanson and Kaveh Majlesi, A Note on the Effect of Rising Trade Exposure on the 2016 Presidential Election (Appendix to Autor, Dorn, Hanson, and Majlesi “Importing Political Polarization? The Electoral Consequences of Rising Trade Exposure,” NBER Working Paper Series, 2016), https://economics.mit.edu/files/12418 (accessed June 17, 2020).
9. Fred Bergsten, China is No Longer Manipulating its Currency (Peterson Institute for International Economics, November 18, 2016), https://www.piie.com/blogs/trade-investment-policy-watch/china-no-longer-manipulating-its-currency (accessed June 17, 2020).
11. Brad W. Setser, When Did the China Shock End? (Council on Foreign Relations, April 6, 2018), https://www.cfr.org/blog/when-did-china-shock-end (accessed June 17, 2020).
12. Autor, Dorn Hanson, Why Obama’s key trade deal with Asia would actually be good for American workers. Federal Reserve Bank of St. Louis, Percent of Employment in Manufacturing in the United States (DISCONTINUED) (2013), https://fred.stlouisfed.org/series/USAPEFANA (accessed July 12, 2020). The World Bank. Manufacturing, value added (5 of GDP) – United States, https://data.worldbank.org/indicator/NV.IND.MANF.ZS?locations=US (accessed July 12, 2020).
13. The Economist, The Mighty dollar (December 3, 2016).
14. Thomas Oatley, International Political Economy (Longman, fifth edition, 2012), 218.
15. Jost Wübbeke, Mirjam Meissner, Max J. Zenglein, Jaqueline Ives and Björn Conrad, Made in China 2025: The making of a high-tech superpower and consequences for industrial countries (merics papers on China, 2016), http://www.iberchina.org/files/2016/MadeinChina_2025_merics.pdf (accessed June 19, 2020), 6-7.
16.Wübbeke et al. warn about this in ibid.
17. Council on Foreign Relations (CFR), Why Does Everyone Hate Made in China 2025? (March 28, 2018), https://www.cfr.org/blog/why-does-everyone-hate-made-china-2025 (accessed June 19, 2020).
18. Jost Wübbeke, Mirjam Meissner, Max J. Zenglein, Jaqueline Ives and Björn Conrad, Made in China 2025: The making of a high-tech superpower and consequences for industrial countries,
19. Robert D. Atkinson, Nigel Cory, and Stephen Ezell, Stopping China’s Mercantilism: A Doctrine of Constructive, Alliance-Backed Confrontation (Information Technology & Innovation Foundation, 2017), http://www2.itif.org/2017-stopping-china-mercantilism.pdf?_ga=2.235536134.645589352.1494587613-40840511.1494247702 (accessed June 19, 2020), 1.
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