August 8, 2019

The Trade War: Stupid is as Stupid Does.

by Hal Gershowitz

Comments Below

Forest Gump had a point. Anyone can make a stupid decision. And when they do they have, well, acted stupidly no matter who they are. Forest and Lieutenant Dan became businessmen who would have understood that starting a trade war believing trade wars “are good and easy to win,” would be, well, a very stupid thing to do.  The reader might recall that Forest and Lieutenant Dan were pretty astute businessmen. They even invested some of the profit from their shrimping operation in that fruit company called Apple.

But we digress. We really are involved in a stupid trade war. As we wrote when President Trump launched this trade war, if it becomes a contest about which country and which People can stand the pain the longest, well, the Chinese are extremely well practiced in personal deprivation.

While the entire US economy is experiencing the effects of the trade dust-up, American farmers have taken the brunt of this easy-to-win war. Agricultural exports to China were more than halved from 2017 through 2018, and now China has encouraged a total suspension of all imports of American agricultural products. So far, the Trump administration has doled out nearly $30 billion in aid to American farmers, and more, much more, will probably be needed as farm exports to China dry up completely. The massive aid to farmers has, by and large, kept them pretty much in Trump’s corner for the time being, but they would rather be selling their produce then taking handouts from Washington.

Trump’s trade war has, so far, accomplished little more than to spook worldwide economic activity. In the United States investors are rushing into longer-term ten-year fixed-income government bonds, driving a continued inversion of the so-called yield curve—never a good sign. Growth has begun to slide and, we suspect, capital investment in plant expansion will contract as uncertainty about the stability of the economy increases. Concurrently, as might be expected, job growth has constricted as well. Economies in Europe are faltering too, which will reduce demand for manufacturing exports from America to Europe.

Data from Trump’s Department of Labor and Department of Commerce both demonstrate that consumer prices of tariffed goods have risen dramatically, and the independent and non-partisan National Bureau of Economic Research concluded in a recent report that the costs of the tariffs were nearly entirely paid for by American consumers.

Peter Navarro, President Trump’s Assistant for Trade and Manufacturing Policy made the lamest of attempts to convince Fox viewers during an interview with Chris Wallace Sunday that American consumers were not being impacted by the tariffs. It’s all being paid by the Chinese he insisted. But when Wallace confronted Navarro with the Administration’s own data showing the opposite was true, he simply dealt with the contradiction by asking how much the American consumer should be willing to pay to stop unfair Chinese trade practices. What a spectacle.

As might be expected, demand for the yuan has plummeted causing the Chinese currency to drop in value. China didn’t step in to prop up the yuan until it dropped below 7 yuan to the dollar. That isn’t currency manipulation as the Trump Administration claimed. It’s called supply and demand. China pegged its currency to reflect the weaker demand resulting from the tariff war.

We and many others wondered why in the world President Trump tore up the Trans-Pacific Partnership agreement which could have collectively aligned the Pacific rim economies as a bulwark against an overly aggressive Chinese export machine. We suspect President Trump was simply eager for a trade war with China to demonstrate his prowess at the bargaining table. Long before he became president he was singing the praises of tariffs. He has been the strongest advocate of tariffs since those titans of trade policy Senator Reed Smoot and Representative Willis Hawley, the architects of the disastrous Smoot-Hawley Tariff Act of 1930. Given that President Trump takes pride in the fact that he doesn’t read and, instead, takes his own counsel, he is probably the only President in nearly one-hundred years who never heard of messieurs Smoot and Hawley, one of the most depressing couples in history.

Trump picked a dubious time to play with economic fire. The ten-year economic recovery that commenced in June of 2009 is growing long in the tooth. His repatriation of corporate US dollars held abroad, his more competitive corporate tax rates, his reduction in many unnecessary and burdensome regulations were all good moves which served to bolster economic activity. He is squandering all of that with a trade war that serves no constructive purpose. It’s a shame.

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5 responses to “The Trade War: Stupid is as Stupid Does.”

  1. Norm Libman says:

    If you listen to Fareed Zakaria (sp) this morning he identifies many of the costs, lost jobs, and impact on the economy from the tariffs. Quite substantial and totally in line with your comments.

  2. Perry says:

    While there is pain and everything imported is cheaper to the
    consumer it is time for America to once again start to produce
    the products they coveted from overseas. We can and will
    need to become self sufficient even at a cost to
    consumers.
    As a country we have become too dependent upon cheap labor
    and we must become self sufficient in the end along with pride
    in what we produce .

  3. Mike says:

    While I value the insights in your columns, I think this particular column was a bit simplistic and overlooked some significant issues in our relations with China.

    No one wins in a trade war. That said, our Country’s historical unwillingness to stand up to some of China’s egregious and unfair trade policies had to be addressed at some point in time. Trump has decided that now is the time for that confrontation.

    The issue of technology transfer is a big deal, as our the other conditions companies must accept in order to gain access China’s markets.

    Under Clinton, Bush and Obama, the USA has talked a good game of standing up to China. Now we are actually doing it. And as other articles have highlighted, while China has a
    much longer threshold and view towards the future, Xi has some serious issues to contend with. As these articles have highlighted, now that the Chinese have tasted some prosperity, their willingness to endure substantial economic suffering may not be as strong as it has been in the past.

    Just a thought

  4. Roberta Conner says:

    It would be refreshing if your persistent criticisms of President Trump occasionally included an alternative route that should be taken instead of the solution he has chosen.

    In the case of China, who has been eating our trade lunch for decades, you apparently would have us just wring our hands and hope that their continued theft of our intellectual property and other trade violations by China would stop on their own. And no, the World Trade Organization has NEVER been effective in curbing China’s cheating ways.

    The mere threat of tariffs apparently forced Mexico to live up to their security responsibilities at our southern border. Short of any other viable alternatives we should strongly support Trump’s efforts to force China to trade fairly with us and the rest of the world.

    • IN REPLY TO MS CONNER: While we do not have quite the resources of President Trump to formulate trade policy, it does not seem that President Trump spends much time formulating trade policy either. He has simply done what he has been saying he would do for many years. That is, simply tax (the American consumer) with tariffs to drive up the cost of buying products made in China.
      It is not really accurate to say that China ignores the judgments of the World Trade Organization, although all Trump acolytes believe that. According to Daniel Griswold, Senior Research Fellow at Mercatus Center at George Mason University and his colleague, Donald Boudreaux, Senior Fellow at Mercatus, the evidence against China on IP theft is mixed. Since joining the World Trade Organization (WTO), China has actually made significant progress in both modernizing and enforcing its IP laws. As the 2016 US Trade Representative (USTR) report on China’s WTO compliance concludes, “Since its accession to the WTO, China has established a framework of [IP] laws, regulations and departmental rules that largely satisfies its WTO commitments,” and, true, the report also notes the need for further updating, and that effective IP rights enforcement is still a serious problem. Nonetheless, it is a problem with many countries, and China isn’t the worst.
      The problem is more urgent in China because of its sheer size and the national security concerns it raises. The US Chamber of Commerce (Chamber), in its international IP index, locates China in the middle of the pack, ranking it 25 out of 50 major trading nations in terms of its protection of IP rights. China ranks just behind Malaysia and Mexico in the index, but ahead of such major US trading partners as Turkey, Colombia, Chile, Peru, and Brazil. True, while the Chamber commends China for patent and copyright reforms and efforts to raise awareness of the need for enforcement, it also finds high levels of IP infringement, barriers to commercialization of IP, and still insufficient legal safeguards for trade secrets.
      The USTR identified a dozen countries for its IP “Priority Watch List.” Along with China, the list includes Canada, India, Indonesia, Russia, and Ukraine.
      The USTR’s March 2018 Section 301 report notes in passing “an apparent decline in the observed number of cyber incidents by China,” citing sources in a footnote indicating “a notable decrease in reports by American companies of intrusions from suspected Chinese hackers” well into 2016. In the related area of counterfeit goods, the administration’s 2017 report on China’s WTO compliance comes to the mixed conclusion that, “Although [IP] rights holders report increased enforcement by Chinese government authorities, counterfeiting in China, affecting a wide range of goods, remains widespread.”
      To be sure, China represents a problem and cyber intrusions from Chinese actors have gone up since March 2018 according to the USTR. Nonetheless, there has been progress. Evidence of China’s real—if uneven—progress in the enforcement of IP rights can be seen in the amount that Chinese companies pay to foreign firms for the use of IP. In 2017, according to the US Department of Commerce, China paid $8.7 billion to US companies for the use of IP. That is more than a 10-fold increase from what Chinese companies paid in 2001, before China joined the WTO. China ranks fourth among nations in IP payments to the United States, behind only Ireland, Switzerland, and the United Kingdom. China’s IP payments to the rest of the world have also risen sharply. According to an analysis by Nicholas Lardy of the Peterson Institute for International Economics, “China’s payments of licensing fees and royalties for the use of foreign technology have soared in recent years, reaching almost $30 billion [in 2017], nearly a four-fold increase over the last decade.”
      The progress that has occurred in China’s enforcement of IP rights is not only driven by external pressure from its trading partners but also by internal demands from Chinese industry to protect China’s own growing IP sector. According to the 2016 USTR report on China’s WTO compliance, Chinese companies themselves are seeking better domestic IP enforcement:
      None of this should obscure the fact that agents in China engage in significant theft of IP from American companies and other firms around the world. The evidence does, however, indicate that China is not unique in the lack of full protection of IP rights. Further, China has, over the span of its membership in the WTO, been making measurable progress in modernizing its laws and enforcing them.
      Evidence also shows that Chinese violations of IP rights have imposed costs on certain US producers, but those costs have been exaggerated. At the high end of the cost estimates is the White House National Cyber Strategy document from September 2018, which alleges that China is engaged in “trillions of dollars of intellectual property theft.” Other estimates range as high as $600 billion. Those numbers, according to Griswold and Boudreaux seem unreasonably high.
      Another pillar in the US complaint against China on IP is China’s practice of requiring foreign companies to transfer technology to their Chinese investment partners. As the USTR charges, “The Chinese government uses foreign ownership restrictions, such as formal and informal JV [joint venture] requirements, and other foreign investment restrictions to require or pressure technology transfer from US companies to Chinese entities.” The USTR notes that foreign companies often decide there are few realistic alternatives to the arrangement because of the size and importance of the Chinese market.
      This, too, is a legitimate complaint against Chinese policy, but the practice of requiring technology transfer as a condition of doing business in China is of a fundamentally different nature than outright IP theft. Imposing performance requirements on foreign-owned affiliates is not a unique or even uncommon practice in less developed nations. Multinational companies routinely accept such conditions as a cost of doing business in those markets. In contrast to IP theft, the multinational firms ultimately decide on behalf of their shareholders whether or not the arrangement is acceptable.

      We believe President Trump made a mistake by tearing up the Trans-Pacific Partnership agreement. It represented an opportunity to form a united front in dealing with China. Instead, President Trump decided to go it alone by satisfying his long-held infatuation with tariffs, an infatuation that almost all economists throughout the political spectrum have long since determined to be foolhardy. So far, we think the evidence suggests the economists are right.

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