Because President Trump’s judgment is a work of genius (really, just ask him) and therefore never wrong, the United States has a real problem. The tariff mess is, of course, everyone’s fault, EXCEPT President Trump’s. And that’s very dangerous because President Trump is going to look everywhere for culprits to blame except in his own mirror. Given the way in which he now tosses the term “disloyal” around, we suspect a lot of corporate CEO’s are nervously waiting for a very heavy shoe to drop.
That the tariff war President Trump unleashed shortly after coming to office is not proving to be as easy to win as he proclaimed it would be when he declared this war, watch for him to really pressure American firms to exit the China market. Contrary to what many commentators have opined, President Trump does, in fact, have emergency powers available if he chooses to invoke them to do just that; force American firms to leave China. Also, to the extent that many American firms have procurement contracts with our government, they cannot take the President’s threats lightly. Worse, this war is escalating as most wars usually do. As we write this essay, President Trump, has, essentially, responded to the retaliatory tariff card the Chinese have just played with, “I’ll see your tariff and raise you one.” This is nonsense and it is dangerous.
Two major issues seem to have informed President’s Trump’s decision to declare this tariff war. His major gripe is that the trade deficit with China is the result of bad deals made by American companies or, worse, by prior Administrations. Both assumptions reflect the President’s understanding (an oxymoron of the first order with respect to trade) that a trade deficit is proof of bad trade policy. It doesn’t seem to have occurred to the President that any country that consumes more than it produces (as the United States does) will have a negative balance of trade and that there is nothing wrong with that. It also suggests an astounding ignorance of the fact that the Chinese trade surplus is what has enabled China to lend us the money we require to fund our profligate deficits. It’s true. China lends the United States more money than any other foreign country. China is also a major investor in America. Some may not like that fact, but if America is really open for business, China has responded enthusiastically. And, of course, American firms have also invested heavily in China.
President Trump has a mercantile mentality when it comes to trade. If we have a negative trade balance with a country then, according to Trump, we’ve made bad trade transactions. Sort of like a retailer selling goods for less than those goods cost the retailer. It doesn’t seem to occur to him that the net dollars China “pockets” in trade transactions with the United States allow China to buy products from other countries and that those countries use the dollars from China to buy products from the United States. The interconnectivity of the world today has produced a tremendous benefit to all countries engaging in robust trade with one another. The American consumer has been the beneficiary of this robust trade even though the American economy has been transitioning from a manufacturing-based economy to a high-tech, information-age economy in which the United States has become, by far, the leading developer of high-tech systems and the leading developer of artificial intelligence. True, jobs are lost during this transformation just as new jobs are created. So-called creative destruction is unavoidable, and it is also disconcerting and painful for many hardworking men and women. Nonetheless, America is at full employment and our economy is, thus far, incredibly strong as the President keeps reminding us.
All of this makes the current trade war unnecessary, ill-advised and very dangerous. Dangerous because Trump’s consistent modus operandi is to trash those with whom he is in dispute. He now has a vested interest in denigrating China in any way he can…and he will. China has become Trump’s number-one public enemy. The potential of an ill-advised trade dispute, morphing into an equally ill-advised diplomatic dispute, or worse, an ill-advised military dispute is not only possible but actually growing more probable as President Trump battles on in an ill-advised trade contest of his making and of his misjudgment.
Nothing has gone right for the United States since Trump has demonstrated his embrace of Smoot-Hawley trade philosophy. American farmers are taking a shellacking that has, so far, required nearly $30 billion in federal aid to soften the damage Trump’s tariffs have caused. American consumers have been, so far, taxed about a thousand dollars through President’s Trump’s tariffs, and if he goes ahead with his additional threatened tariffs, that tab will increase another five hundred dollars to the American consumer.
Manufacturers that export American products are curtailing expansion plans as they wait to see what retaliatory measures might be taken against the United States. Job growth in the United States has slowed, and the stock market is gyrating like crazy as investors try to factor in the extent of uncertainty President Trump is imposing on markets throughout the world. In recent weeks investors nervously watched the yield on ten-year treasuries dip below the yield on three-year treasuries, and now those same investors are watching, wide-eyed, as the yield on ten- year treasuries plummets below the yield on two-year Treasuries. To simplify, investors are nervous and putting their money into longer-term ten-year treasuries, thus bidding up the cost of those ten-year treasuries and, simultaneously, driving down the yield on those same debt instruments.
Trump’s pronouncements on trade and the economy are not quite as reassuring as, say, Franklin Roosevelt’s fireside chats during America’s great depression. Roosevelt intoned a “steady as she goes” message. Trump? “We don’t need China and, frankly, would be far better off without them,” the President said as he ordered American companies “to immediately start looking for an alternative to China.” How absurd. China, of course, responded by imposing additional retaliatory tariffs on $75 billion of US manufactured goods and is resuming its 25% tariff on US car imports.
President Trump tells us, on one hand, that our economy is incredibly strong, and it is. But on the other hand, he demands a 100 basis-point slashing of Fed’s interest rate, an action usually reserved for a flagging economy. And to make sure the Federal Reserve knows he is not kidding, he suggests that Fed Chairman, Jerome Powell (his appointee) might be a greater enemy of the American People than Chinese President Xi Jinping.
President Trump insists that “we have lost trillions of dollars” through bad trade deals with China. That simply isn’t true. In fact, we haven’t really lost anything. We may have a large trade deficit, but we still sell more goods abroad than every other nation in the world except China. That’s a booming economy.
So, then, what does our trade deficit really tell us. It tells us that America is a very wealthy nation that can and does buy a lot of what other nation’s produce. In other words, our trade deficit is nothing to go to war over (albeit, a trade war). This is not a noble war. It is a stupid and dangerous war.
There is another issue that muddies the water when discussing China; intellectual property theft. This too is an easy issue to misunderstand. China is not particularly tolerant of actual intellectual property theft, not anymore, anyway. According to the US Department of Commerce, China paid $8.7 billion to US companies for the use of intellectual property in 2017. 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. Furthermore, American firms have won victories again and again in the relatively new Chinese Intellectual Property Courts.
On the other hand, Chinese law, requiring foreign firms to enter into joint ventures with Chinese firms in order to do business in China is another matter. These firms are required to share intellectual property they own or have developed in return for having access to Chinese markets and Chinese labor. That may be onerous, but it is not theft. Sharing intellectual property is a decision that American firms may choose to make or reject, depending on how much they want access to the Chinese marketplace.
No one is winning this easy-to-win trade war. No one can win it. It will only leave casualties, as most wars do. This war will produce no trophies for anyone. It is being driven by Presidential tantrum, and not by Presidential wisdom.