Why no US/India trade war?

4th December 2018 Off By binary
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Tyler Cowen has a new Bloomberg post on the recent truce in the US/China trade war.  Here is a rare example of where I strongly disagree with him:

Nonetheless, it’s not quite fair to describe the trade war with China as a problem that Trump started and then pretended to solve. The reality is that hostility toward Chinese trade practices has been building for some time. Anti-China measures have long commanded bipartisan support not only in Washington but also among corporate leaders, who see themselves as victims of unfair Chinese trade practices and espionage. This is an issue that predates Trump, and he deserves some credit for doing something to help solve it.

Everything in that paragraph is completely correct–except the last portion of the final sentence, which is wrong. Tyler’s right that Democrats and Republicans and corporate executives have been complaining about China for years.  For instance, Chuck Schumer used to constantly complain about China’s huge current account surpluses.  He demanded a sharp revaluation in the Chinese yuan.  China did exactly what he requested, sharply revaluing the yuan upward and reducing China’s current account surplus to near zero.  But as with any schoolyard bully, capitulation of the victim just whets the appetite for more bullying.  Schumer is not at all satisfied.

China needs to know that if they give in to US demands once again, we’ll just find new topics to complain about. The US is a bully—that’s what we do.  We bully small countries any time they don’t agree with our foreign policy, on anything from Iran sanctions to breast milk.  (Yes, China also bullies small countries on issues such as the disputed islands in the South China Sea.)

I read the situation very differently from Tyler.  Previous presidents like Clinton, Bush and Obama occasionally complained about Chinese trade practices, but their economic advisors were not foolish demagogues like Peter Navarro, they were serious people who correctly advised them that China’s policies were not a big problem for the US and that we’d be better off with a policy of engagement.  As a result, these presidents wisely ignored the calls for a trade war with China.

Tyler mentions practices that we object to such as government supported Chinese state-owned enterprises, and these are indeed bad policies.  But it’s up to China to decide how to organize its economy, not the US.  After all, Europe was also full of state-owned enterprises during the 1970s, as well as all sorts of hidden barriers to US imports.  That was too bad for Europe, but would the US have been wise to launch a trade war against Europe during the 1970s?  Obviously not.

Consider the following two cases:

1. China has foolish economic policies that hurt China a lot and also hurt the US a little bit.

2. India has even more foolish economic policies that hurt India enormously and also hurt the US somewhat.

If the reasons cited by Tyler were the actual basis for the trade war, then India should be the target, not China.  India’s policies are even more anti-market, and deprive the US of even more potential gains than what we’d get from a liberalized China.

Now suppose I’m right, and this is all window dressing that is disguising the real motive—crude protectionism based on economic doctrines that were discredited 200 years ago.  In that case the trade war would be launched against the country with the largest amount of exports to the US, which is China, not India.  Protectionists believe that imports hurt an economy.  Pundits may complain about Chinese policies like state-owned enterprises, but if China’s exports to the US were at the level of Cambodia then no one would care.  Does Cambodia even have state-owned enterprises?  Most Americans don’t know and most don’t care.

So while Tyler’s right that many people in America have been complaining about China for years, he’s wrong in claiming that Trump deserves credit for listening to those complaints and trying to “solve” the problem. It’s up to China to determine how to run its economy.  It’s up to American consumers and firms to decide if they want to buy Chinese goods, or invest in China under the conditions offered by the Chinese government.  Although the US is less protectionist than China, we are far from being a free trading nation.  How would we feel if other countries put sanctions on the US, in retaliation against our numerous protectionist policies?  We should lead by example and unilaterally adopt 100% free trade, unless there’s a clear national security issue (not a phony one like cars and steel.)

I encourage the Chinese to continue liberalizing their economy, as they’ve been doing for the past 40 years—but only because it’s good for them.  Regarding US demands, the best strategy for China is to stand its ground.  Fortunately, Trump has shown he’s desperate to get deals, even if the concessions on the other side are trivial.  Fortunately, Trump also worries about the stock market, and thus he will eventually give in, as he has done so many other times. On the other hand, it makes sense for the Chinese to look like they are willing to compromise, as that will make things easier for Trump.  Like the Chinese, he doesn’t like losing face.

PS.  There may be a few national security issues with China where sanctions are appropriate. I’m no certainly expert on high-tech espionage.  But that’s only a tiny faction of the trade dispute, and if it is a problem is better addressed through sanctions targeted at specific high-tech companies like Huawei.

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