First it was Europe, Canada and Mexico. Now Donald Trump’s focus has switched to the real target for his trade war: China. Wilbur Ross, the US commerce secretary, is in Beijing for talks aimed at reducing America’s $30bn-a month-deficit. Exports of Chinese high-tech manufactured goods are top of Ross’s list.
Make no mistake: Trump’s strategy is a sign of weakness not strength. Countries that resort to protectionism normally do so for one of two reasons: to assist the development process when they are on the way up and to slow the pace of decline when they are in relative decline.
In America’s case, it is certainly the latter. Hefty tariffs of 40% on imported manufactured goods helped the US to build up its industrial power in the second half of the 19th century. By 1945, the US was by far the most powerful economy in the world, and supported trade liberalisation because it needed to find overseas markets for its goods.
Protectionist tendencies never really went away. They resurfaced in the 1980s, when there was a panic about the threat posed by Japan. And behind the Trumpian bombast is a deep-seated fear that America’s hegemony is threatened by China’s rapid economic transformation over the past 40 years.
If the struggle between the US and China merely leads to a trade war, the world can consider itself lucky. Historically, when a rising power challenges the existing top dog it has more often than not led to bloodshed.
That’s not remotely in prospect currently. In terms of the measures that count – technological sophistication, military clout and income per head of population – the US remains streets ahead. But China has been catching up fast. The first phase of its development, moving people out of the fields and into low-cost manufacturing, is over. A second phase, in which investment in higher education allows the economy to compete in sectors hitherto the preserve of the developed west, is well under way. China is not remotely interested in an international division of labour where the west does the clever stuff and it is left with the cheap end of the market.
Trump’s action sums up what Rebecca and Jack Harding are talking about in their new book, The Weaponisation of Trade (London Publishing Partnership). They argue that trade is a strategic concern; it is not just a matter that governments are happy to leave to market forces, decisions made in the boardrooms of multi-national corporations and by technocrats hammering out trade liberalisation deals at the World Trade Organisation in Geneva.
“Trade is more than an economic concept; and trade wars are not just protectionism,” the two Hardings say. “Strategic trade is one way in which countries can build their influence and power globally, and trade can be used in part as a substitute for direct military intervention.”
This marks a shift from the dominant political ethos in the decade that followed the collapse of communism, when the global economy boomed and protectionist pressures waned. Yet the notion that the world would be a better place if it were run in accordance with the free-trade beliefs of Adam Smith and David Riccardo did not survive the financial crisis of a decade ago.
Even before the arrival of Trump, trade barriers were quietly going up, with 7,000 protectionist measures introduced since the financial crisis.Simultaneously, higher transport costs and security fears post 9/11 have made companies less keen on having long supply chains. There has been a tendency to localise rather than globalise production, which has chimed with a political mood that has prioritised national action over multilateral co-operation. Trump’s America First approach is just one expression of the new mood and he will be confident that his tough-guy stance will go down well in the rust belt states that helped to elect him in 2016.
That looks possible, even though the idea that the size of the US trade deficit is simply due to China abusing international trade laws is nonsense. To be sure, Beijing has been able to grow its exports by keeping its currency competitive. No question, there has been theft of US intellectual property rights.
But the prime reason why the US is running such a sizeable trade trade deficit is that the opening of the global economy has allowed US corporations to outsource production to where it is cheaper, which is why the rust belt has been hollowed out.
Low-cost imports from China led to lower inflation, which in turn meant interest rates were lower than they otherwise would have been. American households could load up on cheap credit to buy cheap Chinese imports. The US consumed more than it produced and spent more than it saved.
China has funded America’s spending habits by investing in US companies, US property and US Treasury bonds. The fear that Beijing could pull the plug on the US economy at any time by dumping its US holdings made previous administrations nervous. Trump has decided that the time for dithering is over, although his solutions seem somewhat bizarre. Tax cuts will encourage consumer spending while tariffs will raise the cost of domestic production. Higher inflation will mean a more rapid policy tightening from the Federal Reserve, which will slow the economy. A recession would would certainly bring down the trade deficit.
The communities that saw their guts ripped out by de-industrialisation will welcome anything that offers hope of revival, but have been sold a lie. “They’re closing down the textile mill across the railroad tracks,” Bruce Springsteen sang in My Hometown more than 30 years ago. “Foreman says these jobs are going boys and they ain’t coming back.” Sadly, he was right.