Well before he was elected as President, Donald Trump was expressing anger at what he called the United States’ “unfair” trade deficit with China.
The argument never made much sense; the fact that China sold significantly more goods and services to the US than it imported from it was simply the market at work. Chinese businesses produced more of what Americans wanted, and at the right price, than vice versa. In recent years, the ratio has been about four to one; that is, China exports about four times as much value to the US than America sells back.
Many dismissed Mr Trump’s pre-election attacks on China’s trade as hollow populist rhetoric. His promise to “fix” the deficit resonated with Americans in vulnerable industries, especially manufacturing, but it lacked any detail; just like, for instance, his pledge to force Mexico to pay for a giant wall along the US’s southern border.
When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!
— Donald J. Trump (@realDonaldTrump) March 2, 2018
Yet since the election, Mr Trump’s bitterness at the trade imbalance has grown. Now – despite full awareness of the damage he will do to American businesses – he has announced plans to tax about 1300 Chinese products sold to the US, worth about $A77 billion a year. China, of course, said immediately it would retaliate.
The US’s top trade official, Robert Lightizer, said this week that “nobody wins from a trade war”, while nonetheless adding that the US would counter each Chinese response. In contrast, Mr Trump tweeted earlier this month that “trade wars are good, and easy to win” – a view almost no one else holds.
Everyone will lose from an international trade tit-for-tat, including (and perhaps especially) Australia. China is Australia’s largest export market by far, and the US is our third-largest. Tariffs and quotas, whether introduced in the US or China, simply increase the global price of goods and services. If Americans and Chinese begin paying more for products they once bought from each other, they will have less money to buy from everyone else, including Australia. Protectionism retards the economy, making it less efficient and rewarding the wrong parts of it.
There are genuine criticisms to make of China’s loose commitment to free trade, especially its unwillingness, or inability, to enforce intellectual property rights, and its regular insistence that foreign businesses seeking to operate in China establish joint ventures with local firms.
Yet Mr Trump’s stated reasons for acting make little sense. He accuses China of manipulating its currency to advantage its exports; in fact, the yuan’s value has increased steadily since Mr Trump’s election, worsening China’s export performance and improving America’s.
The President also says regularly that he wants a trade surplus or balance with China. His sole emphasis is on America “winning” – which should be determined by the market, not by governments – rather than creating a level playing field and upholding the rule of law, so as to allow the market to work effectively.
As with most things Mr Trump says, it’s wise to assume the audience is his own ego, as well as those Americans who will vote in 2020. Australians’ best hope is that he is soon distracted from the mess he is making before it no longer be unscrambled.