No One Wins a Trade War

The politics of international trade rarely follows typical partisan lines. For centuries, free trade has been a cause for new businesses, transport companies, bankers, retailers, consumers, and wholesale manufacturers. Protectionism – which is a throwback to mercantilism of the Middle Ages – appeals to legacy big businesses threatened by competition, labor unions that want to preserve inflated wages, cultural groups that thrive on nostalgia, and ambitious politicians who build careers on the fear of foreigners.

If you understand that, perhaps it won’t surprise you to know that Elizabeth Warren and Donald Trump – despite gigantic political differences on so much else – agree on the need for tariffs. She has been visiting China, and reports back, with support for the escalating war: “U.S. policymakers are starting to look more aggressively at pushing China to open up the markets without demanding a hostage price of access to US technology.”

She is a voice for organized labor, which enjoys something of a monopoly privilege in the labor markets. She has also fashioned herself as an opponent of anything that looks like free enterprise. He is an investor in legacy brick and mortar that is being threatened by new forms of production and distribution. Both believe that a vibrant market for international trade, with products distributed by online platforms, could potentially kill their preferred models for professional success.

Brick and Mortar

In the case of Trump in particular, his real estate holdings are bound up with the old model of retail. “Trump’s real estate holdings, specifically those in New York City, have taken a big hit in the past year, as retail values are struggling in response to Amazon’s e-commerce gains,” reports Fortune. “The loss has him moving from 156th on the [richest people] list down to 248th.” It is for this reason that he is trying to turn back the clock.

Why not use the power of the presidency to do something about it? The best reason to eschew that path is that such efforts are futile in the long run. Technologies move forward. Financial losses cannot be covered using artificial methods. Markets eventually clear. Attempts to forestall that are extremely costly for consumers, and it drives down productivity over time. The special interests benefit temporarily but the price is huge for everyone else.

The language of national interest resonates because the US has indeed lost the title of the world’s largest economy. To be sure, you can’t really trust the Gross Domestic Product numbers of either country. By some measures, and adjusting for purchasing power parity (PPP), the Chinese economy is already bigger. In this case, we might be looking at the typical behavior of an empire in decline: lash out at foreign countries and demonize their tactics and methods as a way of distracting from domestic economic concerns.

Observe how the language has already devolved. Now every patent owned by an American company is “US technology,” as if companies themselves are incapable of negotiating their own deals so the US government has to do it for them. This part of the discussion is all about the claim that China is stealing “our” technology.

But concerns over IP are not the dominant excuse to tax imports from China and thereby prompting China to tax imports from the US. The reasons have been the usual list from the trade-war playbook. China pays workers too little. They are rigging the game. They threaten our national security. They are manipulating the currency. The trade deficit is too high. Sometimes it is easy to spot a deception: there are just too many excuses for this policy and not one solid one.

That Deficit

Consider the trade deficit, which Trump talks about incessantly. He cites the incorrect $800 billion figure and says that it proves that China owes us something. But all it really means is that in dollar terms, the US buys more from China than the reverse, which tells us about as much as the fact that you buy more from WalMart than WalMart buys from you. It is a piece of data without any substantive economic significance.

But as with GDP, you can’t really trust these numbers either. They are calculated based on declaring a country of origin for every good, and this, in turn, depends on discerning something the trade bureaucracies called “substantial transformation.” Most things today are produced with the cooperation of people from many lands, while trade numbers depend on isolating a single country as the responsible entity by virtue of the locale in which the product was substantially transformed.

Let’s consider just the coffee cup on my desk. It is branded with the logo of a local brewery, which conceived of the cup, designed the cup, and sells the cup to people who visit for tours, right here in the USA. To actually make the cup and sell it at an affordable price, the brewery outsourced production to China, where workers made it happen and sent it back. But the cup wouldn’t exist much less be sold at all were it not for the local brewery with the idea and the marketing prowess.

Still, trade numbers count this cup as an import for purposes of the trade deficit. Because China put it together and sold it back to the US, does China thereby somehow owe someone something? This makes no sense. It’s just an exchange like any other: all parties benefit.

For this reason, Zachary Karabell writes in Foreign Affairs: “If trade numbers more accurately accounted for how products are made, it is possible that the United States would not have any trade deficit at all with China. The problem, in short, is that trade figures are currently calculated based on the assumption that each product has a single country of origin and that the declared value of that product goes to that country.”

How to fix the numbers? Economists have been working on that problem for many years, and the answer has to do with the calculation of the value added at each production stage in every country for every good and service on the planet earth. That works in theory. In practice, this would be impossible, unless half the world’s population became economists and dedicated themselves to counting. As Karabell writes, “All indicators suffer from the same flaw: they try in vain to distill complicated, ever-changing economic systems into a single, simple figure.”

No One Wins

Trade between nations dates back as far as we have historical records, whereas trade deficit figures are a mid-20th-century invention. Trade does not depend on having statisticians available to calculate the comings and goings of the products and services of whole nations. That this trade war is being conducted with the excuse of these statistics reveals just how pernicious they can be in practice.

The results of this war are as follows. US consumers get to pay more for imports from China. American companies lose markets as Chinese consumers and importers turn to other countries to provide wines, pork, and fruit. And this is only round one. The financial markets have suffered a terrible quarter one, just as all this interventionist rhetoric picked up steam. We are doing ourselves no favors here.

This is not how a nation becomes great again.

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Jeffrey A. Tucker

Jeffrey A. Tucker is Editorial Director for the American Institute for Economic Research. He is the author of many thousands of articles in the scholarly and popular press and eight books in 5 languages. He speaks widely on topics of economics, technology, social philosophy, and culture. He is available for speaking and interviews via his emailTw | FB | LinkedIn