Should China Pay Reparations?

And the craziness continues.

President Trump is unhappy with China for its role in spreading the coronavirus. Some of the ideas that Mr. Trump and his aides are apparently floating around include “stripping China of its “sovereign immunity” – in order to enable the U.S. government or Americans legally to sue China for damages – and “having the United States cancel part of its debt obligations to China.”

The administration’s hang up about China as it relates to Covid-19 is this: “White House officials and multiple congressional lawmakers have become increasingly fixated on China’s response to the outbreak and failure to contain it, asserting Chinese officials concealed key information and refused to cooperate with international health organizations.”

I am sure some of these failures of China are real. That said, the same is true of U.S. officials’ responses to COVID-19. We know that the Centers for Disease Control messed up massively by refusing to use the World Health Organization’s readily available COVID-19 tests. The bureaucrats at the CDC then doubled down on their mistake by putting out a failed test that has left Americans, to this day, without proper testing abilities and, thus, forcing us into this punishing quarantine.

Likewise, the Food and Drug Administration has messed up before and since the beginning of this pandemic. So, too, have the administration and many state governors. Can we Americans sue these government agencies and officials? Can I declare that the additional taxes that I owe for 2019 are now cancelled? How long after I stop paying my taxes do you think it will take the IRS to threaten to throw me in jail? Not long, I assume.

But more seriously, let’s assume that China is indeed the only country to blame for this massive mess. What would happen if the United States government were to use this reality as an excuse to cancel part of its debt to China? It’s likely that many countries would then discover ‘good’ reasons to stop paying their debt to each other, including to the United States government and, possibly, also to private American citizens. In addition, who would be crazy enough to continue lending money to the U.S. at low rates? Not many.

Now, maybe we get lucky and somehow Mr. Trump eventually realizes that not servicing the debt our government owes to the Chinese might not be such a good idea after all. What if, instead, he attempts to raise $1 trillion from the Chinese by imposing tariffs on their exports to America?

This would not be the first time that a president wants to extract money from other governments as compensation for the harm he thinks they have inflicted on us. For instance, as most people will remember, Trump himself told Americans that Mexico was going to pay to build for the border wall that Trump wants to build to stop illegal immigration. Not only did Mexico not pay for the wall, but that wall, paid for by hard working Americans, actually collapsed.

Remember also that Mr. Trump imposed tariffs on imports from China and other trading partners starting in March 2018 and claimed that these tariffs would be paid for by our trading partners. Not so. Several academic studies have shown that these tariffs have actually been shouldered largely by Americans rather than by foreign companies. Any COVID-19 retaliation tariffs would be no different, and would not be paid for chiefly by the Chinese but, rather, by Americans in the form of higher prices.

But let’s say for now that Mr. Trump could indeed legally force the Chinese government to pay billions of dollars of reparations to the United States, and that, somehow, this claim was enforceable. Where does the president think the Chinese will get this money? One way the Chinese could do it is by diverting money they get from selling us imports and rather than use it to buy our exports or to invest in the US, to pay reparation fees. It’s not hard to see how Americans would be penalized by this move.

And also, as Don Boudreaux noted, the Chinese could also “liquidate billions of dollars of their investments in dollar-denominated assets. Not only were these investments made possible by earlier Chinese exports – exports that Trump routinely declares to have harmed Americans – their liquidation would, as a practical matter, further lower the value of stocks and other assets in America and drive up interest rates. Punishing the Chinese in this way would thus also damage Americans.”

The Chinese, of course, could also slow down their rate of investing in the U.S. – including reducing the amount of money they lend to the U.S. government by buying its bonds. This is not really a good time for the U.S. to see one of its prime creditors reduce its willingness to lend to us considering the massive increase in deficit spending that Congress and Mr. Trump has agreed to engage in as part of the response to COVID-19.

The bottom line is this: if the Chinese pay any reparation fees in ways that actually benefit Americans, doing so would necessarily involve an increase in American imports – an outcome that Trump and his supporters believe (ironically and incorrectly) to be damaging to American interests. Yet while more imports are good for Americans, such a compelled increase in imports would yield benefits for Americans only over the short run. The reason is that the Chinese, and other countries as well, would become more reluctant to trade with America.

On the other hand, for the Chinese to pay reparation fees in ways that don’t involve any current increase in American imports, they would have to liquidate a great deal of their investments in America. Any such liquidation would reduce asset values here at home. 

While it’s true that this loss would have to be weighed against a possible gain in the form of less bad behavior by the Chinese in the future, there’s no question that today and at least for as long as the economic ills of the COVID-19 crisis are upon us, Americans would be hurt by a reduction of Chinese investment in the U.S.. At a time when Americans are also hurting from this lockdown, facing the loss of their jobs and the destruction of their businesses, it would be incredibly callous for the president to add to their pain.

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