January 17, 2020 Reading Time: 4 minutes

President Donald Trump’s tariffs-first trade policy against China has unequivocally harmed the majority of people and businesses in both countries since its inception just under two years ago. 

There’s the estimated $46 billion in new taxes directly paid by American businesses importing Chinese products, despite the president’s Twitter admonitions that the Chinese were paying the bill. Factor in massive retaliatory tariffs from China, and the indirect effects of taking money out of businesses’ and ultimately consumers’ pockets and it’s no wonder that even in the muddy waters of macroeconomics, most observers believe the trade war has significantly slowed the global economy.

What about the stated goal of keeping domestic industries healthy — the idea that gives protectionism its name? Before the president firmly trained his gaze across the Pacific, the American steel industry was supposed to be the marquee beneficiary of nascent policy. It never happened. After a promising first month or two, neither steel prices nor export volume rose. 

Like the child repeatedly touching a hot stove, the lesson to the president that even his own brand of rough-and-tumble boardroom central planning wasn’t the way to address deep structural issues should have been clear.

It wasn’t. 

As the administration ramped up tariffs on Chinese goods in the summer of 2018, the president along with his trade advisor and economic snake-oil salesman Peter Navarro retreated to the final hill they could plausibly defend. Of course tariffs were costing the American people, and perhaps they weren’t saving jobs, but this was really a war of attrition designed to outlast and out-tough the Chinese into acquiescing to better IP protection and fewer subsidies to national-champion firms. 

It’s clear that the president’s past as a boardroom brawler greatly impacted his identity and belief in his unique power to restore the nation to greatness — perhaps this was his plan all along.

Phase One of the U.S./China deal was announced January 15, and it doesn’t look likely that any publishers are going to be knocking on the president’s door for an epilogue to his 1980s corporate-alpha-male classic The Art of the Deal. To be fair, global financial markets did respond well to the news, though that only indicates just how damaging the last two years had been.

The truly strange aspect of the initial deal is the additional $200 billion in U.S. goods and services that the Chinese have “pledged” to buy over the course of two years, likely through private firms, state-owned firms, and the state itself. The money, spread in a detailed manner across U.S. industries, smacks of the president adopting the far more planned approach of his Chinese counterparts. That may be pragmatism designed to produce a deal more palatable to the Chinese, who eye-openingly sent their vice premier with a note from the head honcho to meet with Trump. But why after being rewarded for decades for being the opposite of pragmatic would he change now?

As Jeffrey Tucker has written, this president seems to have a strange fixation with trade surpluses and deficits, which most economists don’t believe even matter. Assuming this is the president’s logic, he’s narrowed the deficit and can now begin interviewing sculptors for his spot on Mount Rushmore. But this is not a healthy export sector. A healthy export sector revolves around individual firms creating items for a low enough cost such that a consumer is willing to buy them. 

Without that transfer of information inherent in a price system fueled by value creation, what’s to say the U.S. has any idea what industries these purchases should come from, or how the Chinese government would order businesses of varying degrees of privatization to absorb the new purchases? Finally, after two years of U.S. capacity expansion necessary to meet this contrived demand, the agreement will be done, and U.S. manufacturing might be left right where it started or worse.

In fact, there are rumblings that the Chinese simply won’t be able to make this level of purchases, as well as remarks regarding U.S. farm products from the Chinese vice premier that purchasing decisions would be made considering “market forces.” Suddenly this looks less like President Trump embracing central planning and more like a deal that’s an absolute non-event.

The non-event aspect of this spectacle is underscored by the many outstanding questions left for later phases of the deal, such as the matter of Chinese IP piracy, which whether a major problem or not was frequently discussed in the run-up to the trade war. And then there are the tariffs themselves, the majority of which are still in place. 

The president still has his leverage in place, the American people still have their higher tax bill, and we’re all left wondering what on earth actually happened in the past few days and weeks.

It’s often said that nobody wins a trade war, but the events of the past week lead us to a strange philosophical question. If the leader who almost single-handedly launched the trade war is never willing to concede defeat, and is able to remind crowd after crowd during this election year what a wonderful job he did of staring his Chinese counterparts down across the table, wasn’t there one winner after all?

 And wasn’t that really the whole point from the beginning?

Max Gulker

Max Gulker

Max Gulker is a former Senior Research Fellow at the American Institute for Economic Research. He is currently a Senior Fellow with the Reason Foundation. At AIER his research focused on two main areas: policy and technology. On the policy side, Gulker looked at how issues like poverty and access to education can be addressed with voluntary, decentralized approaches that don’t interfere with free markets. On technology, Gulker was interested in emerging fields like blockchain and cryptocurrencies, competitive issues raised by tech giants such as Facebook and Google, and the sharing economy.

Gulker frequently appears at conferences, on podcasts, and on television. Gulker holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Prior to AIER, Max spent time in the private sector, consulting with large technology and financial firms on antitrust and other litigation. Follow @maxg_econ.

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