February 6, 2020 Reading Time: 9 minutes

Remarks from a Soho Forum debate, February 5, 2020. The resolution was: President Trump’s trade-related initiatives against China deserve broad public support.

In urging you to vote NO on this resolution, I speak not only as a free trader, but as a libertarian. President Trump’s trade-related initiatives against China do not deserve broad public support, since we libertarians are a sizable part of that public. And of course, I also hope that non-libertarians will appreciate my argument. I’ll be talking about rights and consequences. Because Trump’s trade policies are violating our rights, there is a heavy burden of proof to demonstrate that the consequences justify that rights violation. And that burden can’t be sustained. 

Start with libertarianism’s core tenet, the zero-aggression principle. We don’t deny that it might be acceptable, in certain cases, to act aggressively. But since zero-aggression is the default position, acts of aggression by the state require a high degree of confidence that some greater good is being served. 

In this case, we’re dealing with the government’s assault on our right to engage in capitalist acts with consenting adults, as both buyers and sellers. The government’s double-digit taxes, otherwise called tariffs, clearly hobble that right. Karl Marx thought capitalists rob us of the fruits of our labor. Were Marx alive today, he might recognize that the state robs us rather than the capitalists, and that tariffs are one of those ways. 

But if Steve Moore and President Trump want to call for a voluntary boycott of Chinese goods to pressure the Chinese into ending policies they dislike, then they’re free to do so. I wouldn’t participate, mainly because I regard it as an inspiring win-win that stores like Walmart can lift the living standards of Americans by selling them cheap goods made in China, while also lifting the living standards of Chinese workers from grinding $2-a-day poverty. 

But I’d have no right to call these methods unethical, since they involve voluntary action by consenting adults. But of course, Steve is calling for the iron fist of government to get us to comply.  

To justify Trump’s punitive tariffs, Steve should be able to demonstrate beyond a reasonable doubt that the leader we’re supposed to trust with this trade war understands the benefits of free trade. Yet Trump is almost completely clueless on the subject. He clearly views the nation’s trade deficit as a businessman’s profit-and-loss statement, in which losses are suffered with a trade deficit, and profits are earned if there’s a trade surplus.   

I won’t insult Steve’s intelligence by asking him to defend this cockeyed view. The real benefits from trade come not from exports, but from imports. As Steve knows, a trade deficit is made up for by foreign investment in the US economy. And trade deficits widen when the US economy is prospering, not the other way around.  

So Steve is asking us to support a trade war led by a President who happens to be a bloviating ignoramus on free trade. That should be reason enough to dismiss the claim that Trump’s tariffs are part of a brilliant bargaining scheme to ultimately make trade more free. As I’m sure Steve will agree, trade deficits with China will persist no matter what, so Trump will always think US Inc, is running red ink in dealing with China. 

What about the economic effects of Trump’s trade war? Since Steve was once a member of The Wall Street Journal’s editorial board, he might agree with a scorching Journal editorial that appeared last month. The editorial begins: “The evidence of economic harm from tariffs keeps piling up. Two studies out this month indicate—again—that US tariffs are paid almost entirely by American consumers, while illustrating how they also act as a drag on US exports.”  

The findings are surprisingly dire. When the US levies taxes on imports in the form of tariffs, the foreign producers affected often lower prices in order to stay competitive. But that hasn’t happened in this case. According to a study quoted in the editorial: “Approximately 100 percent of these import taxes have been passed on to US importers and consumers.” This is not only hurting consumers, but domestic firms as well, since more than half of the costly goods are inputs domestic firms use to make other products. 

A Federal Reserve Board study published in December, also quoted by the Journal, concluded that “For manufacturing employment, a small boost from the import protection effect of tariffs is more than offset by larger drags from the effects of rising input costs and retaliatory tariffs [imposed by China].” The Fed study also speaks about the long-term harm to manufacturing from the trade war: “The increase in uncertainty generated by recent rounds of tariff increases may be one of the ways in which the effects of past policy persist.”

Trump signed a Phase One trade deal with China last month whose main benefit is that it’s curtailed Trump’s plans to increase the financial bloodshed with stiffer tariffs. But under the agreement, the existing tariffs have only been partially scaled back, so most of the current domestic carnage continues. The deal also includes a bizarre provision that is based on managed trade rather than free trade – trade managed from the top down. The strange pledge from China’s government is that, over the next two years, its economy will buy an additional $200 billion in US exports than was purchased in 2017, which is quite unlikely to happen. 

So far we’ve dealt with the trade war’s assault on our rights and on our economic well-being. Now let’s deal with three myths that have been used to justify the trade war. 

When a state wages war against another state, that state often portrays itself as the passive victim. In the trade war the US has declared against China, we’ve been told that the US has never engaged in the dishonest and dirty tactics that China has perpetrated. That myth is punctured by a Wall Street Journal op-ed whose headline reads, “America’s Abusive Trade Practices,” followed by a subhead that reads, “China has legitimate grievances, too. The World Trade Organization often looks askance at US anti-dumping tariffs.”

The article describes the crony capitalist practices against China that were ramped up under President Obama and have continued to flourish under Trump: the tariffs the US imposes on imports from China based on accusations that China is dumping its goods in our market.

What exactly is “dumping,” you might ask? “Dumping” is a case in which a Chinese firm sells a product for a lower price in the US market than is charged in China’s market. So for normal folks, getting dumped on would be a happy experience and the best kind of dumping would involve a Chinese producer dumping goods on us for free. But in the world of wonks, dumping is considered a violation, entitling the victimized nation to slap a tariff on the goods being dumped. And in the world of America’s crony capitalism, our side has been able to claim we’re getting dumped on even when it’s not been happening. 

You might think that it’s hard to confuse prices in the US with prices charged for the same good in China. But then you’d be underestimating the hired guns who work for the US industries seeking trade protection from foreign competition. In the case of China, there are often no prices available in its home market, so the hired guns have a field day constructing fictional prices, from which dumping charges can be calculated. There’s an even more blatant practice in which prices that contradict the case for dumping are simply ignored, using a method aptly called “zeroing.” 

The author of the Journal op-ed proposes that the US offer to end these trade abuses as a bargaining chip with the Chinese. But as he observes, “offering a carrot instead of a stick seems alien to the blunt bluster of Mr. Trump’s approach to deal-making.” US Trade Representative Robert Lighthizer might also object if we admit to our anti-dumping scams, since Lighthizer was a legal hired gun in the anti-dumping field before becoming Trump’s Trade Rep. 

This brings us to the second myth. When a state wages war against another state, it generally portrays itself as having first considered all the peaceful ways of settling grievances. In this case, we are told that the US can’t use the World Trade Organization to challenge China’s practices because China doesn’t comply with that organization’s rulings. The evidence is that China’s record of compliance is better than ours. An academic study on this subject scrutinizes the 43 cases in which China has been a target of trade disputes from its entry into the World Trade Organization in December 2001 through December 2018. The author finds that, in 42 out of the 43 cases,“China has timely and satisfactorily implemented WTO tribunals.” He concludes that “China’s record of compliance suggests that the dispute settlement mechanism has been largely effective in inducing compliance.”

 He also observes: “Ironically, while the US has been accusing China of not complying with WTO rules, the US’s record of compliance is evidently worse than that of China. The US refusal to change the practice of ‘zeroing’ has been a blunt denial of its World Trade Organization obligations and outright disrespect for World Trade Organization rulings. In addition, while China has never been subject to any request for retaliations as a result of failure to comply, the US has faced 15 [such] requests.”

Which brings us to the third myth. Whenever a state wages war against another state, it generally exaggerates the harm that the other state has perpetrated against it. In this case, we are told that China’s massive theft of our intellectual property comes to hundreds of billions a year, and that’s it’s been threatening our private sector’s incentives to produce intellectual property.

To consider the plausibility of this claim, take the figures on the portion of gross domestic product allocated to private investment in intellectual property, which mainly consists of research and development and software. That investment came to $400 billion in 2000, and has since climbed to a stunning $1 trillion in 2019, at a record high of nearly 5% of GDP. So if our domestic industries feel sapped by China’s piracy of our intellectual property, they certainly don’t show it in their actions.

Similarly, Steve spoke of the Apple stores in China that aren’t run by Apple but by local poachers who exploit the Apple brand. Apple had a market valuation of $4.8 billion in December 2000 and its current valuation is at $1 trillion, a more than 200-fold increase that induces great regret in virtually all of us who didn’t buy Apple stock in 2000. So if the company’s officers and shareholders want me to suffer the financial burdens of the tariffs to fight for its rights in China, I’ll have to tell them that, while I grant their claims as legitimate, others might need my philanthropy far more than they do. 

Speaking of philanthropy, while I question Steve’s high estimate of hundreds of billions of dollars per year in intellectual property theft, it would not be so terrible if we really were subsidizing the Chinese economy to that extent. Ironically, our economy benefits from the awful legacy of Chinese central planning, which is what has made Chinese labor so cheap. The US bought $540 billion in goods from China in 2018, and we easily got a $200 to $300 billion discount on that purchase because of China’s cheap labor. 

But even more to the point, when Steve speaks of their “stealing” our intellectual property, he ignores the difference between “stealing” and putting that stolen technology to some use. Given the heavy hand of central planning in China, it’s unlikely to put much of that stolen technology to good use. So to a great extent, such “theft” is not really theft at all.

Steve himself has noted in his book on Trumponomics that “a huge and growing percentage of Chinese investment is state-led, and if we know anything from history, it is that such central planning will ultimately fail.” 

Quite right. The tragic stupidity of China’s central planning has been highlighted by the coronavirus outbreak. The government has reportedly been spending tens of billions of dollars on expensive medical research to gain global prestige. Yet basic medical services are in scarce supply for the stricken people. 

What about the idea that China is an “existential threat?” It’s an existential threat only if our government owns the world, and of course, that’s the ideology of beltway boys like John Bolton, who need to find a more constructive outlet for their Attila the Hun complexes. Given China’s commitment to the destructive domestic policy of central planning, it’s doubtful that China will ever become dominant in hi-tech, But even it does, we Americans will get along just fine, just like people in Denmark, Canada, Switzerland and Finland get along fine even though their country isn’t dominant in hi-tech. 

[And to those who support the prospect of America’s military pivot to Asia, I’d ask them to reflect on the awful devastation that’s resulted from our original pivot to the Middle East. If China acts like a bully in its own backyard, then we’ll have to leave it to countries like Japan, South Korea, Burma, Vietnam, India, and Russia to form alliances against it. US involvement only does more harm than good.] 

So might there be a better way? Well, start by firing Trade Rep Robert Lighthizer as a corrupting influence and put an end to our anti-dumping scams. Improve our record of compliance with the World Trade Organization and press claims against China with that organization. And abolish all tariffs, since they’re an assault on our rights and on our material well-being. 

Which brings me to the following statement:

“America’s most valuable role in the global economy is to lead by example. Our most important gift to the world is to export the virtues of democratic capitalism and free enterprise. When we get it right, the rest of the world follows.”

Steve, do you recognize those inspiring words? You wrote them with your co-author Art Laffer.

Similarly, Milton Friedman has written:

        “The wise course for us is to move unilaterally toward free trade. This is clearly the right course for action on economic grounds. But it is also the only course of action that is in keeping with our political position in the world. We are a great nation, the leader of the free world. Yet we squander our political power to appease the steel, aluminum and washing machine industries! We should instead be setting a standard for the world by practicing the freedom of competition, of trade and of enterprise that we preach.”

Friedman proposed an amendment to the US Constitution that would read as follows: “Congress shall make no law taxing imports or subsidizing exports.”

A radical idea? Sure. To those who tell me as a radical that I have no sense of politics, I respond that they have no sense of history. Radical change does happen, and we need to keep radical ideas alive, since we’ll never know when we’ll need them. 

I invite Steve Moore to join me in helping to keep this radical idea alive. 

Gene Epstein

Gene Epstein is an American economist. He worked as the economics editor of Barron’s Magazine from 1993 to 2017.

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