Bull in a China shop, part II

As I said last week this title works on different levels. This week I want to debunk the ‘bull’ that Trump talks on trade. Trump thinks his trade policy will force China to open up its economy allowing the US to sell more into China, thereby reducing the trade deficit. This is just bad economics. Trump’s obsession with bilateral trade deficits is the main reason why Trump has struggled to get any economic advisers. Almost all economists just think his ideas on trade are nuts.

For example, suppose China does what it apparently proposed in Argentina – to buy more US agricultural goods and more US gas. What will happen to the dollar? It will rise. The result will be a boost to Chinese exporters, so more exports will arrive from China, while other US producers will find it less attractive to export to China. Trump simply does not realise that the trade deficit (or strictly speaking the overall current account deficit) reflects the balance between saving and investment in an economy, not the relative success of its exporters versus other countries’. If you help one group of US exporters the dollar will simply rise to handicap another group.

I hope, like most economists that Trump does agree a trade deal next year. Otherwise the trade war is going to start seriously impacting the US economy, as I said last week. Assuming a trade deal is reached, and China’s economy is opened up to new kinds of US exports, the US dollar will rise. US companies newly able to export will enjoy gains but existing exporting companies will find they are priced out. Advantage Airbus, for example. Is this of much gain for the US as a whole? Maybe, a little. The US might be better able to specialise in what it is good at, helping some companies to get bigger and more efficient. And a higher dollar is good for real incomes. But the biggest gainer will be China. By opening up more to US competition the Chinese government will force its companies to compete more aggressively, with the productivity gains that go with that.

What about if US companies gain more access for direct investment into China, as the US administration sometimes says it wants (but not so much Trump himself)? To the extent that these ventures invest to sell into the Chinese market they will also increase competition, forcing productivity gains for China and helping to drive its prosperity. US shareholders will gain and the guys back in head office will get a lift but there is little benefit here for the blue-collar American worker.

Of course, if those investments are in new factories in China they may export back to the US. That is actually good news because it will bring cheaper goods into the US and force US domestic producers to be more competitive, but again, it may not be such good news for some blue-collar worker. And Trump won’t like it. One of the key uncertainties about US trade policy is whether Trump actually supports this part of the agenda though it is certainly being pushed by Mnuchin at Treasury. Trump really may just be ‘Tariff Man’, as he tweeted, intent simply on making more in America.

Critics will say I am an unreconstructed globalist in seeing the world this way. I’m sorry but this is all just basic economics. One small caveat. If a small, poorly prepared country suddenly opens up to advanced foreign competition it may well be overwhelmed. In other words, there may be a case for protection for ‘infant industries’ on a strictly time-limited basis. In practice such protection, tends to go on for ever and keep the country poor. Vast swathes of emerging markets fall into this category while, for Japan, Korea and many countries in Europe, the continued protection of service sector industries is what keeps them from reaching the income levels enjoyed by Americans. But in the case of China its economy is big enough and dynamic enough to gain from opening up, especially if the opening is phased which it likely would be.

For the sake of ordinary Chinese people (and also to bring an end to the trade war), I hope Trump succeeds but his policies will strengthen the Chinese economy, not weaken it, and will bring little gain to the US. It is ironic that having given China an enormous lift up by allowing it into the WTO, many in the US now see that as a mistake but are pushing a set of policies which will give China another big boost towards prosperity.