Trump’s puzzling trade war with China, sort of explained

Trump’s puzzling trade war with China, sort of explained

President Trump’s years-long trade war with China is heating up, and nobody is exactly sure why or when it will end.

Last week, Trump raised an existing 10 percent tax on many Chinese imports to 25 percent when talks originally designed to deescalate the earlier round of trade warring collapsed. China responded by raising its own taxes on many American imports. Then Trump started talking about taxing an even wider range of Chinese products.

Naturally, Trump has tweeted a lot about this. His narrative is that tariffs are good because they force China to pay money to the government (which isn’t true) and that farmers shouldn’t worry about losing access to the Chinese market because he can organize bailouts for them anyway. His own economic policy team, meanwhile, concedes that this is wrong and trade war will cause pain on both sides. Global financial markets agree with Trump’s advisers rather than the president, and stocks fell on the news.

Trump’s reasoning for the trade war is a bit murky. His list of goals are a mix of concessions that could be considered pro-worker or pro-company. There’s also part of a larger question of the US-China relationship, which China hawks see as too beneficial to Beijing. They’d prefer to team up with other countries against China rather than slap them with tariffs, as Trump has done.

Regardless, the reality is that trade wars are mutually destructive. The only way to really “win” one is to convince the other side that you are dangerously reckless and ignorant of how the global economy works. This seems like a job that Trump is extremely well-suited to, but it also raises the possibility that he is in fact dangerously reckless and ignorant of how the global economy works.

American presidents have gotten wrapped up in trade wars before. The United States and the European Union waged a two-decade trade war about bananas that spanned the Clinton, Bush, and Obama administrations even though neither the US nor Europe grows bananas. But Trump is escalating the trade war with China with an unusual level of vigor and seeming disregard for the potentially damaging consequences.

Trump’s thinking about China paying the tariffs is wrong

The president likes to argue that tariffs are a kind of direct benefit to the United States because China pays them, so even if the trade war ratchets up, there’s at least an upside.

This is both literally mistaken (American importers pay the tariffs) and a conceptually confused way of thinking about the whole thing. The direct revenue impact of the tariffs just isn’t important.

The big winner from taxing Chinese imports is the people — in America, Vietnam, or wherever else — who make products that compete with Chinese imports.

It’s true that it’s not obvious where the ultimate economic cost falls. On the morning of May 13, Trump tried to cite some research showing that most of the cost falls on Chinese producers by referencing a 2018 study by Benedikt Zoller-Rydzek and Gabriel Felbermayr for EconPol Europe, which argued that a 25 percent tariff on Chinese imports would raise US consumer prices by 4.5 percent, with the rest of the cost being borne by China-based producers.

This obviously doesn’t say that the cost of the tariffs is entirely borne by Chinese manufacturers. A 5 percent price increase is less than a 25 percent price increase, but it’s still an increase.

Other studies, meanwhile, are less optimistic. Mary Amiti, Stephen Redding, and David Weinstein find that “the full incidence of the tariff falls on domestic consumers, with a reduction in U.S. real income of $1.4 billion per month by the end of 2018.”

An important thing to note, however, is the tit-for-tat nature of the trade war. And while Amiti, Redding, and Weinstein find that the cost of Trump’s tariffs has been borne entirely by American consumers, they also find that the cost of China’s retaliation has been borne entirely by Chinese consumers. The Zoller-Rydzek and Felbermayr study doesn’t do this exercise, but the same symmetry principle should operate, with their model indicating that Chinese retaliation was very costly to American producers.

The methodological issues behind this dispute are interesting, but for an ordinary citizen, the symmetry is the most important part. The disagreement is on whether raising trade barriers mostly hurts the country that is raising them or mostly hurts the country that is being targeted. But since in this case both countries are raising trade barriers, there’s no way to escape the conclusion that the conflict is costly. (Though media accounts can end up exaggerating the costs by neglecting some winners.)

The cost of a trade war

If you take an international trade economics class, your professor will probably distinguish between analyzing the cost of tariffs in a small country versus a large country.

In the small country case, which is easier to model, imposing the tariffs affects the domestic price of a good (because of the tax) but doesn’t change the global price (because the taxing country is small).

The US and China are the two largest economies in the world. So we are in the harder-to-model case where imposing a tariff raises domestic prices (because of the tax) but lowers the global price (because the reduction in demand is big enough to move global markets).

This can have some slightly weird results. Chinese moves to block imports of US-grown soybeans, for example, are supposed to hurt the United States. But precisely because it depresses the global price of soybeans, it’s actually good news for everyone who buys soybeans — not just edamame lovers but also farmers who use it as animal feed, food processors who use soy oil, and, ultimately, almost everyone who eats food.

One upshot of this is that the overall cost of the trade war is lower than the impression you’d get from a broad aggregation of trade sob stories. For every consumer sad about higher prices, there’s a producer who’s excited about them. And for every producer who’s sad about lower prices, there’s a consumer who’s happy.

And most of all, the dividing line between who wins and who loses on any given round of tariffs and counter-tariffs has relatively little to do with whether you’re Chinese or American and a lot to do with what your specific role in the global economy is.

In the United States, for example, most people provide locally focused, non-traded services — they work in schools or hospitals or restaurants or retail stores — in which case, they are harmed by Trump’s efforts to punish “China” but actually benefit from China’s efforts to retaliate against the United States.

Sen. Tom Cotton (R-AR), speaking on Trump’s behalf to CBS News, argued that ordinary Americans shouldn’t worry too much about the negative impact the trade war is having on their lives because it’s not like dying in an actual war.

“It’s not as bad as dying” is a somewhat odd defense of a policy, but Cotton is basically correct that the scale of the overall harm here is pretty modest. Americans will see higher prices for some things. But the kind of things that tariffs raise the price of don’t actually impact the main spending categories — housing, higher education, child care, health care — that burden America’s families.

So if the trade war ends up accomplishing something useful, the fact that it was disruptive along the way may be no big deal. The problem is it’s a bit hard to say what Trump is trying to achieve here.

America’s trade war aims are a little hazy

One of the underlying oddities of the saga is that it’s never been entirely clear what Trump actually wants out of this interaction.

America’s official list of demands contains a bunch of items that are somewhat in tension with each other. The US wants China to:

  • End “forced technology transfer” policies whereby US companies that want to set up in China end up needing to hand over some technology to Chinese stakeholders.
  • End policies that force American companies that want to set up shop in China to structure their Chinese businesses as joint ventures with Chinese-owned companies.
  • Crack down on industrial espionage against American firms.
  • Halt its policy of subsidizing domestic companies that operate in strategic high-tech sectors that China wants to dominate.
  • Reduce various barriers to American agricultural exports.
  • Commit to reduce the large bilateral trade deficit.
  • A key thing to note here is that though concern about the loss of manufacturing jobs to China is a key driver of China trade worries among the mass public, several of these demands actually cut in the other direction.

    Forced technology transfers, mandatory joint ventures, and the threat of industrial espionage are all key reasons that American firms might want to avoid outsourcing work to Chinese factories. If China relents on these points, it might be a big win for American business but could plausibly accelerate the exodus of manufacturing work to Asia.

    Points 5 and 6, on the other hand, are pretty classic jobs-focused trade protectionism. Item 4 has a bit more of the flavor of trade protection but is also clearly focused by similar concerns to points 1 through 3 about wanting to slow the pace of China’s technological progress.

    Obviously, Trump’s dream scenario would be for China to simply fold on all points. But in an actual negotiation, you tend to need to settle for half a loaf, and it makes a difference which half you really want. There’s one scenario in which the US and China settle on some handshake deals to narrow the trade deficit via larger Chinese purchases of US agricultural commodities. And there’s another scenario in which the US really drives hard to get China to ease up on technology acquisition. But these two scenarios depend on significantly different characterizations of what the basic complaint is.

    In a normal administration, you would expect background briefings with journalists to help substantially clarify how the White House is really thinking about this. But in Trump’s Washington, it’s clear that his own team simply disagrees to an extent with itself, and that the president is playing an ambiguous role in this game.

    That’s because Trump, at least, seems to portray himself as thinking that the tariffs are good in and of themselves, whether or not they lead to a deal. One way to see this is that, as Democrats often complain, Trump is not really focusing his trade policy on China.

    Instead, he’s simultaneously hitting Korean appliances, Canadian steelmakers, and, potentially, European automakers with separate sets of tariffs. Levying all kinds of tariffs on everyone makes sense if you just love tariffs, but if you’re actually trying to get China to give ground and make a deal, you might want to team up with allies and all crack down on China simultaneously.

    On the other hand, if you want to get the Chinese to back down, making them think Trump is just a reckless person who loves tariffs might be a good strategy.

    Trump could be employing deliberately confusing strategies

    Because a tit-for-tat game of tariffs hurts both the United States and China, the standoff is a bit like a game of chicken.

    China would prefer that the United States back down. But if it becomes convinced that the United States won’t back down — possibly because the president has no idea what he’s talking about — then it starts to make sense for China to consider backing down instead.

    Back when Barack Obama was president, members of his team sometimes mused that the United States was at a strategic disadvantage in this kind of standoff with China because the People’s Republic’s authoritarian political system made it easier to ride out hardships without consequences for Chinese leaders.

    And one account I’ve heard from both current and former senior Trump officials is that Trump — master of the art of the deal — is simply trying to flip this script by acting like he doesn’t know the trade war is harmful.

    Then again, Jonathan Swan reported Tuesday morning for Axios that he’s “asked several current and former administration officials whether Trump actually believes that China pays the tariffs — rather than the reality that U.S. importers and consumers do,” and the consensus is that he really does.

    I talked to some officials a while back, before the trade war was hot. And if their assessment of the situation is correct, in order for it to work, they’d all need to pretend to believe what they told Swan. But what seems most likely is that different members of Trump’s team simply disagree in their assessment of what’s going on because Trump has said and done contradictory things and because they themselves disagree about the best approach to trade policy.

    Trump, meanwhile, has hailed strategies of ambiguity and flexibility in several of his books and much of his 2016 campaign rhetoric. So while the situation is confusing, it’s probably deliberately confusing.

    Trump has preserved his options

    Whether by design or by blunder, Trump has found himself in a situation where he has a lot of options available to him.

    • If China doesn’t back down and the US economy continues to be strong despite the moderately harmful tariffs, Trump can claim the economy is strong because of the tariffs and pitch himself as the savior of the Midwestern swing states.
    • If China offers significant concessions on either major prong of the dispute, Trump can take yes for an answer at any point and claim a major policy victory.
    • If China doesn’t offer significant concessions and the trade war starts for whatever reason to be a major annoyance, Trump can always settle for minor concessions and enjoy a little stock market euphoria.

    Precisely because the trade war is an inherently lose-lose situation, any possible resolution of it is a win. And that, in some sense, is a very nice position for Trump to be in.

    Note, however, that the underlying predicate for all this is that the strong US economy gives Trump room to maneuver. Nevertheless, the signature element of Trump-era politics is the reality that his national approval ratings are stuck in the low 40s despite a benign external environment in terms of national security and economic growth.

    Parlaying the strong economy into a lot of drama that will eventually allow Trump to claim some kind of victory is extremely Trumpy in the sense that it displays his unquestionable genius for making himself the center of attention at all times. But as is so often the case, one is tempted to ask whether it might not make more sense to try a simpler plan that involved less stirring up of trouble and more just letting people relax and enjoy a period of peace and prosperity.


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