President Trump’s tariffs and China


Some economic analysts seriously labeled President Donald Tramp as a man who judges his successes by anecdote, both real and embellished. But his trade war is turning the anecdotes against him, and there are growing signs of trouble, even as the war officially began on 6 July 2018 when the United States tariffs on 34 billion dollar in Chinese imports took effect.
A poll conducted by The Washington Post and the Schar School of Policy and Government at George Mason University asked whether people felt President Trump’s tariffs against China were a good thing or a bad thing, in light of news that China retaliated with its own tariffs on United States’ goods. Fully 56 percent of voters thought the situation was bad for United States’ jobs.
Aaron Blake of The Washington Post recently wrote that President Trump’s barrage of tariff hikes may bring short-term relief to battered industries and their workers. But President Trump’s preferred package of measures doesn’t add up to a sensible economic policy even for the United States itself. There are a number of reasons for this.
First, while these moves are significant, they will eventually squeeze workers in other sectors like autos and construction that rely on steel as an input, as was the case when President George Bush put in place similar tariff hikes in 2002. Second, deregulating financial markets as President Trump also did recently, deregulating environmental regulation and health care make Americans less stable and less healthy. Third and most importantly, trade deals are not ends in themselves but tools to implement broader economic policy goals.
According to Aaron Blake, President Trump in particular, lacks a set of innovation and industrial policies that countries like China and Germany deploy to build strong industry. Rather than investing in America, President Trump pushed through a major tax cut that slashes investment and jeopardizes the United States’s ability to do so in the future. According to the Congressional Budget Office, the tax cut will widen the deficit to 1 trillion dollar per year in 2020.
Professor Mike Alen of Michigan State University seriously argued that the United States should adopt a China-like strategy. In the early 1980s, China started to further integrate itself within the global economy. China’s strategy was to invest heavily into infrastructure, industry and innovation in the country. It did so to the tune of more than 40% of annual GDP for decades. China also kept a tight rein on financial markets to ensure credit and investment were steered into strategic industries that would someday become globally competitive.
Professor Mike Alen stated that when United States and other multinational companies flocked to invest in China, these firms were lured by the prospect to tap into the fastest growing market in world history. In exchange for that access, they were happy to trade technology and knowledge. Alongside many joint ventures, China invested heavily in associated technology parks, research and development and education through the public purse and a series of national development banks.
It is true that people know the story from there. The former World Bank economist Branko Milanovic has shown that the winners from the various globalization strategies were China and the richest segments of the population in the United States and the rest of the industrialized world. The losers were by and large the middle classes in the United States and across the industrialized world.
According to Branko Milanovic, China’s average income has jumped by a factor of ten in the past decades. Chinese wages are higher now than in parts of Europe. According to the World Bank, in 1990, more than 750 million people in China lived in extreme poverty (less than $1.90 per day), representing almost 70% of the entire population. Now, just one percent of all Chinese is extremely poor.
Michael Hicks, Director of the Centre for Business and Economic Research at Ball State University stated that the United States pursued the opposite course. He noted that the United States “strategy” was to largely de-invest in infrastructure and industrial innovation, deregulate financial, labor, social welfare and environmental protections to reduce the cost of doing business and make incumbent United States multinational firms and finance more globally competitive. To add insult to injury, the United States locked these policies in through unbalanced trade deals that let these same firms govern the world economy.
According to the World Bank, the overall investment level in the United States has fallen from 25% of GDP in 1980 to 19% now. According to the Hamilton Project, wages for all but the top 1% of wage earners have remained stagnant or declined in the United States since the early 1980s. What’s more, the country has lost competiveness in key well-paying industries.
As the United States takes this shallow, remarkably non-strategic approach to change, China is doubling down on a new round of investment and innovation. While Trump denies the science of climate change, China accepts the inconvenient truth of climate change, caps the use of fossil fuels and invests in renewable technologies that have become the envy of the world.
In his new book, “Can Democracy Survive Capitalism”, Robert Kuttner reminds the Americans that they don’t have to mimic China’s political system to put together an economic strategy for long run prosperity for all Americans. In fact, Americans invented the wheel with the New Deal that put tight reigns on financial speculation, provided health care, enabled collective bargaining so that workers gained their share of profits and created a trading system that prioritized global trade while allowing for nation states to deploy policies for employment and prosperity.
In that sense, what the United States economy needs is a return to those very sensible roots. Unfortunately, Robert Kuttner argued that both political parties in the United States have lost sight of what brings success and now President Trump is inflicting some of the worst damage yet. Driven by ideology, they are relentless in their joint effort to tear down as much of that sensible economic fabric that laid the foundations of United States prosperity for decades down.