Trade Wars and China

As President Trump's MAGA policies start to undo the unfair trade practices of China and Europe, he faces a wall of criticism from the global elite who personally benefit from the current arrangements. One of the most commonly heard arguments used to sustain the status quo is that 'nobody can win a trade war.' This line is formulated by highly credentialed economists and then picked up and spread by TV talking heads. The problem is that line is false. 

What is accurate to say is that a trade war, say between the America and China, cannot be won by the U.S. without some short-term pain and sacrifice. That much is true. But as far as winning a trade war, giving the immense advantages America has, it is as Trump said: "Trade wars are good and easy to win." And when the president says that trade wars are good, he means that the long-term benefits far outweigh the initial costs.

With regard to China, without belaboring that country's particular vulnerabilities for now, let's look a fairly recent trade war that America won rather handily. This was with Japan in the 1980s.  

In the 1980s, all the talk was that Japan was destined rule the world economically. Japan was registering huge trade surpluses with the U.S. I recall reading numerous accounts back then of how Japanese engineers would be given tours of American facilities and were allowed to take photographs of everything they were shown by naive American managers. At the same time, Japanese companies, under if not under direct government control then at least the heavy influence of  centralized bureaucrats, were positioning themselves to obtain global dominance. This was called Japan, Inc. back then, and it appeared to be a juggernaut destined to steamroll the world. 

To make a long story short, Japan's mercantile policies were brought to heel by President Ronald Reagan, cumulating in the Plaza Accord of 1985. According to Peter Landers, the Tokyo bureau chief of the Wall Street Journal

Faster than anyone thought possible, Japan ceased to be a threat to U.S. economic primacy. Under U.S. pressure, it cut interest rates to stimulate demand for imports. That spurred a historic bubble, which collapsed in the early 1990s, sending Japan into a tailspin. Soon after, all the handwringing about a world controlled by Tokyo ceased. 

By that measure, the U.S. emerged from that trade war a winner.

What made Japan capitulate to U.S. demands? It was the same as it is today -- access to the vast American consumer market. Without that, Japan realized it could not function at a high level. So Japan wisely trimmed its sails and accepted the terms the Reagan administration laid out. 

That win was made possible because Reagan, unlike his successors, unapologetically put America first, just like Donald Trump is now doing with our trading partners. 

The Japan-America trade war happened within living memory. That the so-called economic experts of today choose to ignore it and the lesson therein indicates they have a hidden agenda, probably self-interest of some sort. Note that the unfair trading arrangements has been allowed to fester for so long that a significant number of domestic special interest groups have grown fat on it. Accordingly, they fight to preserve the status quo.   

As for China's vulnerabilities, I'll quickly touch on just a few. The first is that China runs a huge trade surplus with the U.S. For September 2018, the surplus was $34.1 billion, which would translate into over $400 billion for the year. This means China can ill afford to go tit-for-tat with America on tariffs before running out of ammunition. Trump has explicitly said so, and the Chinese know it.

Second, China is a resource-poor country. It needs a steady flow of imports of raw materials, especially food and energy, to keep its export-oriented economy running and even to feed its people. America is nearly self-sufficient and is especially so when trade within North America is included.

China trade brings us no food or energy or technological innovations. Whatever China exports to America can be obtained elsewhere. It's just a matter of cost, an advantage that China is rapidly losing. 

China's third vulnerability lies in innovations. Made in China 2025 is the grand initiative of the Chinese Communist Party to basically have Chinese industries to lead the world in various hi-tech sectors by 2050. This is a laudable objective, but its premise is flawed. Basically, the Chinese plan to do this not by their own innovations but by continuing to steal technology and intellectual properties from the U.S., Europe, and Japan.  As President Trump's trade advisor Peter Navarro put it, "China is basically trying to steal the future of Japan, the U.S. and Europe, by going after our technology."

When U.S. trade negotiators demand that the technology theft must end, the Chinese dig in their heels. They do this for two reasons. First, Made in China 2025 is impossible without massive technology transfers from the West, particularly the U.S. And second, China has built itself up as far as it has based on theft of technology and intellectual property. Perhaps the Chinese figure (or hope) that Trump is just a passing storm and soon things will reset to the good old days. That is not likely.

A trade war with China is so winnable that to not win it, America would have to deliberately want to lose. That won't happen with Trump.

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