“It is vulnerable [to a trade war] because it is a much poorer country with more fragile political institutions.” - Granite Grok

“It is vulnerable [to a trade war] because it is a much poorer country with more fragile political institutions.”

US vs China trade war

So from this Op-Ed by Bill O’Brien on Trump’s Trade actions, one of our regular commentors left this (reformatted, emphasis mine):

Where I work, we’ve been told we will not get raises this year because of the tariffs impacting the bottom line. they also said that the upcoming election was part of it. I asked “why don’t we make those items here again, and avoid the tariffs? We have the equipment and all of us still remember how to do it. We could make them cheaper HERE until the Chinese buckle and open up trade.” All I got was stunned silence; apparently us workers are not supposed to think of these things.

We could make them cheaper HERE” – and isn’t this the problem in the first place?  With a bigger, more intrusive, more regulatory loving, and higher taxing government, Statists / Progressives / “We know better than you do” Big Noses MADE the US less competitive in manufacturing in a lot of areas (unions cost and work rules / demands didn’t help either). A lot of what the Trump Administration has been doing is to reverse the harm that our manufacturing sector has had to endure.  Do we still make a lot of stuff?  Sure do – good stuff, expensive stuff and the mix of those goods is always changing. But can Govt get out of the way and let our manufacturers regain those lost advantages?  Sure can – and the manufacturing jobs + higher productivity numbers are showing that.

But I digress a bit.  Back to the “trade war”. This by noted economist Tyler Cowen (via Instapundit) also speaks to this idea that it isn’t about tariffs per se but seeking reciprocity of an equal footing. I’ve excerpted a bit more than I usually do from a post mostly because I’m no expert in this area.  Yes, tariffs meant simply to protect a domestic company or industry does mean simply higher prices for us (although I am lenient about doing so for companies making defense related goods and services) but that’s not what Trump is doing.  He is waging war, on an economic basis (e.g., “warfare by other means”) that previous Administrations didn’t wish to engage in to protect American citizens::

…To be clear, there are well-done studies showing that the recent tariffs have translated into higher prices for U.S. consumers. I am not contesting that research. The question is whether those studies give sufficient weight to all relevant variables for the longer run.

E.G., the Big (or at least, bigger) Picture (emphasis mine):

To see why the full picture is more complicated, let’s say the U.S. slaps tariffs on the industrial inputs (whether materials or labor) it is buying from China. It is easy to see the immediate chain of higher costs for the U.S. businesses translating into higher prices for U.S. consumers, and that is what the afore-mentioned studies are picking up. But keep in mind China won’t be supplying those inputs forever, especially if the tariffs remain. Within a few years, a country such as Vietnam will provide the same products, perhaps at cheaper prices, because Vietnam has lower wages. So the costs to U.S. consumers are temporary, but the lost business in China will be permanent. Furthermore, the medium-term adjustment will have the effect of making China’s main competitors better exporters.

Obviously, no final long-run estimates are possible right now. But it is quite plausible that China will bear the larger costs here, not the U.S.

Another risk for China is this: As its access to U.S. markets becomes more difficult, China may be tempted to look to Europe. It remains to be seen whether the European Union will adopt additional protectionist measures, but China must consider that the possibility is more than zero.

Frankly, the whole idea of the EU is to be a free trade environment for its member countries – others, not so much.  As China’s Belt and Road Initiative is becoming clear, I doubt that the EU will keep that “possibility” near zero, especially as it surveys how the BRI policies are affecting the developing nations and the debt they have incurred with the “help” from the Chinese Communists.

…There is also a broader reason why a trade war with the U.S. hurts China, and this gets to an important point with trade agreements more generally. A U.S. trade agreement with China would (if enforceable) certify China as a place where foreigners can invest and be protected against espionage, intellectual property theft and unfair legal treatment. That prospect of certification is now suspended. That makes investing in China less desirable for many multinationals, not just U.S. ones. That, in turn, limits Chinese domestic wages as well as long-term learning and technology transfer. A U.S. certification of China might even boost Chinese domestic investment, but again that is now off the table.

Too often we in the US are very short term oriented – to a fault.  The Chinese are long term-ers and they may well understand that what Trump is doing today is going to adversely impact them later on. A quarter percentage here, a half percentage less growth there; it adds up over that longer term and already the Chinese economy is slowing (perhaps even slower than the “known to be bad” reports are saying).

In my numerous visits to China, I’ve found that the Chinese think of themselves as much more vulnerable than Americans to a trade war. I think they are basically correct, mostly because China is a much poorer country with more fragile political institutions.

And finally: My argument isn’t about whether Trump’s policy toward China is correct. I am only trying to get the basic economics straight. Next time you hear that the costs of the trade war are simply being borne by Americans, be suspicious. In their zeal to make Trump look completely wrong, on tariffs or other issues, too many commentators pick and choose their arguments. A more fair and complete economic analysis indicates that China is also a big loser from a trade war. Trump’s threats are exerting some very real pressure on the country.

“America First” – and why not?