NEW YORK – The trade skirmish between the United States and China on steel, aluminum, and other goods is a product of US President Donald Trump’s scorn for multilateral trade arrangements and the World Trade Organization, an institution that was created to adjudicate trade disputes.
Before announcing import tariffs on more than 1,300 types of Chinese-made goods worth around $60 billion per year, in early March Trump unveiledsweeping tariffs of 25% on steel and 10% on aluminum, which he justified on the basis of national security. Trump insists that a tariff on a small fraction of imported steel – the price of which is set globally – will suffice to address a genuine strategic threat.
Most experts, however, find that rationale dubious. Trump himself has already undercut his national-security claim by exempting most major exporters of steel to the US. Canada, for example, is exempted on the condition of a successful renegotiation of the North American Free Trade Agreement, effectively threatening the country unless it gives into US demands.
But there are a host of issues in contention, involving, for example, lumber, milk, and cars. Is Trump really suggesting that the US would sacrifice national security for a better agreement on these minor irritants in US-Canadian trade? Or perhaps the national-security claim is fundamentally bogus, as Trump’s secretary of defense has suggested, and Trump, as muddled as he is on most issues, realizes this.2
As is often the case, Trump seems to be fixated on a bygone problem. Recall that, by the time Trump began talking about his border wall, immigration from Mexico had already dwindled to near zero. And by the time he started complaining about China depressing its currency’s exchange rate, the Chinese government was in fact propping up the renminbi.
Likewise, Trump is introducing his steel tariffs after the price of steel has already increased by about 130% from its trough, owing partly to China’s own efforts to reduce its excess capacity. But Trump is not just addressing a non-issue. He is also inflaming passions and taxing US relationships with key allies. Worst of all, his actions are motivated by pure politics. He is eager to seem strong and confrontational in the eyes of his electoral base.
Even if Trump had no economists advising him, he would have to realize that what matters is the multilateral trade deficit, not bilateral trade deficits with any one country. Reducing imports from China will not create jobs in the US. Rather, it willincrease prices for ordinary Americans and create jobs in Bangladesh, Vietnam, or any other country that steps in to replace the imports that previously came from China. In the few instances where manufacturing does return to the US, it will probably not create jobs in the old Rust Belt. Instead, the goods are likely to be produced by robots, which are as likely to be located in high-tech centers as elsewhere.
Trump wants China to reduce its bilateral trade surplus with the US by $100 billion, which it could do by buying $100 billion worth of US oil or gas. But whether China were to reduce its purchases from elsewhere or simply sell the US oil or gas on to other places, there would be little if any effect on the US or global economy. Trump’s focus on the bilateral trade deficit is, frankly, silly.
Predictably, China has answered Trump’s tariffs by threatening to respond to their imposition with tariffs of its own. Those tariffs would affect US-made goods across a wide range of sectors, but disproportionately in areas where support for Trump has been strong.
China’s response has been firm and measured, aimed at avoiding both escalation and appeasement, which, when dealing with an unhinged bully, only encourages more aggression. One hopes that US courts or congressional Republicans will rein in Trump. But, then again, the Republican Party, standing in solidarity with Trump, seems suddenly to have forgotten its longstanding commitment to free trade, much like a few months ago, when it forgot its longstanding commitment to fiscal prudence.
More broadly, support for China within both the US and the European Union has been waning for a number of reasons. Looking beyond the US and European voters who are suffering from deindustrialization, the fact is that China is not the gold mine it was once perceived to be for American corporations.2
As Chinese firms have become more competitive, wages and environmental standards in China have risen. Meanwhile, China has been slow to open up its financial markets, much to the displeasure of Wall Street investors. Ironically, while Trump claims to be looking out for US industrial workers, the real winner from “successful” negotiations – which would spur China to open its markets further to insurance and other financial activities – is likely to be Wall Street.
Today’s trade conflict reveals the extent to which America has lost its dominant global position. When a poor, developing China started increasing its trade with the West a quarter-century ago, few imagined that it would now be the world’s industrial giant. China has already surpassed the US in manufacturing output, savings, trade, and even GDP when measured in terms of purchasing power parity.
Even more frightening to many in the advanced countries is the real possibility that, beyond catching up rapidly in its technological competence, China could actually lead in one of the key industries of the future: artificial intelligence. AI is based on big data, and the availability of data is fundamentally a political matter that implicates issues such as privacy, transparency, security, and the rules that frame economic competition.
The EU, for its part, seems highly concerned with protecting data privacy, whereas China does not. Unfortunately, that could give China a large advantage in developing AI. And advantages in AI will extend well beyond the technology sector, potentially to almost every sector of the economy. Clearly, there needs to be a global agreement to set standards for developing and deploying AI and related technologies. Europeans should not have to compromise their genuinely held concerns about privacy just to promote trade, which is simply a means (sometimes) to achieving higher living standards.
In the years ahead, we are going to have to figure out how to create a “fair” global trading regime among countries with fundamentally different economic systems, histories, cultures, and societal preferences. The danger of the Trump era is that while the world watches the US president’s Twitter feed and tries not to be pushed off one cliff or another, such real and difficult challenges are going unaddressed.
23 Comments on this article
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PER KUROWSKI Read lessBut Stiglitz, as chairman of the U.N. Commission on Reforms of the International Monetary and Financial System, said nothing about the risk weighted capital requirements for banks, which act like tariffs and odiously distort the allocation of credit to the real economy
https://teawithft.blogspot.com/2018/03/the-basel-committees-tariffs-of-35-risk.html -
KLAUS KASTNER Read lessJust looking at the issue from the financial side (instead of the product side): the trade balance is (typically the largest) part of the current account balance which is trade plus services. And the current account reflects the cross-border transfer of wealth. A current account deficit represents the amount of domestic assets which have moved into foreign ownership. Since the Vietnam War, the US has transferred domestic assets into foreign ownership (i. e. return on those assets goes abroad). I am surprised that apparently no one in the American intelligentsia is worried about this. The US used to be the world's largest creditor and has now become the world's largest debtor? Is that really irrelevant???
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ALEX ASLANIDIS Read less"Reducing imports from China will not create jobs in the US. Rather, it will increase prices for ordinary Americans and create jobs in Bangladesh, Vietnam, or any other country that steps in to replace the imports that previously came from China."
Really? This is the best argument that mainstream economists can muster in favor of "free"-trade? No wonder nobody takes them seriously, other than those who benefited from the current regime.
So, once there's balanced trade with all involved, what's going to happen? Ah, yes, jobs in the US, cause fiscal policy will work without fear of import leaks, or imports distorting the US economy in favor of bubble sectors (FIRE sector). -
ANDREW (ANDY) CROW Read lessWell said ANTON LJUTIC. !
I don't know if Mr Stiglitz is entirely correct in his assessment, but at least he's making intelligent noises. And as you say there's not much sign of intelligent response. -
ANDREW (ANDY) CROW Read less".... Or perhaps the national-security claim is fundamentally bogus,...."
Not much 'perhaps' about it. Most of the US' constant bleating about 'national security' is bogus. -
VENKATRAMAN ANANTHA NAGESWARAN Read lessAsh Carter, in an interview to 'Politico' in February had said that economists had not provided real answers for dealing with China. William Galston, he served in Clinton's first term in office, says that China is yet to ratify the Government Procurement Agreement that it agreed to do so when it joined WTO in 2001. it is about non-discriminatory opportunity in government procurement.
Joseph Stiglitz, who discovered a niche for himself, opposing free trade and all the other nice things for the Fund and for Wall Street, suddenly discovers virtue in free trade because Trump is now considering imposing tariffs on China.
One thing is clear: whether or not Trump wins, economists have both lost it are still losing it.-
ANDREW (ANDY) CROW Read less"Joseph Stiglitz, who discovered a niche for himself, opposing free trade and all the other nice things for the Fund and for Wall Street, suddenly discovers virtue in free trade because Trump is now considering imposing tariffs on China."
That's quite unfair based on the content of the above article. Stiglitz is simply pointing out the extent to which 'Free marketeers' have changed their position because somebody is beating them at their own game. Not that US republicans are much concerned with the productive economy when there is much more to be made from the financial markets.
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ROBERT MULLEN Read lessPlease, just this once, apply your energy and knowledge to the problem of reducing the trade deficit with China, rather than arguing it doesn't matter, or will resolve itself, or is a really good thing, or there is some other bigger problem. Just accept it as a problem and provide a solution -- like a bright ambitious student.
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ANDREW (ANDY) CROW Read lessYes, Robert, but have you considered that the trade deficit with China just might not be a problem ?
If it ain't (actually) broke it don't (actually) need fixed.
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CARL WALCK The border wall is to stop ILLEGAL immigration.
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ANDREW (ANDY) CROW Read less"The border wall is to stop ILLEGAL immigration."
Fat chance that will work. Like the illegals are going to bump into it and decide to go home.
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ANTON LJUTIC Read lessThere isn't a single reply yet that coherently addresses Stiglitz's argument. It's all just contrarian noise. Especially intriguing is George's statement that China is just looking after it's own interests. I guess Trump isn't? And "Make America first" is not a tribal call to close ranks?
Let America begin saving more and spending less and we will see the deficit problem disappear overnight and America run a surplus on trade. But so long as America keeps consuming goods and services that they aren't producing, the difference will have to be made up by their neighbours. Balance of trade is an accounting IDENTITY and it can't be changed by clever arguments. Imports have to be earned with exports or else put on a bill and added to the debt (check the US Capital Account of the BoP!). And what a lot of people seem to miss is that we do not borrow their MONEY. Their money is just a vehicle, a unit of account It cannot be used to buy anything in America. What we do borrow is their goods and services. To be repaid in the same manner, sometime in the future. And it won't be easy to go from full tilt borrowing to repaying.
Problem is, it is awfully expensive to ring the world with military bases, prosecute wars, foment or suppress insurrections (depending on their flavour) and forego billions in tax cuts and loopholes for the wealthy individuals and corporations without tightening the proverbial belt - always politically unpopular. And if the belt isn't tightened then there will be more borrowing. And this President seems keen on loosening rather than tightening the belt.
A wise man would bet on persistent trade deficits at least during this Presidency. But, perhaps, that is not the problem. Mr. Stiglitz has offered an opinion on what the real problem today is (and what isn't). You may disagree with him, but if you do, please explain why your opinion should be preferable to his. Don't just rant. -
JIMM ROBERTS Read lessHowever you slice it, it costs more to make things in developed countries than in less developed ones.
Much like software updates that are essential to keep our computers operating at peak efficiency, all the US can do to sustain if not increase our exports is to sell something state of the art or something at lower cost than anyone else.
The former commands a premium whereas the latter creates or keeps market share. Tariffs to punish our trading partners because they have lower labor costs simply hurts the US consumer; they're a tax by any other name.
At best, Trump the Terrible might be able to make some headway removing trading abuses and non tariff barriers in exchange for removing his tariffs. In any case, he better do it soon before his base realize the cost they're paying for his confrontational hubris-
ANDREW (ANDY) CROW Read lessI think the best gloss that can be put on Trump's tariffs is that they might be only an attempt at a negotiating strategy. It looks like high risk strategy to me.
If he was playing poker I'd be inclined to put a few 'bucks' on his hand being less than impressive.
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JANOS NAGY Read lessFirstly
How sad that a nobel price economist measuring trade by dollar amount and not what actually being trade.
Yes it is labor, taxes and profits what is actually being traded.
Now when you measure the correct economic elements than you can clearly see that that the U.S. has a 30 million labor deficit with China alone and about 500 billion in taxes if those labor would be employed in the U.S.
please do not give me the nonsense that the U.S. has full employment with 80 million people out of the workforce labor participation is barely above 60 percent.
Are all these 80 million people all millioners.
Secondly
Tariffs never worked to uphold the economic democracy the very basics of economic rights of individuals to be able to sell their labor for a fair market value in their respective economic jurisdiction without any interference by governments policies especially trade arrangements that directly discriminate against them.
Only good old quotas did the work to uphold the economic democracy but laughably it’s against the WTO rules.
And who is that signed against economic democracy? -
MARK GENDALA Read lessFree trade? Hey, how about free trade in IDEAS... Can the $250/hour Stiglitz Economic Call Center name a single Economics idea that couldn't be imported from a Bangalore
Economic Call Center for $5/hour... And if this were to happen - how would $250/hour Stiglitz Call Center feed itself and pay the rent? -
NIGEL SOUTHWAY Read lessI have read joe’s new book. It’s all about defending the rabid fanatical religious ideology of free trade and globalization, not outlining what is right for the western nations.
What really stinks is that he describes the real pain the failed practice of free trade and globalization is generating, yet the religious ideology must still come first…..
What is real scary is that this blind purest thinking still exists, and these wonks are teaching the next generation of economists!!! -
NICOLA PHILBIN Read lessAbsolutely perfect time to use the 4th technology industrial revolution to drive harmony, balance and most importantly a global overarching arching policy mapping to Smart Cities, urbanisation and UN2030SDG and 2050 Zero Emissions target.
This time round there needs to be mapping and accountability across an eco system as in the digital era, and the circular business models, eco systems online and offline are key.
The stakeholder should include tech vendors, nations, regulations, trade, intellectual property, fintech, crypto, security blockchain, AI...
1:demarcation between tangible assets and fintech in respect of the choice and penetration offline at point of sale.
2: Consideration for the consumer in respect of retaining democracy and having a voice and empowerment to protect their online privacy, dignity, data, identity and most importantly how to get support when bullying, financial theft, harassment, trolling as today there is no effective support to help
3. Policy between Human and robot employment demarcation, control, and safety-
NIGEL SOUTHWAY All sizzle and no meat in these words
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D CLARK Read lessThe word “fair” should have been in the first paragraph, not in the last, where Stiglitz writes, “In the years ahead, we are going to have to figure out how to create a “fair” global trading regime among countries with fundamentally different economic systems, histories, cultures, and societal preferences.” What does he think Trump is doing but to start correcting now what America and the world has snoozed on as technologies and governments have changed? This is a perfect time and incentive for economists and others to wake up to what is now made very public: the trade inequities that have smuggled their inevitable way into the world’s political and economic systems. It would be interesting to know what Stiglitz means by his in quotation marks “’fair’”, and who might be able to concoct a living formula for his special four preferences, and whether they are relevant. Trump may have caused "confusion", but let's hope that those confused by his actions are able to discern the unfairness that Trump has pointed out in bold and begin “to figure out” now, not in the future, how to come to his aid and help rebalance the skewed scales of trade.
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ANDREW (ANDY) CROW Read less"Trump may have caused "confusion"...."
He certainly has. And that in itself is no bad thing, because it must surely persuade economists and political theorists to interrogate their rather tired and threadbare beliefs.
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GEORGE JONISCH Read lessYour last paragraph says it all if you realize that the history and culture of China and others, define as fair, that which benefits their tribe (country) and that it is foolish not to grab what is available while it is available. Adam smith's theories assume a western mindset of individuals competing against other individuals or companies not the ''groups'' prominent in Asian culture.
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ANDREW (ANDY) CROW Read lessInteresting point, George.
The US rapidly heads for collective action in time of war. The selfish interests of the individual, considered de rigeur for peacetime, go straight into the bin for the duration.
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