Trump’s Losing Trade War

Well, it seems clear that Donald Trump learned nothing from his college days at the Wharton School of Business and that he fell asleep during Econ 101. You would think he had learned something since then but he remains oblivious to fundamental economic trade principles. Despite his cognitive shortcomings, it also seems clear that he now intends to use tariffs as a bargaining tool to bludgeon concessions from the Chinese on the trade tactics commonly said to be “unfair.”

Just how unfair, is arguable because the tactics complained of are common elements in arm’s-length free-market trade bargaining. Trade is a free-market issue. These notorious Chinese unfair trade tactics are:

  1. ordinary reciprocal tariff levels,
  2. Chinese requirements that American companies have to partner with Chinese companies as a condition to doing business there,
  3. Chinese government subsidies supporting companies there that manufacture and sell products to the US and
  4. theft of American technology.

(Incidentally, the media has been derelict in failing to delve into the exact terms of the negotiations with China, as if we, the public, are not interested or not smart enough to understand. Trump said the Chinese reneged on some parts of a deal. What parts? What did they renege on? Nobody ever asked him that. And media complaints of technology theft have failed to identify any specific instances of theft.)

Except for technological theft, all of these issues are simply routine free-market bargaining matters. If American companies don’t want to partner with Chinese companies they don’t have to; but they choose to do business this way. That’s not cheating, it’s just business.

Subsidies are always an issue in trade negotiations and there are regularly accepted means for addressing those problems.

Technological theft, theft of intellectual property and infringement of patents has been going on between countries for centuries. America benefited from stealing weaving technology from England in the late 18th century. Anyway, theft is a security and enforcement matter that has to be dealt with through existing enforcement means, such as the patent courts and agencies. The Chinese certainly agree that theft is wrong and they have agreed to the patent protection provisions of the World Trade Organization which they joined many years ago. Most of the patent infringement losses have resulted from American companies’ failure to protect their patents under Chinese patent laws. But, until 2017, Chinese patent law did not allow for patenting of much computer software. But that has changed and Chinese patent law animal provides protections for computer software ideas. Patent laws in China are more rigorous and more streamlined in protecting patent rights than those of the US and they have better means of enforcing patents than we do. Patents on patentable inventions properly filed by US companies in China are enforced in China.

None of these issues will be solved by starting a tariff trade war. Obviously when one side raises its tariffs the other side retaliates. Trump says that trade wars are easy to win. He is wrong. In a trade war both sides lose. Trump’s tariffs are putting the US economy at risk – putting our economy in a very bad spot. But it is a spot that he has to get out of before the next election. The reintroduction of a long-term Smoot-Hawley tariff regime would be disastrous for both countries. That will not happen. Trump’s drastic tariff hikes are trade war ploy, ultimately a bluff. This is obvious. It is so clear that the Chinese must know it. They are not fooled by the tactics of this supposed genius bargainer and they know that they can simply wait him out. He will likely — he will have to — negotiate a settlement; get an agreement for some minor cosmetic improvements and declare victory as he did with the renegotiation of NAFTA.

The art of the deal may appear to have worked for him in business but will not work in international trade where he does not have the same kind of leverage that he had in business where he could play the bankruptcy card or threaten a lawsuit. A better strategy would be to negotiate in good faith with the Chinese to lower tariffs on both sides so at least we can keep buying cheap TVs, refrigerators and cell phones from China and we can get back to selling them apples and airplanes.

Posted in Miscellaneous.

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