President Trump recently announced a partial trade settlement with China. Does this mean we have won the trade war?
Details remain sparse, and the present deal may merely forestall further tariff hikes. It may be a truce rather than a peace treaty. Nonetheless, avoiding escalation of the trade war is good news.
To think about trade with China or other nations, we should not view nations as trading. Individuals and businesses trade through buying. As consumers, we face a range of options for cars, clothes, phones and so forth. Sometimes a “foreign” product better serves us or offers comparable value at a better price. Businesses similarly consider who can best supply the inputs they use. Today’s global supply chains make the difference between foreign and domestic manufacturers a matter of degree.
Viewing trade as individual action helps us recognize that trade makes consumers better off. Overseas sales boost American firms’ revenues and make their customers across the globe better off too. Voluntary trade in markets benefits all involved, even when they live in different countries.
All nations’ governments limit their citizens’ freedom to trade internationally. This is unfortunate; a world economy with everyone participating would be more prosperous. And governments use their tax dollars to help their companies sell in foreign markets. These export subsidies hurt the world economy by making products artificially attractive to consumers.
What can we do if other nations keep their citizens from buying American products? As a rule, I think we should engage in trade to the extent possible. Limited trade still produces benefits.
The charitable interpretation sees President Trump’s trade war as trying to make China open their markets. Tariffs on Chinese imports threaten the profits Chinese companies earn selling here. A trade war tries leveraging this pressure for a better deal. If successful, the costly trade war would yield future benefits.
Yet pressuring governments on trade is problematic. A government that restricts imports demonstrates relatively little concern for their citizens’ well-being. For many years Japan limited rice imports, an important staple of their national diet. If Japanese rice growers were so important that politicians were willing to make households (who could vote against the politicians in elections) pay more for rice, could we possibly have enough leverage to force a policy change?
The dispute with China also involves allegations of unfair trade. One element of unfairness is government assistance to companies exporting to the U.S. Another component is currency manipulation, or keeping the value of China’s currency, the yuan, low to make exports artificially cheap. (Intellectual property and technology transfer are also concerns but these issues are sufficiently involved to warrant separate treatment.)
Government export assistance raises fairness concerns and harms the world economy. We might accept it when American companies lose out in fair competition against companies from Canada, Europe or Asia. Export subsidies inflict pain on Americans with no gains for the world economy. Why should we let American companies go out of business and American workers lose their jobs due to government-assisted exporters?
Yet establishing the unfairness and even existence of specific forms of assistance when governments are extensively involved in the economy is exceedingly difficult. Are the tax breaks and worker training provided by Alabama and other states unfair assistance in international trade? International finance economists do not agree whether China is currently manipulating the yuan to aid exports. Absent some way to clearly identify unfair assistance, every American company facing international competition will seek protection.
The details on this agreement and any follow up agreements will tell us if President Trump’s trade war has increased the freedom of Americans and Chinese to trade. Wars sometimes result in bloody stalemates, with leaders then peddling a deal restoring the status quo ante as victory. The cost of trade wars and shooting wars makes peace with honor, if possible, an attractive alternative.
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
