As a Chinese official once explained to me, the strategy is to open the window but place a screen on it. They get the fresh air (foreign investment and technology) while keeping out the harmful elements (volatile capital flows and disruptive imports).
In fact, China’s practices are not much different from what all advanced countries have done historically when they were catching up with others.
.. One of the main US complaints against China is that the Chinese systematically violate intellectual property rights in order to steal technological secrets. But in the nineteenth century, the US was in the same position in relation to the technological leader of the time, Britain, as China is today vis-à-vis the US. And the US had as much regard for British industrialists’ trade secrets as China has today for American intellectual property rights.
.. The fledgling textile mills of New England were desperate for technology and did their best to steal British designs and smuggle in skilled British craftsmen. The US did have patent laws, but they protected only US citizens. As one historian of US business has put it, the Americans “were pirates, too.”
.. Any sensible international trade regime must start from the recognition that it is neither feasible nor desirable to restrict the policy space countries have to design their own economic and social models. Levels of development, values, and historical trajectories differ too much for countries to be shoehorned into a specific model of capitalism.
.. Governments that worry about the transfer of critical technological know-how to foreigners are, in turn, free to enact rules prohibiting their firms from investing abroad or restricting foreign takeovers at home.
.. Many liberal commentators in the US think Trump is right to go after China. Their objection is to his aggressive, unilateralist methods. Yet the fact is that Trump’s trade agenda is driven by a narrow mercantilism that privileges the interests of US corporations over other stakeholders. It shows little interest in policies that would improve global trade for all. Such policies should start from the trade regime’s Golden Rule: do not impose on other countries constraints that you would not accept if faced with their circumstances.
Debacle in Quebec
there has never been a disaster like the G7 meeting that just took place. It could herald the beginning of a trade war, maybe even the collapse of the Western alliance. At the very least it will damage America’s reputation as a reliable ally for decades to come; even if Trump eventually departs the scene in disgrace, the fact that someone like him could come to power in the first place will always be in the back of everyone’s mind.
.. I’m already seeing headlines to the effect that Trump took a belligerent “America first” position, demanding big concessions from our allies, which would have been bad. But the reality was much worse.
.. He didn’t put America first; Russia first would be a better description. And he didn’t demand drastic policy changes from our allies; he demanded that they stop doing bad things they aren’t doing. This wasn’t a tough stance on behalf of American interests, it was a declaration of ignorance and policy insanity.
.. Trump started with a call for readmitting Russia to the group, which makes no sense at all. The truth is that Russia, whose GDP is about the same size as Spain’s and quite a bit smaller than Brazil’s, was always a ringer in what was meant to be a group of major economies. It was brought in for strategic reasons, and kicked out when it invaded Ukraine.
.. There is no possible justification for bringing it back, other than whatever hold Putin has on Trump personally.
.. Then Trump demanded that the other G7 members remove their “ridiculous and unacceptable” tariffs on U.S. goods – which would be hard for them to do, because their actual tariff rates are very low. The European Union, for example, levies an average tariff of only three percent on US goods.
.. Yes, Canada imposes high tariffs on certain dairy products. But it’s hard to make the case that these special cases are any worse than, say, the 25 percent tariff the U.S. still imposes on light trucks.
.. His trade advisers have repeatedly claimed that value-added taxes, which play an important role in many countries, are a form of unfair trade protection. But this is sheer ignorance
.. they’re just a way of implementing a sales tax — which is why they’re legal under the WTO.
.. He may just have been ranting. After all, he goes on and on about other vast evils that don’t exist, like a huge wave of violent crime committed by illegal immigrants (who then voted in the millions for Hillary Clinton.)
Was there any strategy behind Trump’s behavior? Well, it was pretty much exactly what he would have done if he really is Putin’s puppet: yelling at friendly nations about sins they aren’t committing won’t bring back American jobs, but it’s exactly what someone who does want to break up the Western alliance would like to see.
.. Alternatively, maybe he was just acting out because he couldn’t stand having to spend hours with powerful people who will neither flatter him nor bribe him by throwing money at his family businesses – people who, in fact, didn’t try very hard to hide the contempt
.. this was an utter, humiliating debacle. And we all know how Trump responds to humiliation.
Trump’s Trade Disaster
In the second year of his presidency, Donald Trump has doubled down on his “America First” brand of economic nationalism, by making impossible demands of US allies and escalating a multi-front trade war of his own making. In doing so, however, he has all but guaranteed that Americans themselves will bear the costs.
President Donald Trump may fancy himself a builder, but when it comes to international treaties and norms, he has proved to be a one-man wrecking crew. And now, the chaos appears to be spreading and deepening... THE TRUTH ABOUT NAFTA
For decades after World War II, Mexico pursued many of the same disastrous economic policies as other developing countries. It maintained high protectionist barriers for manufactured goods, and relied heavily on commodity exports, particularly oil. As a result, it experienced recurrent stop-go cycles, whereby accelerating inflation and ballooning balance-of-payments deficits would force a round of austerity, only for the process to repeat itself after increases in commodity prices, but at a slower rate of growth each time. Not surprisingly, the growth rate during these years waxed and waned dramatically, and by the start of 1989, Mexico’s per capita income was around $2,393 – about 11% that of the US.
.. at the time, the average US tariff on manufactured imports was around 2%, while Mexico’s average tariff on US exports was around 10%. It was clear from the start that the US would gain more from improved access to the Mexican market than vice versa.
.. Ross Perot famously warned that an FTA with Mexico would result in “a giant sucking sound going south.” Of course, nothing of the sort happened.
NAFTA entered into force on January 1, 1994, and between 1993 and 2000, US unemployment fell from 6.9% to 4%. Today, it stands at 3.8% – its lowest point in almost two decades.
.. Some of the demands directed at Mexico, in particular, are so outrageous that no country could ever accept them. Others, such as the US proposal for more stringent rules of origin (which require that a certain percentage of an imported article be fabricated within the NAFTA trade bloc), are very problematic, but a compromise can probably be reached.
.. One of the US’s most disruptive tactics has been to demand that Mexico bring its auto workers’ pay up to the level of their US counterparts. The minimum wage in Mexico is currently around $4 per day, and around $6 per day in manufacturing industries. But the wage floor US negotiators have reportedly demanded is $16 per hour – 21 times the average wage in Mexican manufacturing.
.. it is inconceivable that the Mexican electorate would stand for one segment of workers earning $128 per day while everyone else still earned an average of $4-6 per day.
.. the Trump administration’s demand is so absurd that even the US auto industry opposes it , not least for what it would do to US producers’ value chain.
.. Another impossible US demand, which would affect Canada as much as Mexico, is a sunset clause that would force each government to renew the renegotiated NAFTA every five years. The fact that the entire deal could potentially expire every five years would create a permanent state of uncertainty
.. The Trump administration has justified the tariffs on national-security grounds, which makes absolutely no sense when one considers that US allies are bearing the brunt of the costs.
.. The Trump administration’s approach to both allies and adversaries represents the worst kind of “managed trade,” which the US and other countries with market-based economies have long condemned.
South Korea did not achieve strong, sustained growth until it liberalized its trade and other economic policies, starting around 1960, with the encouragement of the US.
.. South Korea must now create an administrative apparatus to limit its steel producers’ exports to the US. That means tracking 52 different categories of steel to ensure that exports remain at or below 70% of their 2014-2017 levels.
.. there is a need to monitor and regulate the inflow of steel and aluminum, whether by the US, South Korea, or both. For the US, expanding its own customs service to perform this task would carry enormous administrative costs
.. the new dispensation will likely lead to all manner of influence peddling as firms try to win scarce licenses from customs officials
.. There are around 80,000 jobs in the US steel industry, more than 900,000 jobs in the US auto industry, and millions more in other industries that use steel or aluminum.
.. by protecting domestic producers, the Trump administration is raising steel and aluminum prices within the US, while reducing them in the rest of the world. In essence, Trump is conceding even more cost advantages to non-US producers, for no good reason.
.. After World War II, the US led the way in establishing a rules-based trading system, first with the General Agreement on Trade and Tariffs, and then with its successor, the World Trade Organization. The past 73 years have shown that when there are legitimate grievances between trading partners on issues such as high-tech secrets, bilateral efforts to resolve them often prove ineffective, whereas action taken through the WTO has a strong track record. Unless and until the Trump administration recognizes this fact, Americans themselves will bear the costs of its disastrous trade policies.
Trump’s Trade Confusion
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.
.. 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.
.. 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 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.
.. 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.
.. 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.
.. 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.
.. 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.
.. 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.