The US is at Risk of Losing a Trade War with China

The “best” outcome of President Donald Trump’s narrow focus on the US trade deficit with China would be improvement in the bilateral balance, matched by an increase of an equal amount in the deficit with some other country (or countries). In fact, significantly reducing the bilateral trade deficit will prove difficult.

.. macroeconomics always prevails:

..  if the United States’ domestic investment continues to exceed its savings, it will have to import capital and have a large trade deficit.
..  because of the tax cuts enacted at the end of last year, the US fiscal deficit is reaching new records – recently projected to exceed $1 trillion by 2020 – which means that the trade deficit almost surely will increase, whatever the outcome of the trade war. The only way that won’t happen is if Trump leads the US into a recession, with incomes declining so much that investment and imports plummet.
.. The “best” outcome of Trump’s narrow focus on the trade deficit with China would be improvement in the bilateral balance, matched by an increase of an equal amount in the deficit with some other country (or countries). The US might sell more natural gas to China and buy fewer washing machines; but it will sell less natural gas to other countries and buy washing machines or something else from Thailand or another country that has avoided the irascible Trump’s wrath.
.. But, because the US interfered with the market, it will be paying more for its imports and getting less for its exports than otherwise would have been the case. In short, the best outcome means that the US will be worse off than it is today.
.. The US has a problem, but it’s not with China. It’s at home: America has been saving too little. Trump, like so many of his compatriots, is immensely shortsighted. If he had a whit of understanding of economics and a long-term vision, he would have done what he could to increase national savings. That would have reduced the multilateral trade deficit.
.. There are obvious quick fixes: China could buy more American oil and then sell it on to others. This would not make an iota of difference, beyond perhaps a slight increase in transaction costs. But Trump could trumpet that he had eliminated the bilateral trade deficit.
..  As demand for Chinese goods decreases, the renminbi’s exchange rate will weaken – even without any government intervention. This will partly offset the effect of US tariffs; at the same time, it will increase China’s competitiveness with other countries—and this will be true even if China doesn’t use other instruments in its possession, like wage and price controls, or push strongly for productivity increases. China’s overall trade balance, like that of the US, is determined by its macroeconomics.
.. China has more control of its economy, and has wanted to shift toward a growth model based on domestic demand rather than investment and exports. The US is simply helping China do what it has already been trying to do. On the other hand, US actions come at a time when China is trying to manage excess leverage and excess capacity; at least in some sectors, the US will make these tasks all the more difficult.
.. if Trump’s objective is to stop China from pursuing its “Made in China 2025” policy – adopted in 2015 to further its 40-year goal of narrowing the income gap between China and the advanced countries – he will almost surely fail. On the contrary, Trump’s actions will only strengthen Chinese leaders’ resolve to boost innovation and achieve technological supremacy, as they realize that they can’t rely on others, and that the US is actively hostile.
.. If a country enters a war, trade or otherwise, it should be sure that good generals – with clearly defined objectives, a viable strategy, and popular support – are in charge. It is here that the differences between China and the US appear so great. No country could have a more unqualified economic team than Trump’s, and a majority of Americans are not behind the trade war.
Public support will wane even further as Americans realize that they lose doubly from this war: jobs will disappear, not only because of China’s retaliatory measures, but also because US tariffs increase the price of US exports and make them less competitive; and the prices of the goods they buy will rise. This may force the dollar’s exchange rate to fall, increasing inflation in the US even more – giving rise to still more opposition. The Fed is likely then to raise interest rates, leading to weaker investment and growth and more unemployment.
.. Trump has shown how he responds when his lies are exposed or his policies are failing: he doubles down. China has repeatedly offered face-saving ways for Trump to leave the battlefield and declare victory. But he refuses to take them up.
Perhaps hope can be found in three of his other traits:
  1. his focus on appearance over substance,
  2. his unpredictability, and his
  3. love of “big man” politics.

.. Perhaps in a grand meeting with President Xi Jinping, he can declare the problem solved, with some minor adjustments of tariffs here and there, and some new gesture toward market opening that China had already planned to announce, and everyone can go home happy.

.. In this scenario, Trump will have “solved,” imperfectly, a problem that he created. But the world following his foolish trade war will still be different: more uncertain, less confident in the international rule of law, and with harder borders. Trump has changed the world, permanently, for the worse.

Even with the best possible outcomes, the only winner is Trump – with his outsize ego pumped up just a little more.

 

I Think I’m Going to Kathmandu, Say the Chinese

If things go as planned, one day soon Chinese trains will pull into Kathmandu, Nepal, on a new railroad built to lessen the landlocked Himalayan country’s dependence on India.

.. It’s time to acknowledge that in raw economic terms China has comprehensively outpaced India. If winning regional influence depends on building ports and railroads abroad, or dazzling visitors with skyscrapers and broad boulevards at home, then India’s prospects look bleak.

Compared with China, however, India remains a bastion of free speech, minority rights and judicial independence. New Delhi ought to play to these traditional strengths by deepening them.

..  On Monday, China blocked HBO.com after comedian John Oliver ran a segment that discussed Mr. Xi’s alleged touchiness about his purported resemblance to Winnie the Pooh.

..  it wasn’t always a certainty that China would pull ahead. According to the World Bank, as recently as 1990 India’s per capita income ($364) was higher than China’s ($318). Paradoxically, China’s communists unleashed market forces more effectively than their democratically elected counterparts in India.

.. Four years ago, Mr. Modi looked set to enact the sweeping reforms India needs to eradicate poverty and catch up with China. But despite a few successes, such as a national goods and services tax and a bankruptcy law that makes it easier to exit a failed business, the Indian prime minister disappointed. He more resembles his lackluster socialist predecessors than a market-friendly East Asian leader.

.. India’s archaic labor laws suppress job growth by making it extremely hard to fire workers during a downturn.

.. With a per capita income of $8,100, the average Chinese is nearly five times as rich as the average Indian. The gap has widened over the past 10 years.

..  48 of the world’s 100 tallest buildings are in China. None are in India.

.. the ruling Bharatiya has earned a reputation for intimidating reporters with massive lawsuits, pressuring media barons to sack unfriendly editors, and using lap-dog television channels and a vicious troll army to smear political opponents.

.. India’s constitution guarantees religious freedom, but Mr. Modi often remains distressingly silent when Hindu mobs lynch innocent Muslims on suspicion of killing a cow.
..  But the government has taken to stalling the appointment of senior judges it does not approve of, raising fears that it will chip away at judicial autonomy.

 

Why Marx Was Wrong

On the occasion of Karl Marx’s 200th birthday, the co-founder of communism has received more than a few positive reappraisals, even from Western leaders. But those arguing that Marx cannot be blamed for the atrocities that his ideas inspired should reexamine his ideas.

.. For much of the twentieth century, 40% of humanity suffered famines, gulags, censorship, and other forms of repression at the hands of self-proclaimed Marxists.
.. Marx regarded private property as the source of all evil in the emerging capitalist societies of his day. Accordingly, he believed that only by abolishing it could society’s class divisions be healed, and a harmonious future ensured.
.. Under communism, his collaborator Friedrich Engels later claimed, the state itself would become unnecessary and “wither away.” These assertions were not made as speculation, but rather as scientific claims about what the future held in store.
.. it was all rubbish, and Marx’s theory of history – dialectical materialism – has since been proved wrong and dangerous in practically every respect. The great twentieth-century philosopher Karl Popper, one of Marx’s strongest critics, rightly called him a “false prophet.” And, if more evidence were needed, the countries that embraced capitalism in the twentieth century went on to become democratic, open, and prosperous societies.
By contrast, every regime that has rejected capitalism in the name of Marxism has failed – and not by coincidence or as a result of some unfortunate doctrinal misunderstanding on the part of Marx’s followers. By abolishing private ownership and establishing state control of the economy, one not only deprives society of the entrepreneurship needed to propel it forward; one also abolishes freedom itself.
.. Because Marxism treats all contradictions in society as the products of a class struggle that will disappear when private property does, dissent after the establishment of communism is impossible.
By definition, any challenge to the new order must be an illegitimate remnant of the oppressive order that came before.
.. Marx showed almost no interest in people as they actually exist. “Marxism takes little or no account of the fact that people are born and die, that they are men and women, young or old, healthy or sick,” he writes. As such, “Evil and suffering, in his eyes, had no meaning except as instruments of liberation; they were purely social facts, not an essential part of the human condition.”
.. Xi views China’s economic development over the past few decades as “cast iron proof” of Marxism’s continued validity.
But, if anything, it is exactly the other way around.
it was the China of pure communism that produced the famine and terror of the “Great Leap Forward” and the “Cultural Revolution.” Mao’s decision to deprive farmers of their land and entrepreneurs of their firms had predictably disastrous results, and the Communist Party of China has since abandoned that doctrinaire approach.
Under Mao’s successor, Deng Xiaoping, the CPC launched China’s great economic “opening-up.” After 1978, it began to restore private ownership and permit entrepreneurship, and the results have been nothing short of spectacular.
.. If China’s development is being held back by anything today, it is the remnants of Marxism that are still visible in inefficient state-owned enterprises and the repression of dissent.

It’s Benjamin Netanyahu’s World Now

It wasn’t always like this. In his 36 years as a diplomat and politician, Mr. Netanyahu has been reprimanded by the Reagan administration, nearly barred from entering the White House, and banned from the State Department during George H. W. Bush’s administration because of his criticism of its policies. He has been at loggerheads with President Bill Clinton and President Barack Obama, both of whom could barely conceal their disdain for him. Now he has an administration that shares his positions almost instinctively.

The simplest explanation for this reversal of fortune is that the Trump administration is dominated by the two types of ideologues with whom Mr. Netanyahu has always gotten along best: foreign policy hawks like Secretary of State Mike Pompeo and the national security adviser, John Bolton, and Christian evangelicals like Vice President Mike Pence. And presiding over it all is Mr. Trump, a man who has known and admired Mr. Netanyahu since they first met in New York in the 1980s.

.. On May 9, the morning after the announcement on the Iran deal, Mr. Netanyahu was in Moscow as guest of honor at Russia’s Victory Day, standing beside President Vladimir Putin. Mr. Putin still supports the Iran deal, and is in tacit alliance with Iran, Israel’s deadly adversary. And yet the Russian president presented the Israeli prime minister as his country’s close ally. He has also allowed Israel to attack Iranian bases and weapons depots in Syria, and even to bomb Russian-built antiaircraft batteries.

.. Mr. Putin and Mr. Trump are not alone. Mr. Netanyahu has recently been feted by Prime Minister Narendra Modi of India, President Xi Jinping of China, Prime Minister Shinzo Abe of Japan, as well as a host of leaders of smaller countries — including those with far-right governments like Hungary, Poland and Austria. No less significantly, he has maintained close contacts with President Abdel Fattah el-Sisi of Egypt and behind the scenes with the Arab leaders of the Persian Gulf.

Mr. Netanyahu is the toast of the new wave of right-wing, populist and autocrat-like (if not outright autocratic) leaders. They see in him a kindred spirit, even a mentor. He is the leader of a small country who has taken on American presidents and outlasted them. He has successfully defied the Western liberal human rights agenda, focusing instead on trade and security. Israel’s success as a regional economic and military power is proof in their eyes that the illiberal approach can prevail.

He has spent more time than any of them on the geopolitical stage, winning election after election. In many ways, Mr. Netanyahu is the precursor to this new age of “strongmen” who have come to power in different parts of the world. It is the age of Bibi.

.. He has identified a trend: The world is tiring of the Palestinian issue.

.. Mr. Netanyahu has hastened this trend by expanding Israeli diplomacy with Asian and African countries, which have shown little interest in the Israel-Palestine conflict, but are eager to acquire Israeli technology, both civilian and military.

.. Mr. Netanyahu believes he has won the argument. He has proved that the world, not even the Arab nations, doesn’t really care about the Palestinian issue. That Israel can continue enjoying economic growth, regional military dominance and improving foreign relations despite its military control over the lives of millions of stateless Palestinians.