I’m increasingly concerned that the U.S. and China are heading for a collision. At a time when the global economy and world stock markets are fragile, this would be bad for everybody. I do think there is a reasonable chance that Presidents Trump and Xi Jinping will hammer out some kind of a tentative deal at their G20 meeting in two weeks, but I fear that may be only a temporary ceasefire and that the longer term trends are likely to lead to more friction. One basic problem is that Trump and Xi are a bit alike: Both are overconfident, impetuous authoritarian nationalists who disregard human rights. Hence the symmetry of two freight trains colliding, the topic of my column on the long run souring toward China and the dangers ahead. Here’s what you should watch out for.
.. I’m still gnashing my teeth at the “caravan hoax” pulled by President Trump to scare voters into supporting GOP candidates in the midterms, and I think too many news organizations were too credulous in covering the story without sufficient context and fact-checking. We in the media shouldn’t allow ourselves to become a channel for fear-mongering and demonization. And now it looks as if the U.S. may spend $200 million pointlessly keeping U.S. troops in the desert near the border, away from their families over Thanksgiving, as a forgotten prop for the midterms. Meanwhile, we can’t afford effective treatment for 90 percent of people with drug addictions, and we can’t afford to reduce lead exposures that damage the brains of more than half a million American kids each year. Grrrrrr.
Saudi Arabia has changed its story again on the murder of Jamal Khashoggi, pinning it on some fall guys but protecting the crown prince. And the U.S. seems happy to buy into that cover-up. Indeed, NBC reports that the U.S. is considering deporting a Turkish dissident cleric (something Turkey very much wants) as a kind of bribe to get Turkey to keep quiet about the torture, murder and dismemberment of Jamal. What the Trump administration doesn’t seem to appreciate is that the crown prince is not a force for stability in the Middle East, but for instability (as we’ve seen in the mess he’s made with Yemen, Qatar and Lebanon). Check out this extraordinary video reconstruction of the murder of Jamal and subsequent cover-up.
Is Trump Duping Putin?
Russian President Vladimir Putin seems to think that he has been using his strategically incompetent American counterpart to advance his ends. In fact, Donald Trump has dragged everyone into his reality-TV world, in which sensation, exaggeration, and misinformation all serve his only true goal: to be the center of attention.
But the truth is that neither Democrats nor the media have actually had much success in reining in Trump. As for the Republicans, who control both houses of the US Congress, even once-vocal opponents – such as Senators Lindsey Graham and Ted Cruz – now lick Trump’s boots. With Trump having bullied his party into submission, it seems unlikely that his failure to deliver for Putin can be blamed on others.
The more likely explanation for Trump’s betrayal of Putin is that his warm rhetoric was, like everything else that comes out of his mouth, driven by his desire for ratings, not any actual interest in – let alone commitment to – helping the Kremlin. Consider how Trump’s early overtures to another strongman, Chinese President Xi Jinping, gave way to a full-blown trade war against that country, which Trump now portrays as America’s enemy.
.. Of course, the world has come to expect broken promises and capriciousness from Trump. What is surprising is how Putin has misread the situation so badly. How could such a keen observer of the US, whose former career as a spy honed his ability to decipher people’s motives and intentions, fail to recognize the falseness of Trump’s promises?
.. If anyone knows that actions speak louder than words, it is Putin, whose words often include transparent denials of documented wrongdoing, from meddling in the US election to violating treaties. Yet Putin continues to ignore Trump’s actions and seeks for more meetings “to touch base” with the ever-complimentary US president, such as at this month’s World War I centenary in Paris or the G20 summit in Argentina.
The US Will Lose Its Trade War with China
In handicapping the US-China conflict, Keynesian demand management is a better guide than comparative advantage. In principle, China can avoid any damage at all from US tariffs simply by responding with a full-scale Keynesian stimulus.
The United States cannot win its tariff war with China, regardless of what President Donald Trump says or does in the coming months. Trump believes that he has the upper hand in this conflict because the US economy is so strong, and also because politicians of both parties support the strategic objective of thwarting China’s rise and preserving US global dominance.
But, ironically, this apparent strength is Trump’s fatal weakness. By applying the martial arts principle of turning an opponent’s strength against him, China should easily win the tariff contest, or at least fight Trump to a draw.
.. Comparative advantage certainly influences long-term economic welfare, but demand conditions will determine whether China or America feels more pressure to sue for trade peace in the next few months. And a focus on demand management clearly reveals that the US will suffer from Trump’s tariffs, while China can avoid any adverse effects.
From a Keynesian perspective, the outcome of a trade war depends mainly on whether the combatants are experiencing recession or excess demand. In a recession, tariffs can boost economic activity and employment, albeit at the cost of long-term efficiency. But when an economy is operating at or near its maximum capacity, tariffs will merely raise prices and add to the upward pressure on US interest rates. This clearly applies to the US economy today.
.. US businesses could not, in aggregate, find extra low-wage workers to replace Chinese imports, and even the few US businesses motivated by tariffs to undercut Chinese imports would need to raise wages and build new factories, adding to the upward pressure on inflation and interest rates.
.. With little spare capacity available, the new investment and hiring required to replace Chinese goods would be at the cost of other business decisions that were more profitable before the tariff war with China. So, unless US businesses are sure the tariffs will continue for many years, they will neither invest nor hire new workers to compete with China.
.. Assuming that well-informed Chinese businesses know this, they will not cut their export prices to absorb the cost of US tariffs. That will leave US importers to pay the tariffs and pass on the cost to US consumers (further fueling inflation).. Thus, the tariffs will not be “punitive” for China, as Trump seems to believe. Instead, the main effect will be to hurt US consumers and businesses, just like an increase in sales tax... Where will the competitively priced imports that undercut China come from?
In most cases, the answer will be other emerging economies. Some low-end goods such as shoes and toys will be sourced from Vietnam or India. Final assembly of some electronic and industrial machinery may relocate to South Korea or Mexico.
.. But this should have no effect on Chinese growth, employment, or corporate profits if demand management is used to offset the loss of exports. The Chinese government has already started to boost domestic consumption and investment by easing monetary policy and cutting taxes.
.. In principle, China can avoid any damage at all from US tariffs simply by responding with a full-scale Keynesian stimulus. But would the Chinese government be willing do this?1
This is where bipartisan US support for a “containment policy” toward China paradoxically works against Trump. China’s rulers have so far been reluctant to use overt demand stimulus as a weapon in the trade war because of strong commitments made by President Xi Jinping to limit the growth of China’s debt and to reform the banking sector.
.. But such financial policy arguments against Keynesian policy are surely irrelevant now that the US has presented the battle over Trump’s tariffs as the opening skirmish in a geopolitical Cold War. It is simply inconceivable that Xi would attach higher priority to credit management than to winning the tariff war and thereby demonstrating the futility of a US containment strategy against China.
.. This raises the question of how Trump will react when his tariffs start to hurt US businesses and voters, while China and the rest of the world shrug them off. The probable answer is that Trump will follow the precedent of his conflicts with North Korea, the European Union, and Mexico. He will “make a deal” that fails to achieve his stated objectives but allows him to boast of a “win” and justify the verbal belligerence that inspires his supporters.
Trump’s surprisingly successful rhetorical technique of “shout loudly and carry a white flag” helps to explain the consistent inconsistency of his foreign policy. The US-China trade war is likely to provide the next example.
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:
- his focus on appearance over substance,
- his unpredictability, and his
- 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.
Putin seems to think that he has been using the strategically incompetent Trump to advance his ends. In fact, Trump has dragged everyone into his reality-TV world, in which sensation, exaggeration, and misinformation all serve his only true goal: to be the last “survivor” on the island. By the time Putin finally realizes that he has been duped, the world will probably have paid a high price in terms of political stability, strategic security, and environmental damage. And Putin will have to pay it, too.