The president is completely wrong about his trade war, apart from when it comes to China. In the end he might, unintentionally, do exactly the right thing.
The verdict is in: Donald Trump is only partly compos mentis. The White House is governed by a man who is irrational, impulsive and ignorant. That's how he is described by people close to him in "Fear – Trump in the White House," the exposé by Bob Woodward. The message is that Trump would have plunged the world into disaster long ago if it weren't for a small group of level-headed technocrats in the White House.
Perhaps. But it is entirely possible that Trump might ultimately achieve some success with his economic policy, despite — or precisely because — he doesn't care about established beliefs and procedures. It is conceivable that he wants the wrong thing, and in effect does the right thing, as a sort of unintended consequence of his actions.
The new U.S. tariffs against China take effect on Monday. They affect a further $200 billion of imports, which are now subject to a special 10 percent tax. This rate is set to rise to 25 percent at the end of the year if a comprehensive agreement is not reached. The Chinese government has reacted immediately with tariffs on U.S. imports worth $60 billion.
Further escalation can't be ruled out. Trump has already been threatening for some time to impose special tariffs on all Chinese imports. The retaliation could encompass action against subsidiaries of U.S. companies in China and the sale of U.S. dollars from Beijing's gigantic currency reserves alike.
So far, however, the real economy appears relatively unperturbed. The mood among U.S. companies hasn't been this good since the boom year of 2000. Investment and employment are increasing. Productivity is rising. The stock markets are in high spirits. The U.S. economy is likely to grow by nearly 3 percent this year and by only slightly less in 2019, according to recent projections from the Organization for Economic Co-operation and Development.
The leaders of the Federal Reserve will meet on Wednesday. Another interest rate increase by the governors and the prospect of further raises is seen as certain — and as proof of robust economic developments.
How does a trade war square with a booming economy? It's possible that America is merely experiencing a short-lived boom, fueled by Trump's tax cuts and the Fed's still relatively low level of interest rates. It's possible that the trade war is escalating, and the tensions that are already having a negative impact in some countries are doing lasting damage to the economy. But it is at least conceivable that Trump will actually ultimately save the global trading system.
Globalization Works, in Principle
To be clear, Trump is fundamentally completely wrong about his protectionist ideology. Without the globalization of the last three centuries, the rich and aging countries in the West would probably have brought about economic stagnation in the best case scenario. The opening of trade, capital and labor markets offered opportunities for established nations and companies. Conversely, experience shows that countries refocusing their attention on their own backyards would reduce productivity, thereby threatening prosperity levels as a whole.
Emerging and developing economies, in particular, have benefited in recent decades. Life expectancy around the world has gone up on average by around 10 percent since 1990. The number of starving people has fallen considerably. Hundreds of millions of people in poor countries have ascended to the middle class. This would have been impossible without the exchange of goods, capital and knowledge. Nowhere is the globalization dividend greater than in Asia. Gross national product per head has risen in many parts of Africa, too.
Nevertheless, the global trading system with its rules is designed so that market economies, in principle, carry out fair trade. This doesn't rule out disputes. The World Trade Organization is available to settle disputes through its arbitration process.
Zombie State-Owned Companies
This is why the trade wars Trump has instigated with market economies in the West are pointless and dangerous. Overrunning Canada, the EU or Japan with tariffs and justifying such measures on the grounds of national security – outside the WTO – is destructive because it undermines the whole regulatory framework.
But it's different with China.
A dominant economy engaging in a power play by means of state control, as China is doing, is not envisaged within the global trading system.
Zombie state-owned companies — those that are heavily indebted and kept alive with cheap loans from state banks — distort the global market with their excess capacity. China's authorities are making it difficult for foreign companies to access markets. Many service sectors remain closed.
Tenders for government contracts, which in other countries would be published internationally, overwhelmingly go to state-owned companies in China. Enforcing protection of intellectual property "continues to be a major challenge," as the WTO puts it with diplomatic restraint in its report on Chinese trade policy, which runs to nearly 200 pages. Knowledge sharing is part of sweet and sour business in Asia. Industry has been complaining about this for some time, as have European organizations and associations.
So far, all the criticism from the West has not led to China turning into a true market economy that sticks to the rules. Even before Trump took office, China was the main target of anti-dumping measures, and not just by the U.S. Beijing's actions stand in curious contrast to the fine speeches by officials, first and foremost President Xi Jinping, who portray China as the new protector of the global order.
Negotiating Like a Mob Boss
In this way perhaps Trump will actually make some substantial progress. His tactics of making violent threats and erratic demands might not work too badly at all with a trading partner like China. But for the leadership in Beijing, it is hard to tell how far the U.S. is prepared to go. How much damage is it willing to inflict on its own economy? Beijing's strategy could accommodate Trump more than has been conceivable thus far. Perhaps Trump and his mob boss style will bring off what serious negotiators have not yet achieved.
For this to happen, his experts would have to lead him at the right moment to return to the global trading system. He could still celebrate China backing down as a great victory for the global order, complete with a snazzy TV appearance and big fanfare.
So much for the opportunities. Trump's actions also come with risks, however, and they are substantial.
Protectionism Is Politically Attractive
If China does not back down, the conflict could turn very ugly. The U.S. is evidently not showing any intention of strengthening the WTO. On the contrary, Trump has always made it clear that the U.S. will not be told what to do by an international organization.
It remains unclear what Trump's objectives actually are. His obsession is the U.S. trade deficit. But his other economic policy measures — tax cuts while the economy is doing well, which stimulate the Fed to raise interest rates and are currently strengthening the dollar — are more likely to increase the deficit further. Tariffs will do little to change this.
If Trump really wanted to make American jobs more competitive, his government would be making major investments: better schools, cheaper universities, better infrastructure in general for the left-behind areas of the Midwest and the South, plus a strategy for dealing with the opioid epidemic which is destroying lives and livelihoods, mainly in poor communities. But all of this is expensive, laborious and especially unpopular in his conservative party, and therefore politically unattractive.
It would be very surprising if Trump's policy ultimately benefited America's underprivileged, i.e., the very people who helped elect him. In terms of trade policy toward China, however, it may be that he – unintentionally – does exactly the right thing.