Trump’s Losing Trade Strategy

The Trump administration’s trade strategy is losing because the unilateral imposition of tariffs to reduce the trade deficit is a poor response to a fake problem.

The Trump administration launched a large-scale offensive to reform global trade rules, which it considers to be unfavorable to the United States’ economic interests. According to the administration, “unfair” trade agreements adopted in the past explain the increased U.S. trade deficit and the loss of industrial jobs. That is why the administration announced the unilateral imposition of tariffs, along with additional tariffs on products imported from China. As he waves the threat of a “trade war” around, a war that he is determined to win, President Donald Trump strives to negotiate what in his eyes are new, more “balanced” trade agreements with United States trade partners.

The Fake Problem of the Trade Deficit

Although the U.S. trade balance was stable until the 1980s, the neoliberal turning point of the Reagan administration provoked a trade deficit that accelerated in the 1990s and 2000s and continued until the crisis in 2008, which effectively stabilized it. The United States’ trade position reflects the growth model adopted since the 1980s, characterized by delocalizing the assembly of industrial goods to low-wage countries, in order to reduce American firms’ production costs. It has resulted in an economy founded on the consumption of goods imported mostly from East Asia.

While China recorded a trade deficit with the United States until the mid-1980s, it recorded a surplus of $60 million for the first time in 1985, which then increased continually to $347 billion in 2016 – representing 44 percent of the United States’ total trade deficit. This evolution is enough to make China the American economy’s main problem in the Trump administration’s eyes. However, the traditional indicator of trade balance presents a false vision of reality, as it does not allow for identifying the distribution of value added for the products in question.

For example, Apple’s iPod, iPad and iPhone are presented by trade balance statistics as being “made in China.” The totality of the trade surplus and the value added by high-tech products is credited to China. But, these products are merely assembled in China by the Taiwanese company Foxconn, to whom Apple outsources the assembly of these products. China’s support is limited to providing the labor force that assembles the components, which only represents 5 percent of the value added of these products. In reality, most of the iPhones’ added value, exported from China to the United States and other consumer countries, is held by the United States, as well as by the half-dozen other industrialized countries where companies design the technological components in smartphones.

More generally, the financial return drawn from American companies’ deployment of technologies to foreign countries, even if this doesn’t appear in trade balance statistics, is superior to the United States’ foreign deficit. The trade balance is an indicator that does not allow one to take into account the complexity of international trade, and subsequently contributes to erroneous diagnoses, which inevitably lead to poor responses.

The Poor Response to Tariffs

It is U.S. economic policy, which since the 1980s has encouraged economic agents to consume more than they save, that is the cause of America’s foreign trade deficit. China is limited to providing American consumers with cheap products assembled by a Chinese workforce, but designed and marketed by transnational companies in the United States and other industrialized countries. The United States will not reduce its foreign deficit by imposing tariffs, but rather by adopting policies that encourage economic agents to consume less and save more. The tax reform adopted by the Trump administration will result in the inverse situation, because it will lead to an increase in spending in public relations – leading, according to estimates, to an increase of $1 trillion to $2 trillion in America’s current deficit through the next decade.

Tariffs will do nothing but slow the decrease in industrial jobs, which the Trump administration attributes to competition with China after it became a member of the World Trade Organization in 2001, but which can be much better explained by gains in productivity through technological advancements. The level of industrial jobs in the United States has been decreasing for decades, well before the existence of competition with China. It went from 25.9 percent in 1969 to 12 percent in 2001, when China became a member of the WTO, to representing just 8.5 percent in December 2017. Of course, contrary to neoliberal theory, unequal distribution of international trade profits creates “losers of globalization,” which necessitates reinforcement of the welfare system; the Trump administration is instead trying its hardest to dismantle former President Barack Obama’s health care law.

Moreover, by multiplying unilateral decisions that conflict with the WTO’s rules, the Trump administration is putting the multilateral system established by the United States in danger and entering into a conflict with its trade partners, who are displeased to hear President Trump affirm that past trade agreements were “unfair,” when these agreements were firmly negotiated in the United States’ interest. This reinforces China’s position, which advocates multilateralism to further isolate the United States and avoid a direct confrontation.

The trade war announced by President Trump in traditional sectors such as steel actually masks the true issue for Chinese-American rivalry: control over technology. The Trump administration denounces the Chinese government’s discriminatory practices encouraging foreign companies to transfer their technologies to Chinese businesses. These accusations are largely justified and shared by the United States’ other trade partners. Nevertheless, the Trump administration’s unilateral tariffs on Chinese tech products are not able to slow down the Chinese economy’s move upmarket, as President Xi Jinping strives to do with his “Made in China 2025” project by developing 10 industrial sectors in cutting-edge technologies in an effort to dominate the 21st century’s digital economy.

Ultimately, we can hope that the Trump administration will be content with a few bilateral concessions that he can sell to his electoral base on the brink of midterm elections, with the adoption of the agreements presented as more equal. But this only marginally changes international trade – similar to what was done with South Korea at the end of March. China has considerable leeway to make concessions to the United States without changing its strategy of moving up in the technological market. At the Boao Forum for Asia last April 10, President Xi Jinping once again assumed the role of the defender of globalization, announcing additional imports (notably of automobiles), a greater opening for foreign companies and banks, as well as a strengthening of intellectual property rights protections.

This type of bilateral agreement will not resolve America’s trade deficit problem, nor will it slow down China’s rising power, but it will at least allow us to avoid an escalation of tariffs that would make everyone losers.